OPEC spooks everybody
The view of financial markets this morning is very different from the one investors left on Friday evening. A major falling-out among the major oil producers at the weekend caused oil prices to gap lower, taking risk assets with them and dragging the entire US Treasury yield curve below 1% for the first time.
Falling demand for oil brought about by China’s shutdown and the sharp decline in air travel prompted OPEC+ to call an emergency meeting last week. Russia could not agree with Saudi Arabia’s call for further production cuts and it looks now as though OPEC participants will be competing for market share. The oil price breakdown, which had already begun with a 10% decline on Friday, spooked investors and share prices were marked down severely in the Far East this morning.
The risk-off move was costly for commodity- and energy-related currencies and positive for the safe-havens. Japan’s yen was the clear leader for a second day, strengthening by an average of 2.9% and climbing 3% against the US dollar. The Swiss franc came second with an average gain of 1.7%. At the other end of the scale Norway’s krone dropped 2.8%, the Canadian dollar fell 1.9% and the Aussie took a 1.1% hit.
Once upon a time a monthly increase of 273k in US nonfarm payrolls would have excited investors, probably sending US equities and the dollar higher. There was little of that on Friday. What went on in the States a month ago matters a great deal less than what happens next to the global economy.
The same logic could apply to the Chinese trade figures released on Saturday: the collapse in exports in February does not prevent March being a great month. But nobody believes the situation is about to improve miraculously. Other incidental data printed towards the end of last week showed US factory orders falling 0.5% in January, Australian retail sales down by 0.3% for the same month and Canadian payrolls increasing by a bigger than expected 30k. None of the data had any appreciable effect on currency values.
The same was true of the only UK ecostats, the Halifax house price index. It went up by 0.3% in February and was 2.8% higher on the year. The Halifax was noncommittal about the outlook, saying, “Looking ahead, there are a number of risks, including the potential impact of coronavirus, which continue to exert pressure on the economy and we wait to see how these will affect housing market sentiment later in the year.” Sterling had a mostly positive day with an average gain of 0.6%. It added one US cent and lost three quarters of a euro cent.
The recent behaviour of financial markets suggests that at least some participants foresee recession, perhaps on a global scale. Japan announced a big step in that direction this morning with a 1.8% quarterly decline in gross domestic product.
There is not much on today’s agenda to shape expectations. Germany’s trade surplus in January was a little wider than forecast and industrial production enjoyed a 3% monthly rebound.
This morning Sentix reports on Euroland investor confidence. After lunch come Canadian housing starts and building permits. Tonight brings NZ manufacturing sales, UK retail sales (the BRC version), Australian business confidence and Chinese inflation.