Brent oil prices slumped this week, to levels not seen for more than two decades. Stockpiles are continuing to build, with only muted demand following the slump in the global economy. In the U.S., West Texas intermediate oil plunged into negative territory. This is a first, and uncertainty is mounting about storage for excess oil. WTI oil prices have now entered contango, meaning oil contracts for future delivery are more expensive than spot prices. In the short term, no one in America wants oil. More encouraging is the news that major European economies, along with the US and Canada, are managing to “flatten the curve”. The number of daily confirmed cases has plateaued across the west. As the pandemic becomes more manageable, the possibility that the worst may soon be over, for many countries, rises. Some are cautiously easing their lockdown; others look set to follow in May. However, the outlook for many emerging markets outside the well-governed parts of East Asia and Eastern Europe continues to worsen.
With the unprecedented monetary, fiscal and regulatory response, policy makers are containing the risk of a severe follow-up financial crisis that would otherwise deepen and lengthen the probable recession.
The improving clarity, about the outlook of the pandemic and the lockdowns needed to contain it, can help financial markets to weather the weak economic data and poor corporate results expected for Q1 and Q2 of 2020. Some 90% of European companies and 75% of US companies are reporting earnings over the coming month, how the market reacts to the data will be important in the short to medium term.
On the approach to lockdowns, governments face a tricky balancing act. To return to normality too fast risks a potential second wave of infections that matches or even exceeds the first and would require renewed harsh lockdowns. The cautious approach to lifting the lockdowns, the better preparedness of healthcare systems and the changes to daily life and hygiene routines suggest that a second wave can be prevented. The risk will be lower in countries that have thorough testing strategies and in those that take a serious approach to contact-tracing.
Nevertheless, a potential resurgence of the virus presents the biggest challenge for financial markets. On top of the massive economic shock from the first wave, the economic damage and the risk of a financial crisis would be more severe during a second round of harsh lockdowns.
In spite of this risk, which must be taken seriously, the finite nature of the pandemic, the positive news flow on vaccine development and the policy makers’ response has given the market grounds to rally. Leading the way have been technology and pharmaceutical sectors. There remains opportunity within the market and we continue to rebalance portfolios, selectively adding to equity, whilst remaining mindful of risk and aware that volatile conditions are likely to remain.