Volatility is staying in the markets for now. Last week we saw an initial rebound in the stock market on Monday, after which we saw a decline in most of the rest of the week. The FED tried to soften the market volatility a bit by cutting the federal fund rates by 50bps to a range of 1-1.25%. The FED tries to stay ahead of economic disruptions caused by the Corona virus. Markets initially bounced quite quickly, but went back down. The FED cannot do much to stop the Corona virus from spreading. It is not the case that investors are losing faith in the economy. They are worried about the virus and the FED cannot significantly change those worries. More central banks are expected to cut rates. Though, the only thing that will really help on the short/medium term are indications that the Corona virus is getting contained and that no new outbreaks are being expected. For now, the outbreaks in Italy, South-Korea and Iran are not yet under control.
Italy taking strong measures
To stop the Corona virus spreading further, Italy has taking some strong measures. Italy is locking down much of Country’s North. Around 16 million people are in quarantaine till at least April 3rd.
In the mean time investors are waiting for the time that daily new infection cases do go down. Below you can see an overview of the new daily cases of the Corona virus (red bars). Over half of the daily cases are currently coming from Italy and Iran. In China the virus seems very well contained.
As the Corona virus has been wiping out a significant amount of demand for oil on the short/medium term, the oil price has been crashing. 2020 started with an oil price around $60 and currently we are close to $40. On Friday the oil price went down nearly 10% as Russia did not want to agree to the OPEC production cut. With this, Russia is breaking a long-lasting good relationship with Saudi Arabia and OPEC. Yesterday, Saudi Arabia hit back and announced massive discounts on their crude oil prices for sales to Asia ($4-$6) and to the US ($6). With this, Saudi Arabia is starting a price war on oil which does not benefit anyone. It is possibly a way to try to get Russia back to the negotiation table for oil production cuts. But I do not think Russia likes this behavior at all and will not blink too quickly. Oil prices will open dramatically lower on Monday (probably somewhere between -10% and -15%) and will possibly see heavy pressure in the upcoming weeks.