Can The Coronavirus And Oil Crisis Send The World Into Recession | Before & After | Refinitiv
This is Before and After from Refinitiv. I'm your host, Johanna Botta. This week, we'll be looking at turbulent times in oil and the University of Michigan Consumer Report. In the After section. We'll be reporting on the CPI number. This week's market action saw two black swans in Coronavirus and oil combine to create a lot of market movement. What at first started as an OPEC meeting to address the falling demand for oil around the globe, quickly descended into madness. A week ago Friday, the market had been unsettled by whispers that Russia wasn't fully on board with reducing their supply. What followed was an over-the-top response by Saudi, who promised to open the floodgates and produce oil at will. This triggered a 20 percent decline overnight and both WTI and Brent Oil. The unprecedented crash came after OPEC linchpin Saudi Arabia pledged to unleash its enormous excess capacity onto an already saturated market. The Saudis are capable of quickly boosting their production by 2 million barrels per day at short notice. I know February 7th seems like an eternity ago when on this show we were discussing what would happen if oil were to trade below 52, and what stress that would cost on high yield corporates. We even dared to dream a world where oil dropped below the next key level of forty two point five. And then last Monday happened. And now we know how it looks and worse, we know what the ramifications are. If we look at this 13 year chart of the high yield ETF compared to crude oil, we can see how the fate of both instruments is intertwined. In 2008, when the market collapsed, we saw oil trade down into the low 40s and HYG was in free-fall. Of course, in '08 the malaise was much more severe and the credit stress was acute. But today there are now signs that the problems are spreading, with corporates drying down their emergency credit lines and the investment grade ETF starting to underperform government bond futures. We can also see the last time HYG tanked under 80, when the Saudis flooded the earth with oil in 2015. Surely the stress on credit this time will be worse, coupled with a very real economic slowdown, which wasn't fully the case in 2015. So how can HYG still go lower? Given that the majority of shale drilling companies weren't profitable with oil above forty two point five, then the situation with oil down in the 30s is very drastic. If we assume that the collapse of a functioning OPEC will mean a race to get as much oil out of the ground in a short amount of time with no regard to price, then it's an impossible case to make for the U.S. energy sector. The caveats are that this is a fluid situation where geopolitics can truly affect reality. Last time the University of Michigan's Consumer Sentiment Report was released on Feb. 28th, 58% of respondents saw good times financially in store for the remainder of the year. One safe assumption is that this report will not be as optimistic for the remainder of the year. As Covid-19 has spread throughout the U.S. in a much more geographically dispersed fashion, consumers will limit their exposure to stores, malls, theaters, restaurants, sporting events, air travel and the like. That being said, we've seen drastic repricing of stocks that reflect those spending habits. But is it enough? Could the Michigan report paint a less grim picture? Or are all past data points now irrelevant? Consider American Airlines, which in 2020 has seen its stock price halved. Now, remember, in 2001, after 9/11, most Americans were in no mood to go anywhere, let alone get on a plane. The Dow Transports Index sold off 32%. So far this month, it's down 26%. Not an insignificant repricing. One favorable aspect of last month's report will likely have improved on the bright side - 'Favorable buying conditions exhibited only insignificant changes over the past month or year. Declines in mortgage rates had a large positive impact on homebuying, with low mortgage rates mentioned by 42%, the highest proportion since 2016'. The Bottom Line - we're looking for glimmers of hope and this report may offer some. If not, the stark picture is widely expected. The headline MOM CPI number came in up 0.1% versus an expectation of zero. This uptick came even with a drop in energy prices of 2%, as food costs are the most rapid price increase in a year. Retailers facing supply shortages will have no incentive to discount, but as we said, economic numbers aren't as important as they were for us to gage the FED. We're much more concerned with the severity of the virus effects on the real economy. It seems like the February report is already showing preliminary effects that we anticipated. Of course, the FED already cut 50 BPS and the Federal Government has his own stimulus. But we need to stay aware of the impact on consumers and both fiscally related terms, and of course, virus related. So there it is. Oil and Consumer Sentiment in the Before and CPI and the After. Refinitiv data throughout. This has been the Friday episode of Before and After. Please subscribe and hit the notification bell to ensure your alerted to all of Refinitiv's future market updates. Have a great weekend and we look forward to seeing you again next week.