The Pandemic Year 2020: Investors Navigating the New Normal with COVID

As we head into the holiday season, investors remain focused on COVID-19 pandemic which has forcefully plunged the world into a “New Normal”. The alarming speed of the spread of the virus across the world has transformed and reshaped the world in a short amount of time but with longer-lasting impact. As everyday life has been impacted, investors have also reassessed and realigned their investment strategies to face the new world.

Stock Market

Quarter 1 – A Trio of Crises & the Great Lockdown

The markets tumbled like dominoes hit by various headwinds at once ranging from geopolitical tensions between the US and China, Hong Kong and Iran, extreme weather conditions, an oil price war, and the novel coronavirus which forced various forms of lockdowns and social distancing across the globe. Faced by an unprecedented health crisis, and an oil crisis, the world was bracing for an unexpected economic crisis.

Volatility soared in the markets to decades high from an average of 20 to a high above 80 around mid-March causing several circuit breakers and trading halts on some stock exchanges. The stock market bottomed down, and major equity indices dropped in bear market territory ending an 11-year bull-run in the stock market. Global stocks experienced the worst week since the global financial markets.

Central banks and governments rushed in to intervene and cushion the freefall in the financial markets and support their economies which brought some degree of calm in the stock market.

Quarter 2 – The Grand Reopening & Roadmap to Recovery in a Pandemic

Investors witnessed the grand reopening in the second quarter after the great lockdown in the first quarter. Massive fiscal stimulus, ultra-low levels of interest rates, central banks interventions and optimism on the reopenings helped the stock market to rebound as fiercely and aggressively as it initially fell.

The government and central banks have absorbed nearly all the shocks of the virus on the financial markets by injecting massive liquidity in the economy, keeping credit flowing and supporting their economy with huge fiscal stimulus plan among many others unconventional plans. On the reassurance that the intervention measures are not going to fizzle out anytime soon, investors have pushed global stocks higher:

  • Major US equity indices rallied and record new highs.
  • European stocks were flaring better. Even though the Eurozone was not economically strong pre-COVID-19 crisis, the better containment of the virus compared to the US and the historic unity European countries have shown during the coronavirus crisis has boosted confidence for European stocks
  • Australian shares also rebounded significantly and reclaimed the 6,000 level to mark the best quarter in over a decade.

Quarter 3 – Vaccine Optimism, Presidential Election, and Tech Rally

While the vaccine updates and the US Presidential elections campaigns were at the forefront of the markets in the third quarter, global stimulus improving economic data, a better-than-expected earnings season and the resilience of the technology sector have lifted risk sentiment. Global equities have been on a staggering rally at the beginning of the quarter allowing the major equity indices to recover the losses made in the first quarter.

However, geopolitical risks – US/China tech war and the ending of the US pact on Hong Kong extradition and reciprocal tax treatment, the US stimulus gridlock, the rising number of coronavirus cases and the uncertainty around the pace of recovery created an environment of caution.

Investors were monitoring closely the interventions by central banks and governments to push stocks higher at the risk of the global economic backdrop and the stimulus-fueled economy. The month of September again lived up to its reputation of being the typical scary month for investors which saw major corrections in the stock market as investors were navigating in a highly uncertain environment.

Once the volatility around the US elections faded, investors were focused on the prospects of another round of national lockdowns and the lack of timely US stimulus support. The tech sector was at the centre of attention as the big tech leaders outshined when the world went into virtual reality mode. The industry biggest players: Amazon, Apple, Facebook, Alphabet, and Microsoft were somewhat well-equipped to rise to the challenges. The resilience and performance of the tech sector year-to-date stood out this year – mega-caps tech companies have tackled the pandemic relatively unscathed by its impact compared to the economic malaise other industries are facing.

  • The Reshuffling of the Dow Jones Industrial Average

Another notable event was the reshuffling of the Dow – Amgen (AMGN), Salesforce.com (CRM) and Honeywell International (HON) were added to the index while Pfizer (PFE), Raytheon Technologies (RTX) and Exxon Mobil (XOM) were removed. The moves were spurred by Apple’s decision to split its stock which will reduce the Information Technology index weight.

Apple made history in August and retakes the market-cap lead from Microsoft to become the first US company to be valued at US$2 trillion.

If immediate attention generally was on the FAANG group, Sea Ltd, the leading internet platform in Southeast Asia and Taiwan drew attention as well. The company outshines Tesla and the FAANG group of companies and emerged as the world’s best performing large-cap stock.

The Last Quarter – First Vaccinations

Amid the election mayhem and a probable contested election, the gridlock in Congress, another wave of hard lockdowns, and Brexit chaos, investors had a breather with promising vaccine updates. The back and forth on the US stimulus coronavirus relief package and Brexit negotiations took the markets on a wild ride in the last quarter. Throughout the last few months, Pfizer and BioNTech, Moderna and AstraZeneca issued convincing statements of the progress of the vaccine trials.

The emergency vaccine approvals and the first vaccinations across major countries like the US and the UK brought some relief following the ongoing surge in coronavirus cases in certain economies. Overall, there was enough optimism in the last few weeks for global equities to recover from October’s plunge.

Source: Bloomberg

US Share Market

Despite a contested election, the lack of timely fiscal support and the raging spread on the virus in the US, the share market was supported by the vaccine updates and first immunizations which took place earlier this month.

Source: Bloomberg

Similarly, the encouraging vaccine news was the bullish trigger for the European markets despite the further lockdowns in major European countries, tough Brexit negotiations and a slower economic recovery compared to its peers. As of writing, a new variant of the virus in the UK triggered a sell-off in the European markets. The CBOE Volatility Index jumped to the highest in a month above the 30 mark.

The new COVID mutation was mainly detected in the UK but the WHO confirmed its presence so far in Denmark, the Netherlands and Australia as well. Investors are closely monitoring statements on whether the new variant is more easily transmissible than the original strain of the disease.

The Australian Share Market – Back in Black

After the release of the Federal Budget, Australian shares started to decouple from US and European stocks as investors endorsed the government blitz which boosted confidence. During the month of November, the Australian share market has rallied significantly on the back of:

  • The easing of lockdown restrictions in the second most populated state and the second’s largest city in the country.
  • The positive vaccine updates coming from Pfizer and BioNTech, Moderna and AstraZeneca.
  • The confidence in the Australian economy as compared to other major countries. Consumer confidence reached a 10-year high.
  • Historically low-interest rates. Even though the RBA slashed interest rates to a historic low, there is a level of reassurance that the lower level of interest rates will stay for a longer period which means that the central bank is not expecting a deterioration in the Australian economy fuelling investors’ confidence.
  • The Asia-Pacific Free Trade Agreement has provided another level of confidence at a time of global trade uncertainty. It has also elevated expectations that both countries might initiate some sort of dialogue after the Chinese Communist Party has frozen all communications with Australian ministers.

In November, the ASX recorded their best month in decades and briefly erased its 2020 losses before retreating lower. As of writing, the index is currently trading at around 6,601.

Forex Market: The King Dollar?

The US dollar went on a roller coaster ride throughout the year. In a classic reaction to an unpredictable and uncertain event like the pandemic, the demand for haven assets triggered a rally in the US dollar. As panic gripped markets, dollar funding pressures drove the US dollar index to a 3-year high above the 102 level. Even though policymakers stepped in to enhance flows, the greenback remained in elevated levels.

Source: Bloomberg

A significantly bigger stimulus package compared to its peers at the beginning fuelled hopes that the US economy would probably recover faster than other major economies. The US dollar was unable to maintain the bullish momentum over the following quarters as risk sentiment improved and the US was still battling hard the spread of the virus with no signs of slowing down and stimulus packages were not flowing in as required.

Major currencies remained stronger than the US dollar in the following quarters. Major central banks like the RBA had to tap into QE for the first time this year and many even contemplate or left the door open for negative interest rates if warranted.

Source: Bloomberg

The Euro gathered strength on the historic unity, some economic recovery, the ECB stimulus program and EU budget. The renewed lockdowns and Brexit woes remain the factors that may drove further volatility in the EUR pairs. The EURUSD pair is trading at a high above the 1.22 level.

The Antipodean currencies were among the top gainers lifted by the additional funding from the central banks, governments, renewed confidence, economic data and the better containment of the virus as compared to other major economies. The AUDUSD pair is trading nearly three-year high around the 0.750 level.

Source: Bloomberg

As the Brexit deadline looms, the Pound swung between gains and losses driven by contradictory headlines and statements from both the EU and the UK. Traders grew more hopeful in the last few days when both parties appear committed to seeing a deal through despite significant differences on three critical issues: level playing fieldgovernance and fisheries. Investors were taken on a roller-coaster ride following intensifying deal negotiations and on-and-off positive and negative announcements.

Brexit hopes drove the GBPUSD pair to an intraday high of 1.3624 last week. The Pound plummeted on the news of a new variant of the virus and as of writing, the pair retreating lower to the 1.33 level.

Gold Rally

At the start of the year, the US dollar and Gold were moving in tandem due to the prevailing uncertainties – QE, low-interest rates, trade frictions, geopolitical tensions, global debt and growth uncertainties, gold hoarding by central banks have driven the gold price higher just below the $1,700 mark.

However, Gold was initially liquidated due to the wider and rapid spread of the coronavirus across the globe. The precious metal is viewed as a highly liquid asset and investors were in a need of cash due to margin calls and other liquidity requirements. COVID-19-induced liquidity issues caused the yellow metal to plunge to a low of $1,451.55.

The yellow metal rallied at the start of the third quarter to a high of $2,075 in the month of July but traded within a narrow range as investors digested some positive vaccines updates, improving economic data and easing lockdown restrictions. The XAUUSD pair plunged below a key psychological level below the $1,900 mark but held on to elevated levels.

From the health crisis point of view, the vaccine updates are fuelling the hopes of a quicker recovery and providing reassurance to investors. However, the amount of stimulus injected into the global economy over the last couple of months is evidence that the economic and financial recovery might take some time. Gold is still trading at a decade-high around the $1,880 mark.

Oil Market

An oil price war and the ongoing pandemic struck the crude oil market at a time where the industry was already faced with a simultaneous demand and supply shock. As the world grapples with the ongoing pandemic, different forms of lockdowns across the globe have severely impacted key industries of consumers of oil. Global activities have slowed down on a massive scale with empty roads, grounded aircraft, plunging car sales and disrupted supply chains abruptly sapping oil demand.

The extent of the disruptions in the energy market caused by the pandemic will probably leave a lasting impact on the oil market which may take years to overcome. Traders are analysing whether the impact of the pandemic will either accelerate the pace in using renewables or delay that process.

Crude oil prices have mostly remained stuck within a range below the $50 after the big plunge earlier this year. With a dire demand outlook from as per the October reports, there are increasing pressure from OPEC members and its allies to balance the supply side and avoid flooding the oil market with extra supply.

In a pandemic-induced environment, investors are navigating a new normal with COVID-19. Despite the painful year on the health front, the stock market had a great year driven by the prompt interventions in the financial markets by central banks and governments around the globe.

While a vaccine provided a sense of relief, we are ending the year with much uncertainty on the geopolitical, economical and health front.

By Deepta Bolaky

Disclaimer: The articles are from GO Markets analysts, based on their independent analysis or personal experiences. Views or opinions or trading styles expressed are of their own; should not be taken as either representative of or shared by GO Markets. Advice (if any), are of a ‘general’ nature and not based on your personal objectives, financial situation or needs. You should therefore consider how appropriate the advice (if any) is to your objectives, financial situation and needs, before acting on the advice. If the advice relates to acquiring a particular financial product, you should obtain and consider the Product Disclosure Statement (PDS) and Financial Services Guide (FSG) for that product before making any decisions.

About GO Markets

GO Markets was established in Australia in 2006 as a provider of online CFD trading services. For over a decade we have positioned ourselves as a firmly trusted and leading global regulated CFD provider. Traders can access more than 250 tradeable CFD instruments including Forex, Shares, Indices and Commodities.

Follow us and keep up to date with the latest market news and analysis.

The Lockdown, The Fallout and the RoadMap to Recovery

Global Lockdown

In an abrupt and unprecedented manner, the world witnessed a mass halt to global activities due to the pandemic. Governments and central banks rushed in to intervene and support the global economy with unconventional measures to cushion the impact of the coronavirus on their economies and ease market strains.

As the virus spread quickly across the globe, the world forcing employers and employees to work remotely and rethink how to operate in a new ‘virtual reality’. Similarly, investors are faced with a new normal and are at an inflection point where there is a pressing need to reshape their investing strategies.

Oil Crash

The oil price war is over for now and the OPEC+ group has also agreed to a historic production cut in early April; though . Aa little too late considering how the situation unfolded during the month. Oil demand took the biggest hit seen in years at a time where production was reaching new highs.

The world is running out of spare room to store the fast-expanding glut that the pandemic has created. The damage initially caused by the price war was irreversible during such pandemic. The lack of storage capacity triggered a big plunge in crude oil prices.

Crude oil futures markets were in chaos, triggered by the inability of investors or traders to take on physical deliveries of oil barrels. The storage problem is so dire that investors or traders holding oil contracts are willing to sell their contracts at a loss, causing crude oil futures to turn negative for the first time in history.

A situation of more sellers than buyers.

On April 2020, WTI futures for May delivery traded at around negative 37 for the first time ever, reflecting the urgency of sellers to offload their contracts to avoid taking physical deliveries given the pandemic-induced circumstances.

Source: Bloomberg

What to expect in the coming months?

There is no quick fix for rebalancing the oil market. In such volatile markets, it is hard to predict what will happen with the June contract as the storage capacity will remain a primary source of concern.

Oil future prices took another blow when one of the largest oil funds, the United States Oil (USO), filed an SEC filing and revised its investment in oil future contracts to concentrate on contracts that are further out in the future.

Crude oil prices have remained under heavy selling pressure throughout the month. The near-term outlook for the oil market remains grim but investors are hopeful some recovery will take place when:

  • Production cuts will slow down the speed at which storage tanks are being filled; and
  • Major economies will ease lockdowns and activities will gradually pick up.

In the last few days, WTI for June delivery lost more than 15% and is trading at $14.26 a barrel while Brent recovered from earlier losses for June settlement and is trading at $21.42 a barrel.

GDP Contraction

The International Monetary Fund (IMF) has predicted in its 2020 World Economic Outlook that the economic impact of the COVID-19 pandemic might result in the “worst recession since the Great Depression”. The IMF expects the world economy to contract by 3% in 2020 due to the magnitude and speed of the collapse in activity following the various forms of lockdown seen across the globe.

Attention was on the GDP figures of the world’s two largest economies!

Earlier this month, China reported a deep contraction of 6.8% in GDP in the first quarter. It was not surprising given that China exercised strict lockdown measures and put a halt to activities throughout most of the quarter.

China has slowly resumed activities since the beginning of the month as the worst of the pandemic appears to be over. Manufacturing and trade data has been more upbeat which has risen expectations of a gradual return to normal if China avoids another wave of the virus.

Investors will be ending the month with the US GDP report that will show the first wave of the impact of the pandemic. After more than a decade of expansion, the US economy was expected to contract by 4% with a steeper contraction in the second quarter.

As of writing, the preliminary figures show a worse-than-expected contraction of 4.8%, which is the first sharpest decline since the Great Recession.

The figures echoed the IMF warnings!

Earnings Season

Earnings results were widely expected to highlight the pain inflicted by the coronavirus-induced crisis. Even though investors were expecting a tough earnings season with withdrawn forecasts, confusion and uncertainties about the 2020 outlook, the quarterly results are also meant to reveal how certain industries are affected by the virus and how those insulated from the virus are managing the pandemic.

Everything about the pandemic is unpredictable and therefore, companies in every sector are facing the challenges to communicate their guidance. Companies within certain sectors will perform worse than others.

Financials

The earnings season kickstarted with major US banks. As widely expected, banks like JP Morgan, Wells Fargo, Citigroup, Bank of America, Goldman Sachs and Morgan Stanley all reported a significant drop in profits. Overall, the banks made significant provisions for credit losses and saw major declines in asset management revenues.

Banks like Goldman Sachs and Morgan Stanley have flared better and their share price is currently up by 15% or more.

Communication Services

Our attention move to the big tech giants like Alphabet, Facebook and Netflix which have been reclassified to the communications sector in the last few years.

Netflix was among the first few to report its quarterly results. The company reported a $5.8B in revenue with a year-on-year growth of 27.6%. The number of subscribers came above estimates and more than double its target with 15.77 million paid subscribers. The substantial growth came in March when the lockdown and social distancing measures forced many more households to join the TV and movie-streaming service.

However, the company warned that revenue and growth might decline mostly due to probable lift of the confinement measures, a stronger US dollar that is impacting international revenue growth and the lack of high-quality content following the pause in production. Its share price reached a high of around $440, but as of writing, it is currently trading at $411.

Alphabet, Google’s parent company, issued its quarterly results after the bell on Tuesday. The company reported an increase of 13% in revenue for Q1 2020, compared to a 17% increase for the same quarter a year ago and earnings of $9.87 per share. Based on expectations, it was a miss on earnings. However, the company has performed well given the challenges and is cautiously optimistic tones for the second quarter. Alphabet’s share price rose by almost 9% on Wednesday.

Facebook – The social networking giant reported earnings of $4.9B or $17.10 per share for Q1 2020 compared to earnings of $2.43B or $0.85 per share in Q1 2019. The company doubled its earnings. Similarly to its peers, Facebook warned of the unprecedented uncertainty and withdrew its revenue guidance for the rest of the year. Its share price jumped by 6% to trade at $194.20.

Both Google and Facebook have seen a significant reduction in demand for advertising, but the companies still managed to stay massively profitable and adapt in a coronavirus-fueled environment.

Tech Sector

Microsoft released strong results in the third quarter of its fiscal year 2020. Overall, COVID-19 has had a minimal net impact on total revenue. As people around the world shifted to work and learn from home, there was a significant increased in demand for Microsft’s Cloud business to support remote works and learning scenarios. Compared to the corresponding period of last fiscal year:

  • Revenue was $35.0 billion and increased 15%
  • Operating income was $13.0 billion and increased 25%
  • Net income was $10.8 billion and increased 22%
  • Diluted earnings per share were $1.40 and increased 23%

Microsoft did not only top revised COVID-19 estimates but also the earnings that were expected back in January before the coronavirus crisis.

All eyes will be on Apple Inc. which will report earnings on Thursday, April 30, 2020 after market close. Apple’s conference call to discuss second-quarter results will be held on the same say at 2:00 p.m. PT / 5:00 p.m. ET.

Consumer Discretionary

Unlike the consumer staples sector which includes companies that produce or sell essential products, consumer discretionary stocks are mostly companies that do not manufacture or sell essentials. The various forms of lockdowns have left many people without employment. For example, the US economy lost around 20 million jobs over the last few months. It took the US like a decade to add those jobs in the economy.

Amazon.com Inc has always stood out from the lot because of its status as a leading e-commerce retailer. Investors will closely watch its earnings reports for guidance. The company Amazon.com, Inc. will hold a conference call to discuss its first quarter 2020 financial results on April 30, 2020 at 2:30 p.m. PT/5:30 p.m. ET.

Stock Market

Worldwide sharp contractions in the manufacturing sectors, warnings of economic contraction and fears of a recession in the month of April have created panic and volatility in the financial markets.

A look at the All-Country World Index shows that global equities are poised for their biggest monthly gain since the Great Recession. The biggest driver is the unprecedented and unconventional actions by central banks combined with massive fiscal stimulus.

Global equities are surging even though economic data is painting a different picture.

Towards the end of the month, some positive developments on the novel coronavirus cases and the possibilities of earlier opening plans of certain major economies has driven markets higher. Mega-cap stocks like Microsoft, Amazon, Facebook and Google have also contributed to lifting sentiment and drove the rally while smaller-cap companies are bearing the brunt of the pandemic.

The Reopening Plans

There is still hope for the economy despite the tough circumstances. V-shaped or U-Shaped Recovery? New infections have slowed down but there is still no vaccine and economies are at risk of a new wave of infection.

A vaccine could have increased expectations of a swift recovery like a V-shaped immediate recovery in the third quarter or a U-shaped recovery with stability more towards the second half of the year.

However, at the moment, governments are easing lockdown restrictions and investors will be back to a New Normal to replace the current “normal”. The economy is trapped in an unusual type of recession created by the novel coronavirus.

The roadmap to recovery will be progressive and dependent on the governments approaches towards easing lockdowns. It will be different across the globe depending on how governments feel about the situation and the risk of a second wave of the virus.

The path to recovery will be a learning process given the unknown territory!

Follow us and keep up to date with the latest market news and analysis.

Deepta Bolaky, Market Analyst at GO Markets.

Read Our GO Markets Review

About GO Markets

GO Markets was established in Australia in 2006 as a provider of online CFD trading services. For over a decade we have positioned ourselves as a firmly trusted and leading global regulated CFD provider. Traders can access more than 250 tradeable CFD instruments including Forex, Shares, Indices and Commodities.


Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice

Quarter One Summary: Crisis, Volatility, and Opportunities

A Trio of Crises

Faced by an unprecedented health crisis that caused an abrupt slowdown of activities, forced by governments and an oil crisis derived from a simultaneous demand and supply shock, the world is currently bracing for an economic recession.

The markets tumbled like dominoes hit by various headwinds at once. The freefall in the markets has forced central bankers and governments to implement various stimulus packages, emergency rate cuts and engage in significant bond-buying.

Confidence has taken a massive hit as the world faces unprecedented quarantines measures!

Volatility Index (VIX)

A look at the CBOE Volatility Index shows how investors are reacting to the impact of the coronavirus on markets and the economy. Also known as Wall Street’s fear gauge, the index is a real-time market index that represents the market expectation of 30-day forward-looking volatility.

The Index, on average, has been around the 20 levels but increased to decades high at 82.69 on the 16th of March 2020. The sharp rise is the reflection of fears and anxieties prevailing in the financial markets.

Source: Bloomberg

Stock Market Busts and Circuit Breakers

Circuit breakers were first introduced in the 1980s to curb panic selling. For the US exchanges, the S&P500 is used as the pricing reference to measure a market decline and there are currently three levels to the circuit breakers:

Level 1 (7%)

  • Trading will halt for 15 minutes if the drop occurs before 3:25 p.m.
  • At or after 3:25 p.m.—trading shall continue unless there is a Level 3 halt.

Level 2 (13%)

  • Trading will halt for 15 minutes if the drop occurs before 3:25 p.m.
  • At or after 3:25 p.m.—trading shall continue unless there is a Level 3 halt.

Level 3 (20%)

  • At any time during the trading day—trading shall halt for the remainder of the trading day.

There were four circuit breakers in one month which is a record number ever since circuit breakers were first introduced!

The novel coronavirus has created such uncertainty around the globe, which has caused plunges in global equities. Despite the VIX easing to 65.54, further wild swings seem certain in the next couple of weeks.

Source: Bloomberg

Rescue Packages

In such plunging markets, the focus has been on the rescue packages. Some world leaders were complacent at the beginning, however, we are now seeing highly coordinated intervention measures flooding the markets in an attempt to cushion the effect of the COVID-19 on the global economy.

  • Central banks issued emergency rate cuts as well as other policy tools like quantitative easing (QE).
  • Major countries like Australia and New Zealand were forced to join the QE wagon to support their respective economies.
  • Governments issued various massive stimulus packages to relieve consumers and businesses from the coronavirus fallout. The US stands out with a $2 trillion stimulus package, the biggest in history.

The rescue packages have not necessarily addressed the full extent of the economic pain which yet to be seen in the coming months, but have provided some relief to wounded economies.

Stock Market – A degree of Calm

In the first quarter of 2020, it is evident that the 11-year bull run in the stock markets was over. Major equity indices dropped in bear market territory in what was the worst week since the global financial crisis.

Source: Bloomberg

The stock market went on a roller coaster ride as investors pulled out of riskier assets. The degree of calm is driven by various interventions in the financial markets. But, the worst of the virus is not yet over and it may not yet be a lasting rebound.

It could well be a dead cat bounce. Notwithstanding, there are not enough signs to predict whether the stock market has found a floor or is yet to find a bottom. There are too many uncertainties to start pricing-in a recovery.

FX – The King Dollar?

The currency market is on the same wild run as other markets. The immediate attention falls on the King dollar. In the early stage of the outbreak, the US seemed relatively unfaed by the virus and the greenback gathered strength as a safe-haven compared to the rest of the world.

As panic gripped markets, dollar funding pressures drove the US dollar index to a 3-year high above the 102 level.

Source: Bloomberg

Even though the greenback has somewhat retreated as policymakers stepped in to enhance flows, the US dollar index remains in elevated levels just below 100. A significantly bigger stimulus package compared to its peers are fuelling hopes that the US economy would probably recover faster than other major economies.

Gold – The Safe- Haven

The price movement of the precious metal also depicts the turmoil in the markets. At the start of the year, the US dollar and Gold were moving in tandem due to the prevailing uncertainties. QE, low-interest rates, trade frictions, geopolitical tensions, global debt and growth uncertainties, gold hoarding by central banks have driven the gold price to a high of $1,680.47.

Gold was liquidated due to the wider and rapid spread of the coronavirus across the globe. The precious metal is viewed as a highly liquid asset and investors were in a need of cash due to margin calls and other liquidity requirements. The greenback and the US dollar have therefore started to diverge from each other. COVID-19-induced liquidity issues caused the yellow metal to plunge to a low of $1,471.24.

Source: Bloomberg

Once investors were reassured that central bankers are injecting money into the financial system, investors resumed the buying of gold as a safe-haven. At the same time, gold is facing disruptions in the physical markets due to the shutdown of gold refineries leading to a shortage of gold. A combination of positive fundamentals, weaker US dollar and rescue packages lifted the XAUUSD pair back above the psychological level of $1,600.

The economic backdrop is creating a bullish environment for the precious metal. Amid high volatility, Gold traders are likely going to keep monitoring any updates on the virus, liquidity in the financial markets, and the strength of the US dollar for fresh trading impetus.

Volatility Means Opportunities

Human lives and the global economy are at risk. The coronavirus has heavily impacted the way the world operates. Even though the worst of the health crisis is not over yet, and many countries are bracing for another brutal quarter ahead, the health crisis will ease and end at some point.

It is not all gloomy in the investment space despite the sharpest falls in history. The panic-driven volatility might present investment opportunities. Investors will likely be in search of bargains by buying at rock-bottom prices once the number of coronavirus cases start to slow down.

Follow us and keep up to date with the latest market news and analysis.

Deepta Bolaky, Market Analyst at GO Markets.

Read Our GO Markets Review

About GO Markets

GO Markets was established in Australia in 2006 as a provider of online CFD trading services. For over a decade we have positioned ourselves as a firmly trusted and leading global regulated CFD provider. Traders can access more than 250 tradeable CFD instruments including Forex, Shares, Indices and Commodities.


Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice

Gold Is Being Liquidated

Liquidity Crisis

High levels of liquidity happen when there is both supply and demand for an asset, meaning transactions can take place easily. A market is considered to be liquid if it can absorb liquidity trades with significant changes in price.

A liquidity crisis is, therefore, an acute shortage or drying up of liquidity. In simple terms, it occurs when there is a simultaneous increase in demand and a decrease in the supply of liquidity across many financial institutions or businesses.

As the impact of the coronavirus rattles markets, global central bankers and governments are ramping up efforts to address liquidity issues across markets.

Gold – A Highly Liquid Asset

In times of uncertainties, investors generally seek safety with traditional haven assets like Gold.

Why is Gold also selling off?

Gold is set apart as it has a feature of a liquid asset just like cash. Investors are on the hunt for liquidity which is prompting the gold market sell-off. An environment of thin liquidity and high volatility is forcing investors to unlock capital in gold to fulfil liquidity requirements. Gold was seen outperforming this year which makes it a profitable asset – prompting investors to take profit.

As the turmoil in global stocks intensifies, investors are looking for ways to cash in to meet margin calls.

At the same time, the safe-haven status of the gold is being hammered by a stronger US dollar. Despite the Fed’s bold emergency rate cuts, the greenback made an impressive comeback against its peers. Another wave of global easing hits markets, making the US dollar the preferred choice compared to other major currencies. The unusual tandem between the US dollar and Gold seen since the beginning of the year seems to have also faltered at the start of March.

Source: Bloomberg Terminal

Gold has recently lost some of its haven appeal as investors search for liquidity, but it has remained around elevated levels in the past 12 months. On Tuesday, reports of a big stimulus package of more by $1 trillion has helped the gold to rebound slightly.

Gold Stocks

Gold is a victim of the sell-off because of its outperformance and liquidity features, which are beneficial to investors during times of financial crisis.

However, gold mining stocks have the potential to rally in anticipation that the price of precious metals will go up once the markets stabilise. In the Australian share market, the rebound on Tuesday was mostly driven by the gold mining stocks, which surged by more than 15% despite a fall in gold price.

Source: Bloomberg Terminal

It is therefore not uncommon for gold to act as a source of liquidity at the start of a liquidity crisis. As investors are convinced that central banks’ intervention measures like rate cuts and quantitative easing will inject enough liquidity in the financial market, Gold will find buyers.

Follow us and keep up to date with the latest market news and analysis.

Deepta Bolaky, Market Analyst at GO Markets.

Read Our GO Markets Review

About GO Markets

GO Markets was established in Australia in 2006 as a provider of online CFD trading services. For over a decade we have positioned ourselves as a firmly trusted and leading global regulated CFD provider. Traders can access more than 250 tradeable CFD instruments including Forex, Shares, Indices and Commodities.


Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice

Bear Market – Where’s the Floor?

Investors are in a state of shock rattled by the drumbeat of bad news. It is hard to ignore the noises coming from the markets; virus risks, bear market, recession risks and oil shock are dominating headlines fuelling the panic.

The Volatility Index is at its highest since the 2008 global financial crisis.

During such periodic bouts of volatility, rather than catching the safety wagon, some investors might look for trading opportunities by being selective about certain categories of assets or stocks within certain industries.

Fears and Opportunities

Virus fears are spiralling and causing carnage in the financial markets. Investors are not looking at the virus in isolation but are mostly reacting to how an added layer of uncertainty is weighing on an already fragile global economy.

The current situation is unnerving to investors and even though it is difficult to predict a bottom, the markets would eventually find a floor. We, therefore, expect elevated volatility to persist in the coming weeks as market participants will be busy monitoring any developments.

Short-term buying opportunities will likely be conditional on the extent of monetary and fiscal intervention.

Medium-term will be more challenging as investors will be assessing the impact of the pandemic to recalibrate growth and expectations.

Monetary and Fiscal to the Rescue

Another wave of monetary easing policy has hit the financial markets following heightened fears of a supply and demand shock over the wider spread of the coronavirus. After the Fed, BoC, and the RBA, Bank of England joined its peers and slashed interest rates by 50 bps. The ECB was the biggest disappointment for markets as the central banker did not cut interest rates.

In an era of low-interest rates, central banks are running out of ammunition to support the ailing economy. This week we have seen that governments responded to the chaos in the markets with fiscal promises. Australia and the US were among the first to announce an economic stimulus plan but failed to reassure investors.

Oil Crash – is it time to BUY?

Monday was the worst day since the global financial crisis in 2008 as an oil shock and virus fears have wiped billions from the markets.

Should you Buy? It might be time for some buying opportunities but caution should prevail.

A swift recovery in the oil and gas industry is hard to predict. There are a number of issues that are keeping the oil market on edge ranging from fundamental challenges to climate change crisis. The energy sector was already poised to be challenged in this new era as the increased concerns on climate change and the rise of renewables are altering the dynamics in the industry.

But, now we should expect more volatility in the oil market due to the price war initiated by Saudi Arabia to punish Russia for not committing to more production cuts.

Markets are on wait-and-see mode to monitor whether the pressure from Saudi Arabia will force Russia to go back to the negotiable table. In the meantime, a simultaneous shock to both demand and supply and the unknown length of the epidemic will defy a swift recovery.

Hence, it will be a challenging few weeks ahead as the outlook for the oil market remains weak. As of writing, Brent Crude and WTI dropped to $33 and $31 – the lowest levels seen in five years and are currently finding support around those levels.

Eventually, when prices start to stabilise, the recovery might come in incremental stages. The revised price outlook for WTI and Brent Crude will probably be around $40 and $45 – the levels they were at before the flash crash.

Stock Market – Bear Market

Where is the floor to this Meltdown? It is probably the first question many investors are trying to forecast to step in and buy.

The stock market faced the end of the longest bull- run in history this week!

Wall Street had its worst day since 1987 which is surely unnerving for investors. Trading was suspended for 15 minutes twice during this week. Countries are shutting down slowly and imposing stringent quarantine measures to contain the virus. We are not moving past the impact of the coronavirus to fears of a recession.

This is an unprecedented panic around a global pandemic. Around the globe, major governments and central bankers failed to timely react and reassure on the health front and on the economic measures to weather the storm in the markets.

Major equity indexes are deep in a bear market as the measures acted like a balm rather than the vaccine needed to stem the downturn.

Source: Blomberg Terminal

In the Asia/Pacific region, the Australian share market is being hit the hardest in the Asia/Pacific region. A combination of the virus risks, bushfires and droughts triggered the freefall in Aussie stocks. The RBA has very little room for intervention so markets are relying on the government stimulus plans to support the economy.

Source: Blomberg Terminal

Scott Morrison was among the first prime minister of major countries to deliver a detailed bold fiscal stimulus package designed to support confidence, boost investment and keep Australians in a job. Yet, it barely brought relief to the markets.

The ferocity of the fall in the Australian share market derives from the fact that its economy was stagnant and already facing significant challenges.

Cautious Buying Opportunities Still Possible

While it is a moment of capitulation for some which prefer to wait for some stability before finding some buying opportunities, investors could also think of the markets:

“Post-Coronavirus”

Once investors isolate the noises and panic, being selective can create investment opportunities:

  • Some sectors might be safer than others: Health care sector could be the winner in this situation
  • Identify quality blue chips stocks poised to rebound to benefit from bargain prices
  • Look for low financial leverage stocks

Deepta Bolaky, Market Analyst at GO Markets.

Read Our GO Markets Review

About GO Markets

GO Markets was established in Australia in 2006 as a provider of online CFD trading services. For over a decade we have positioned ourselves as a firmly trusted and leading global regulated CFD provider. Traders can access more than 250 tradeable CFD instruments including Forex, Shares, Indices and Commodities.


Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice

Follow us and keep up to date with the latest market news and analysis.

A Volatile Month – With New Highs and Big Plunges

The COVID_19 has added another layer of uncertainty in the markets and is threatening to disrupt an already fragile global economy.

Investors are forced to exercise increased caution towards the end of the month due to the mistrust over the virus case count following two changes in methodology within one month and the wider spread across borders.

According to the WHO, The “World must prepare for pandemic”. As more cities in certain countries go into quarantine, investors fret a bigger impact of the virus risks on the global economy.

Coronavirus is being viewed as the tip of the iceberg and the last straw.

Haven Demands

It was a classic reaction where investors sought safety with haven assets like the Japanese Yen, US Dollar and the Gold.

Japanese Yen

The Yen normally find buyers when there are panic and uncertainties in the markets. We saw the currency periodically picked up haven demands when coronavirus fears escalated but the momentum was weaker compared other haven assets.

Given that Japan’s economy contracted the most in five years, the haven status of the Japanese Yen was compromised.

The Mighty Dollar

The US dollar remains the King of forex backed by stronger economic fundamentals, a less-dovish central bank and its haven status. Nearly all the major currencies were weaker against the greenback.

Source: Bloomberg Terminal

The US dollar index which tracks the performance of the greenback against a basket of currencies rose to new highs in February before retreating to levels around the 2019 highs.

The Index is composed of six component currencies namely: the Euro, Japanese Yen, British Pound, Canadian dollar, Swedish Krona and Swiss franc. The Euro which has the biggest weightings in the index improved tremendously following upbeat German’s IFO surveys which pulled the index from 2020 highs.

The retreat is mostly driven by the upside movement of the shared currency. In other words, markets’ sentiment towards the greenback has not fundamentally changed. The dollar remains preferred compared to other major currencies.

Gold

A fragile risk environment pushed the gold price to multi-year highs. The yellow metal broke key levels to the upside and traded just below $1,700. Since the beginning of the year, the XAUUSD pair has remained in elevated levels around the $1,550 and $1,600 level. However, gold traders pushed the pair significantly higher as the virus risks sparked fears of economic fallout.

At such high levels, gold was in the RSI overbought territory and a correction was highly expected. As of writing, the pair has consolidated around $1,650. Investors will likely continue to monitor the updates on the virus for fresh trading impetus:

  • The rate of new cases and deaths inside and outside of China
  • The quarantine measures undertaken by affected countries
  • The WHO’s stance of the spread

Coronavirus is certainly not the only headwinds, but it is definitely boosting the short-term outlook for gold. We expect any retracement will likely be limited as investors are hedging against poor fundamentals and the long-term headwinds.

Buying Opportunities?

Are COVID_19 fears alone causing such a massive sell-off in the global stock markets?

The rally in the stock market is mostly fueled by the central banks’ intervention amid historically low levels of interest rates. Therefore, the stock market is viewed as the next best alternative for “parking” money.

Coronavirus is an evolving risk which is acting as the tip of the iceberg triggering a massive sell-off in an overheated market. Risk sentiment remains fragile and the virus is probably the excuse for the long-awaited pullback.

Major equity indices fell dramatically and US benchmarks are poised to end the month into correction territory due to a fall of more than 10% in the last few days.

A correction to the stock market bull run was long overdue.

Source: Bloomberg Terminal (Thursday at 10:00 AEST)

Key highlights of the month that shows the nervousness in the markets are:

  • Gold currently trading at a 7-year high.
  • US dollar index rose to 3-year high and traded in the upper range of the 99 levels.
  • Japanese stocks have decoupled from Chinese stocks. Equity losses in Japan are higher than those in China as its economy is struggling.
  • European and US sharemarket lost around 10% or more for the month.
  • Australian share market is the worst performer in the Asia/Pacific region.
  • Malaysian stocks enter into bear market territory.
  • Hong Kong stocks are bearing the brunt of months of political unrest and a gloomy outlook after the virus broke out. Hong Kong stocks are near the lowest since mid-2004 relative to its global peers.

The Big Plunge in the stock market makes the Buy-the-Dip strategy seems attractive at first glance. However, price action in the markets is expected to remain volatile until there are more positive developments on the virus. Investors are struggling to assess the risks of supply chain disruptions and the economic impact on the global economy.

Uncertainties are roaring loud and clear in the financial markets even though any effects of such an epidemic is normally expected to be temporary. When the stock market was soaring, it was hard to find convincing reasons to sell. Market participants are now on pause and taking the opportunity to be reflective about the struggling economy fueled by central bankers’ constant intervention.

Earnings Warnings

A stronger-than-expected earnings season is being overshadowed by warnings of the virus on future sales and profits. The WHO has not yet declared the spread as a global pandemic, but companies fed by a global supply chain or within certain industries have already warned that their earnings will take a hit.

Bond Market

The record low yields in the bond market is a reminder of how investors are pricing the risks. As stocks tanked globally, the 10-year Treasury note yield fell to an all-time low. US government bonds are generally the safest assets sought by investors during times of economic distress.

COVID-19 risks, and a myriad of other concerns like the Fed’s policies, and the uncertainties around the 2020 US election are denting risk sentiment.

Economic Data

In an already sluggish global economy which are battling several headwinds and low levels of interest rates, investors are monitoring economic data to gauge the “forecasted” recovery. The United States is standing out compared to its peers as its economy is more resilient and its central bank is also less-dovish.

The impact of the virus on the world’s economy will depend on how widely the virus spreads across borders. The US economy is strong and might have more room to absorb the temporary effect of the virus risks.

This month, we saw central banks like the ECB seeking for a more fiscal boost as there is little room for central bankers to shore their economy.

Stepping into March, we expect the markets to remain volatile driven mostly by the developments of the virus. The decision of the outbreak by the WHO will be heavily monitored. Investors will look for support that the spread of the virus is contained while reassessing the uncertainties and the actions from central banks to stem the economic impact.

Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice.

Deepta Bolaky, Market Analyst at GO Markets.

Read Our GO Markets Review

About GO Markets

GO Markets was established in Australia in 2006 as a provider of online CFD trading services. For over a decade we have positioned ourselves as a firmly trusted and leading global regulated CFD provider. Traders can access more than 250 tradeable CFD instruments including Forex, Shares, Indices and Commodities.


Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice

Follow us and keep up to date with the latest market news and analysis.

Australian Earning Results: 17th February 2020

Sectors performance was mixed, with Information Technology, Energy and Real Estate leading gains of more than 0.5%, while significant losses were seen in the Consumer Discretionary and Communication Services sectors.

Brambles Ltd, Regis Resources Limited and QBE Insurance were among the best performers of the ASX200 today, following the release of the earnings reports.

Brambles Limited (BXB) widely recognised as a leading sustainable logistics business rose by more than 4% to $13.18 on an upbeat profit outlook, despite a drop of 9% in the first half net profit. The company manages to deliver sales and earnings growth in the first half in a challenging economic environment.

  • Sales growth +7% at the high end of the Group’s mid-single-digit revenue growth objective
  • Underlying Profit +5% includes +3pt benefit from AASB 16; sales contribution to profit, efficiency gains and lower lumber and transport inflation offset higher operating costs and asset charges across the Group
  • Net finance costs decreased 12% despite US$14m of lease interest recognised due to AASB 16. The decrease reflected interest income from Australian dollar deposits and lower debt funded by IFCO sale proceeds
  • Profit after tax (incl. discontinued operations) down (9)% due to inclusion of US$51.4m of IFCO earnings in 1H19. IFCO was divested in 2H19
  • Underlying effective tax rate decreased to 29.9% reflecting a change in mix of global earnings
  • Underlying EPS of 17.8 US cents up 1.0 US cent reflecting higher earnings and 0.3 US cent benefit from the share buy-back

Regis Resources Limited (RRL) reported a strong half-year net profit after tax of $93.4million. The Australian gold miner’s revenue was boosted by the sales price rather than quantity. For the 2020 outlook, the Duketon operations continue to be on track to deliver the annual production guidance. Its share price ended more than 3% higher

  • Record Net Profit of $93.4 million which represents a 17% increase in the prior corresponding period
  • Revenue of $371.4 million with 182,807 ounces of gold sold at an average price of $2,063 per ounce
  • EBITDA of $185.6 million with a strong EBITDA margin of 50%
  • Cash flows from operating activities of $147.2 million
  • A fully franked interim dividend of 8 cents per share declared
  • Production on track to meet full-year guidance 340,000-370,000 oz

QBE Insurance Group (QBE) announced an FY19 statutory net profit after tax of $550M, up 41% from $390M in the prior year. Its share price jumped by 4.24% to $14.75.

  • Adjusted net cash profit after tax was $733M, up 6% from $692M in the prior year
  • Adjusted cash profit return on equity was 8.9%, up from 8.0%2 in the prior year
  • Group-wide renewal rate increases averaged 6.3% compared with 5.0% in the prior year
  • Premium rate momentum accelerated across all divisions over the course of FY19, especially in International (particularly Europe) and North America
  • Group-wide renewal rate increases averaged 8.3%3,4 during 2H19

GWA Group Limited, the leading supplier of building fixtures and fittings to household and commercial premises performed strongly despite the struggling residential housing conditions. Tim Salt, the Managing Director highlighted the resilience of the business in the face of challenging market conditions.

  • Net Profit of $23.6 million
  • A fully-franked interim dividend of $0.08 per share
  • 1HFY20 revenue of $206.3 million and EBIT of $37.5 million

The Company’s share price rose by 2.05% to finish the day at $3.98 from $3.90.

Index Limited (IMD) share price traded in the red before lunch despite strong earnings reports. The mining tech company edged higher to close at 1.34% higher at $1.51.

  • Strongest half-yearly revenue of $127.9m – up 2% on 1H19 ($125.0m)
  • Underlying EBITDA of $28.1m1 – up 12% on 1H19 ($25.2m)
  • A robust balance sheet with a strong net cash position of $25.5m2 – up 24% on 1H19
  • A fully-franked interim dividend of 1cps declared – up 25% on 1H19 (0.8cps)

Bendigo and Adelaide Bank (BEN) issued its interim-results which a dividend cut and lower profits while announcing a $300 million capital raise and a trading halt.

  • Statutory net profit: $145.8 million, down 28.2 per cent, including a pre-tax software impairment of $87.1 million and accelerated amortisation of $19.0 million
  • Cash earnings after tax: $215.4 million, down 2 per cent
  • Net interest margin: 37 per cent, up 2 basis points (bps)

This week will be the busiest week for February’s earnings. We will see more companies reporting on Wednesday and Thursday. Stay tune for more updates by GO Markets!

Deepta Bolaky, Market Analyst at GO Markets.

Read Our GO Markets Review

About GO Markets

GO Markets was established in Australia in 2006 as a provider of online CFD trading services. For over a decade we have positioned ourselves as a firmly trusted and leading global regulated CFD provider. Traders can access more than 250 tradeable CFD instruments including Forex, Shares, Indices and Commodities.


Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice

Follow us and keep up to date with the latest market news and analysis.

The Week Ahead – Safe-Haven Demand, EZ Data and Oil Reports

Corporate earnings, positive trade news, and improving economic data supported the global stock market despite the virus risk uncertainty.

Safe-haven Demand

The virus is adding another layer of risk to an already fragile environment. Markets have been finding support on certain measures adopted by China and other governments to contain the spread:

  • The largest quarantine in history and other unprecedented measures have limited the spread across borders with two deaths confirmed outside China.
  • Fatality rate stands at 2.1% compared to 10% for the SARS.
  • China is spending at least $10 billion to control the coronavirus outbreak and reaching out for medical supplies as the first wave of international experts head to the disease’s epicentre.
  • “Assuming current trends continue, we’re still projecting a mid-to-late-February peak” in Wuhan, said Adam Kucharski, an associate professor of infectious disease epidemiology, in an email on Sunday.

As the outbreak within China is worsening, particularly in the Hubei province, the death toll rises above 800 and has surpassed SARS. Investors will likely monitor the effectiveness of these measures over the next couple of weeks.

China is also facing backlash over the initial cover-up of the deadly virus. Amid a wave of anger and outpouring grief around the death of the 34-year-old doctor who warned about the coronavirus, China’s anti-corruption agency was forced to send a team for a comprehensive investigation to calm the nation.

The uncertainty around the virus could hurt risk appetite to the benefit of haven assets in the short term. We expect demand for haven assets like the Japanese Yen, Swiss franc, US dollar and Gold to grow with any escalation in the coronavirus outbreak.

The Bloc’s Fiscal Boost

Investors are taking note of the significant risks in the Eurozone area. The bloc’s economy only grew by 0.1% in the last quarter while Italy and France contracted. The overall slow growth combined with the prospects that certain members might fall into recession is casting doubts on the overall outlook for the bloc.

The European Commission’s economic growth forecasts could be a market-mover. Amid growth concerns, it is reported that Eurozone finance ministers are set to discuss a more growth-friendly fiscal policy while also keeping in mind the EU fiscal rules and budget deficit limit of 3%.

German’s GDP will also be closely monitored as the eurozone’s largest economy, continues to be a source of worry. Industrial Production dropped by 3.5% in December fuelling fears of a recession. Any contraction in the GDP figures will exacerbate fears.

Russia Wants More Time

The bearish oil reports and demand concerns overshadowed supply disruptions in Libya. China, the world’s largest oil consumer, is at risk of facing further slowdown amid the virus outbreak and is fuelling demand-growth fears.

Source: Bloomberg

WTI tumbled more than 10% over the past couple of weeks and briefly fell past the psychological level of $50. After bottoming to the lowest level seen in more than a year, WTI and Brent Crude pared some losses following discussions of deeper production cuts.

Source: Bloomberg

In the coming days, oil traders will eagerly wait for Russia’s decision on whether to join OPEC for further output cuts in response to the coronavirus outbreak.

US economy

Amid several central bank speeches and data, inflation figures will dominate the economic events. Jerome Powell will testify on the semi-annual Monetary Policy Report to the Congress at the beginning of the week.

The Fed is on a wait-and-see approach and improving data is unlikely to cause a change in sentiment. However, investors will look for more clues to see if the Fed will or have reason to be less dovish.

The Statement, along with the Retail Sales and CPI figures, will help investors gain further insights on the US economy and monetary policy.

Deepta Bolaky, Market Analyst at GO Markets.

Read Our GO Markets Review

About GO Markets

GO Markets was established in Australia in 2006 as a provider of online CFD trading services. For over a decade we have positioned ourselves as a firmly trusted and leading global regulated CFD provider. Traders can access more than 250 tradeable CFD instruments including Forex, Shares, Indices and Commodities.


Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice

Follow us and keep up to date with the latest market news and analysis.

An Action-Packed January

Investors barely had time for a breather as the new developments were crucial in setting the tone for the rest of the year.

Climate Change

There were many expectations that 2020 which marks the start of a new decade will be the confirmation of a new era for climate change. January was the reality of the “green” shift in the world of finance. Extreme weather conditions and raging bushfires across Australia triggered fierce debates about the climate crisis across the globe.

This year, the World Economic Forum in Davos also emphasized on climate change and had even run a more environmentally-friendly event to raise awareness for the need to reduce our carbon footprint.

Market participants are recognising the intense pressure on policymakers and the urgency for climate action. Investors are at a key turning point where the fundamental shift is forcing sustainable investment.

Middle East Tensions

The start of the month was marred by heightened tensions in the Middle East. A series of missile strikes from both the US and Iran has kept investors on edge due to rising fears of war. President Donald Trump’s decision not to retaliate after the latest Iranian attack on a US base in Iraq calmed investors.

Trade Agreements

Market participants welcomed the positive news on the trade front. After Mexico, the US formally signed the new North American trade pact into law on Wednesday. Canada is the only country left to ratify the revised trade agreement.

Phase One of the trade deal between the world’s two powerful economies is officially signed. Despite the scepticism that the next phase of trade negotiations will be tough, investors cheered the trade truce.

Brexit

Brexit is now official and this Friday will mark the day the UK will formally leave the European Union. The European Parliament has approved UK’s withdrawal agreement and both parties now have an 11-month transition period to allow new UK-EU negotiations to take place.

Central Banks

Central banks eased monetary policies last year and had even restarted unconventional monetary policies amid fears of a slowing global economy and trade tensions. However, comments this month by the central banks have been more or less in line with expectations. Major central banks appear to be on hold, as anticipated, and projections have not been significantly different to trigger a reassessment of global interest rate outlook.

Coronavirus (2019-nCoV)

Despite a volatile few weeks, there was enough optimism on both the economic and geopolitical front to bolster confidence in the global markets. However, the outbreak has caused more than 170 deaths and 7,000 infected persons so far and has triggered some momentary panic in the markets.

Governments around the world are ramping up efforts to contain the virus which brought some reassurance to investors. China has quarantined major cities and many airlines have cancelled flights to China to limit the spread across borders.

Tourism, travel and aviation-related stocks are the most negatively affected while a handful of biotechs companies surged this month after the Coalition for Epidemic Preparedness Innovations announced funding of $12.5 million to develop new vaccines against the Wuhan virus.

  • Inovio Pharmaceuticals: Its share price rose by more than 20%.
  • Moderna Inc.: Its share price added 8%.
  • Novavax Inc.: Its share price bounced from all-time lows to $10 before retreating slightly. As of writing, it is currently 71% higher for the month at $6.84.

The World Health Organisatoin (WHO) has officially declared the coronavirus outbreak as a global health emergency easing fears that the WHO is increasing its efforts to contain the virus.

Risks Remain

Overall, a series of key positive developments has helped the stock markets reach fresh new highs, but the Coronavirus has tamed the momentum. At this stage, the impact of the virus on the global economy is quite limited. While it is too early to determine the economic effect of the virus, any global epidemic generally tends to have a short or medium-term repercussions. The increased international efforts to contain the spread are so far encouraging.

Aside from the pandemic, investors are expecting a global recovery over the months. Economic data released this month has been promising. Yet, certain risks persist which could have some impact on the pace and magnitude of the global recovery:

  • US-China Phase One: Its success is heavily dependent on China’s compliance and commitment, which remains murky. Traders are also less optimistic about the second phase which will handle challenging issues on IT, Artificial Intelligence and cybersecurity among other hi-tech areas.
  • Geopolitical tensions: The rising tensions between the US and Iran came at a surprise. Investors are likely to keep risks within the Middle East on their radars. However, we expect geopolitical tensions to bring only periodic bouts of volatility unless there are serious escalations.
  • Central Banks: There are expectations that most central banks will maintain a steady interest rate in 2020. The Bank of England (BoE) and Bank of Canada (BoC) were among the few to resist the global run towards easing monetary policies. However, investors are watching closely the change of tone coming from the central bankers.

Fundamentals are improving and there are more positive economic growth forecasts than expected. At the moment, volatility is mostly driven by headlines and the unexpected virus. The current environment is positive, but caution is still expected given the prevailing uncertainties. In February, we expect investors to keep monitoring those risks, and analyse economic data and earnings results to reassess growth expectations.

Deepta Bolaky, Market Analyst at GO Markets.

Read Our GO Markets Review

About GO Markets

GO Markets was established in Australia in 2006 as a provider of online CFD trading services. For over a decade we have positioned ourselves as a firmly trusted and leading global regulated CFD provider. Traders can access more than 250 tradeable CFD instruments including Forex, Shares, Indices and Commodities.


Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice.

US Dollar and Gold in Tandem

In times of uncertainties – be it economical, political or policy uncertainties, investors generally seek safety with haven assets like the US dollar, Japanese Yen, Swiss franc or Gold. Our attention today is on Gold and the US dollar, both of which have had an interesting start to the year so far.

Gold

Major equity indices reached fresh record highs in January. Yet, gold price remains in elevated levels around $1,550. It is a situation of “cautious” risk appetite.

The narrative is simple. Investors are still navigating in an environment with high levels of uncertainties, despite easing trade tensions and receding recession fears:

  • QE and record low-interest rates
  • Geopolitical tensions
  • Global growth uncertainties
  • Growing global debt
  • China’s commitment to Phase One

Major central banks are pumping money into the economy through quantitative easing and are reducing interest rates to stimulate the economy, hence driving demand for riskier assets. Hard assets like gold are therefore generally sought as investors are hedging against poor fundamentals and the long-term headwinds.

Currently, the fears that the Coronavirus may spread to more countries and dent economic growth are also boosting the short-term outlook for gold.

US Dollar Index

We are seeing a stronger US dollar but the greenback acting as a safe-haven will likely face some limitations. The Federal Reserve cut interest rates three times last year, mainly due to weaker global growth and trade tensions.

Lower rates and still a stronger US dollar?

The US dollar is gaining a competitive advantage over its peers in the currencies market. The US economy is stronger and the Fed is considered to be less-dovish than other central banks. While some might still need to reduce interest rate further in 2020, the Fed is expected to remain on pause with the expectations of being among the first central banks to be able to start hiking again in 2021.

The Tandem

Given that gold is internationally quoted against the US dollar, any appreciation or depreciation of the greenback will generally cause an inverse reaction in the price of gold. A strong dollar will therefore negatively affect the price of gold.

Since the beginning of the year, instead of a negative correlation, both the US dollar Index which represents the performance of the greenback against a basket of currencies and the XAUUSD pair are moving in tandem.

An alignment which is unusual but occasionally occurs during periods of heightened geopolitical and economic risks.

Source: Bloomberg

Quantitative Easing and Central Bank Gold Hoarding

Quantitative easing is a controversial and unconventional monetary measure used by central banks to pump money into their economies. Recession fears and lack of inflation growth despite a decade of low- interest rate have forced central banks to reconsider QE in 2019.

The ECB has resumed the QE process while the Fed is providing liquidity in the repo markets. While the Fed denies that the interventions are not technically a new phase of QE, such liquidity interventions in the markets instilled fears of a struggling global economy.

As a result, QE is triggering a rally in gold.

The Favourite Mighty Dollar

At the same time, the US dollar is being favoured in the currencies market as it retains a positive interest rate differential with many countries. Overall, investors are looking for the next best alternative. The US economy is not shielded from the global headwinds, but are perceived as performing better in comparison to other major countries.

Is Gold a Better Safe-Haven?

As major economies engage in easing monetary policies, central banks are also piling up on gold. Emerging markets like China and Russia have also increased their gold reserves over concerns on currencies like the US dollar and Euro. Why? To diversify away from the US dollar?

A stock rally and a stronger dollar do not seem to have tamed the rise of gold. The stock rally is being driven by the QE process, easing trade tensions and receding recession fears, while the US dollar is being favoured over its peers.

However, we note that a partial trade deal and a global economy poised for a mini-recovery could limit the potential upside of the US dollar. The “by-default” strengthening of the US dollar could limit the effectiveness of the actions enacted by the Fed to shelter its economy from global headwinds. Also, the global growth narrative is dependent on China’s commitment to Phase One. Both are moving together, but the magnitude is different.

The current sentiment is positive yet fragile due to the uncertainties, which is creating a favourable environment for the precious metal.

Deepta Bolaky, Market Analyst at GO Markets.

Read Our GO Markets Review

About GO Markets

GO Markets was established in Australia in 2006 as a provider of online CFD trading services. For over a decade we have positioned ourselves as a firmly trusted and leading global regulated CFD provider. Traders can access more than 250 tradeable CFD instruments including Forex, Shares, Indices and Commodities.


Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice.

2020 Kicks off with US-Iran and Climate Change Crisis

The start of the year was marred by the escalating tensions between the US and Iran while extreme weather conditions across the global triggered fierce debates about climate change.

What do we know so far about the tensions between Iran and the US?

  • Iranian-backed militia killed an American Defense Contractor
  • The US retaliated with missile strikes
  • The American Embassy in Baghdad was attacked
  • US airstrikes killed top Iranian military official, General Qassem Soleimani
  • Iran responded by launching missile strikes at two bases hosting U.S. forces in Iraq

As the world witnesses the rising tensions between the US and Iran, and a uniting Iran over the assassination of one of the most influential and powerful men, the downing of Ukraine International Airlines flight PS752 has caused an international outrage and brought internal division within Iran.

Beyond Economic War

The existential conflict between the US and Iran moved beyond an economic war. In 2019, the US announced further economic sanctions on Iran which brought the latter into a deeper recession. As a significant buyer of crude from Iran, China sees the situation as an impediment that can hurt its economy. The Iran risks may therefore overshadow the trade deal.

Investors have already pricedin some extent of the risks associated with Iran since President Trump pulled out of the 2015 nuclear deal and started to impose sanctions. Even though the headlines brought Iran back on the geopolitical risks radar and caused a spike in volatility, we do not see the conflict changing the investment landscape at this stage.

Climate Change

2020 is set to be the confirmation of a new era for climate change. As we entered a new decade, the extreme weather conditions around the world have forced leaders of many countries to reassess their actions over climate change and transform the global energy system.

In Australia, the unprecedented and raging bushfires across the country act as a warning to the world and has even challenged a reluctant Prime Minister to take more action

Energy Sector

Oil prices experienced their largest weekly drop since July 2019 despite the tensions in the Middle East. Coincidently, markets were hit by two contradictory themes for the oil and gas industry: Iran Risks and Climate Change.

Source: Bloomberg Terminal

It should be highlighted that the energy sector emerged as the worst-performing sector of S&P500 in the last decade. Investors are stepping into 2020 being accustomed to the global oil glut and the gradual shift in the oil and gas industry.

Iran risks fuelled expectations of a reduction in supply while the “green” shift lowers demand expectations.

Eyes are now on the US-China trade deal!

Stock Markets

Despite an erratic few weeks of trading, global stock markets have performed quite well:

  • Major equity benchmarks traded at a record high
  • US stock indices are trading higher by 1% and above
  • Most European Bourses are also experiencing similar gains
  • Australian benchmark outshines its peers with more than 4% gain
  • FTSE100 is lagging slightly behind with 1% gain

Brexit will remain the dominant factor for the UK markets. Despite the volatile year 2019, the FTSE100 posted two-digit gains. The Tory win had pushed the index above the 7,500 mark. Looking ahead, the Footsie is expected to rebound and investors are eyeing the next target at 8,000 level for 2020.

However, given that a large amount of earnings of the index is derived from overseas, an appreciation of the Sterling may hinder the performance of the FTSE100 to play catch up with its global peers.

Source: Bloomberg

Are Re-Pricing Risks Required?

The killing of the Iranian key commander took the markets by surprise. Heightened geopolitical risks have somehow become the new normal and unless there is any serious escalation, medium to long-term effect on the markets would be limited. In a new world of higher tariffs, de-globalisation, and historic low levels of interest rates, the most significant risks for 2020 are:

  • Trade deal outcome.
  • Central Banks.

Deepta Bolaky, Market Analyst at GO Markets.

Read Our GO Markets Review

About GO Markets

GO Markets was established in Australia in 2006 as a provider of online CFD trading services. For over a decade we have positioned ourselves as a firmly trusted and leading global regulated CFD provider. Traders can access more than 250 tradeable CFD instruments including Forex, Shares, Indices and Commodities.


Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice.

2019 in a Nutshell and the Transit into a New Decade

If one is to describe the year 2019 in one word, we believe the word “uncertainty” would be the right fit. The world has entered 2019 with a high degree of uncertainty and is poised to finish the year with probably the same extent of uncertainties. The Global Economic Policy Uncertainty Index which is a GDP-weighted average of national EPU indices for 20 countries has remained in elevated levels in 2019.

Each national EPU index reflects the relative frequency of own-country newspaper articles that contain a trio of terms pertaining to the:

  • Economy (E)
  • Policy (P)
  • Uncertainty (U)

In simple words, the frequency at which newspapers cite “uncertainty” in relation to economic policy is high.

Source: Bloomberg Terminal

Sino-American Trade War

We have seen a de-escalation of trade tensions between the world’s two largest economies towards the end of the year. Investors grew hopeful that both countries will sign a partial trade deal. After weeks of speculations regarding the partial trade deal, “ a deal in principle” made headlines driving major US equity benchmarks to new highs. The optimistic statements in the US were not reciprocated to the same extent in China. It was a much muted and cautious response.

Any commitment and compliance from China remain murky.

The Trade Truce is being handed over to the financial markets like a Christmas gift. The real surprise will be unwrapping the gift and taking note of the details of the agreement. At the moment, vague promises and speculations are creating a “fragile” positive environment.

Uncertainties Persist! Phase One will ease but not eliminate uncertainties as Phase Two will handle challenging issues such as IT, Artificial Intelligence and cybersecurity and other hi-tech areas.

At CNBC’s Hadley Gamble at the Doha Forum, US Treasury Secretary Steven Mnuchin’s comments on Phase two was not inspiring:

“Phase Two maybe 2a, 2b, 2c, we’ll see….”

Populism and Globalisation

The growing prospect of populism comes with an array of uncertainties which is hard to ignore. President Trump’s presidency and Brexit are the bellwether of populism and have played a significant role in the recent volatility in the markets.

President Donald Trump

The Western political space is changing and is disrupting globalisation. The US President adopted a hard-line approach on not just trade, but also on migration and capital flows. The US has launched a trade war against major countries, some of which have been key allies of the US.

Brexit

Brexit Europe and the United Kingdom are practically on hold due to Brexit. The echoes of populism have threatened the existence of the bloc and have crippled its economy. Following the referendum for the UK to leave the European Union, the bloc’s members like Germany, Italy and France were also hit by several anti-establishment groups.

Hong Kong Protests

Hong Kong came to a standstill following months of democratic protests. The people of Hong Kong initially took to the streets to voice their frustrations on the extradition law. After the demonstrations intensified and turned violent, protesters laid five demands including an investigation into police brutality and the resignation of Chief Executive, Carrie Lam.

After more than six months of protests, economists are predicting a 1.3% contraction for 2019. The recent election resulted into an electoral win for pro-democracy parties which brought a semblance of normality after months of unrest.

Slowing Global Growth

Manufacturing Contraction

The manufacturing sector has been one of the main factors that had triggered concerns of a recession. In the US, the two widely- used indicators of the performance of the manufacturing industry are ISM and IHS Markit.

Both surveys consist of a diffusion that summarises whether the market conditions are expanding, staying the same, or contracting. Over the months, investors received mixed signals from both surveys. The divergence could partially be explained by the differences in the methodology used. Yet, the contrasting signals were noteworthy for investors.

As the year draws to an end, the preliminary Markit Manufacturing PMI figures for the US shows that it will be another month of steady growth fuelling hopes of a brighter start for 2020. On the other side, the ISM shows that the manufacturing industry has been softening for the past eight months and contracted for the fourth straight months at a faster rate.

Source: Institute for Supply Management

Interest Rates and Central Banks

Slowing global growth and recession fears have forced major central banks to cut interest rates to record lows. The Reserve Bank of New Zealand was among the first major central banker to commence a major easing cycle. After some resistance, the Fed and other central bankers has also cut their interest rates. The European Central Bank have even resumed the controversial quantitative easing to stimulate its economy.

Towards the end of the year, the concerns of slowing global growth have receded as global economic data has shown some signs that the downturn may be bottoming out. Central banks have paused the easing policies and appear less dovish when setting policies for 2020.

Stock Markets

A look at the performance of major global equity indices does not reflect the angst seen during the year. As of writing, the stock market is set to close the year on a strong note.

Two Digits Gains and Record Highs!

Chinese stocks have recovered strongly over the month. Despite a trade war, sanctions against public tech companies and slower economic growth, Chinese shares rallied. buoyed mainly by renewed optimism on the trade front.

Hong Kong Shares took a beating as months of protests have discouraged investment and compromised the country’s position as a financial hub. The US has also passed the bipartisan Hong Kong Human Rights and Democracy Act that could strip the city of its special trading status following annual reviews of its democratic freedoms. As of writing, the Hang Seng index was up by only 7%.

FTSE100 was primarily driven by Brexit-related events. Towards the end of the year, the index has been trading sideways, but the majority win by the Conservative Party has pushed UK stocks higher. However, the possibility of a hard-Brexit has tamed the rally.

World Equity Indices (% Change)

Source: Bloomberg Terminal

As the year comes to an end, we are seeing the dominant risks – trade and Brexit that have rattled the markets over the months moving in a positive direction.

Energy Sector

The energy landscape is changing over the increased concerns on climate change. The rise of renewables is altering the dynamics of the industry. The “Greta effect” and various extreme weather conditions are constant reminders that the climate crisis is not going away and governments will be forced to adjust policies to tackle climate change.

As we move into a new decade, we see that the energy sector has been left behind. Looking at the different sector of the S&P500, energy emerged as the worst performer.

The oil and gas industry is facing a supply glut and decreasing demand at the same time. Saudi Aramco’s IPO which is one of the biggest IPO was launched as a local affair reiterating the struggle to entice international investors at a time where the oil market is facing structural headwinds.

The deeper production cuts by the OPEC members and allies and less geopolitical tensions are currently supporting a fragile oil market.

2020 will be the confirmation of a new era…

Investors are navigating in an environment with historically high levels of policy uncertainty. As we step into a new decade, market participants will be familiar with:

  • A new world of higher tariffs
  • Peak globalisation
  • Climate change
  • A probable tech war between the US and China
  • Commodities gluts
  • Historically low levels of interest rates.

2020 is probably not the year for a recession. In the last two months, investors have priced-out the recessions risks. The optimism is mostly based on positive trade-related comments, central banks intervention and expectations of steady interest rate in 2020.

Still, Uncertainties Remain and 2020 could be as volatile as 2019!

Deepta Bolaky, Market Analyst at GO Markets.

Read Our GO Markets Review

About GO Markets

GO Markets was established in Australia in 2006 as a provider of online CFD trading services. For over a decade we have positioned ourselves as a firmly trusted and leading global regulated CFD provider. Traders can access more than 250 tradeable CFD instruments including Forex, Shares, Indices and Commodities.


Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice.

OPEC Meeting: A Crucial Week for the Oil Market

OPEC+ Politics

The rising tensions in the Middle East and the non-compliance of certain OPEC+ members are threatening the cooperation among the producers that are much needed to confront the global crude glut and a weakening global demand.

The oil market has been roiled by the seizure of oil tankers and the attack on oil production plants in Saudi Arabia. However, the rise in oil prices during those incidents was limited as the supply glut and demand concerns have capped gains.

Given that some countries have failed to comply with the productions cuts, Saudi Arabia being the OPEC de facto leader is now seeking stringent compliance from members. The oil kingdom appears less tolerant of those cheating on agreed quotas.

The Transition in the Oil and Gas Industry

The increasing engagement on climate change and the rise of renewables pose an imminent threat to the oil and gas industry. Climate change is at the fore which means that oil demand growth is also heavily dependent on the government’s action to tackle climate change. The energy landscape is changing, but there are much debates about the pace of the transition and the extent of disruption.

In such trying times for the oil market, it is even more important for the Cartel to stay together and do its best to keep oil prices from falling further.

Saudi Aramco’s IPO

The much-awaited IPO is another sign that the oil market is facing structural headwinds. The IPO has been launched as a local affair as bankers struggled to entice international investors. The current risks in the oil market and debates that peak oil is getting closer have deterred investment in oil.

In this respect, it is widely expected that the short-term price action of WTI and Brent Crude would largely be influenced by the outcome of the December summit. We have identified two main scenarios which will drive the oil market this week:

No Action

The deal on production cuts agreed back in 2016 will stand until March 2020. Even if the oil-producing cartel decides to wait until next year to make a decision, market participants might be able to get clues on the production cuts. Any tensions between members at the summit could add downward pressure on oil prices.

Lengthy Extension and Deeper Cuts

Investors are hopeful that there will be a more meaningful development at this meeting. This is mainly because the success of the IPO highly depends on the prospects of higher oil prices and commitments that the cartel will keep the market stable.

Hence, we might see an extension up to June 2020 or commitments for deeper cuts. Either one will provide some upside traction to oil prices. However, a combination of both has the potential to trigger a significant rally.

Even so, traders should remain vigilant as any upward momentum would be subject to the risks on the trade front. While OPEC members are trying to control the supply-side, they do not have much control on the demand-side.

President Trump is back with tariff threats and alongside speculations around the OPEC meeting, WTI and Brent Crude were seen trading on the downside. Chinese Manufacturing data have cushioned the fall. As of writing, WTI and Brent Crude were trading in the vicinity of $56 and $60 respectively.

A supply glut and weak oil demand growth would remain the primary downside risks for the oil market in 2020. Eyes are therefore on the meeting in Vienna on the 5th and 6th of December!!

Deepta Bolaky, Market Analyst at GO Markets.

Read Our GO Markets Review

About GO Markets

GO Markets was established in Australia in 2006 as a provider of online CFD trading services. For over a decade we have positioned ourselves as a firmly trusted and leading global regulated CFD provider. Traders can access more than 250 tradeable CFD instruments including Forex, Shares, Indices and Commodities.


Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice.

 

RBA: “QE is not on our Agenda!”

In a year that saw the RBA cutting interest rates three times, the speech around “Unconventional Monetary Policy: Some Lessons From Overseas” fueled speculations that the RBA is to tap into the unchartered territory of unconventional monetary policy: Asset purchases/Quantitative easing

What is Quantitative Easing (QE)?

QE is a process of creating new money which involves a central bank to buy mortgage-backed securities and Treasuries from its member banks to inject liquidity directly into its economy. There is no actual exchange of funds but the central bank issues a credit to the banks’ reserves as it buys the securities.

Therefore, QE increases the amount of money in the system and lowers interest rate. This particular method is usually used when inflation is very low or there is deflation, and conventional monetary policy has become ineffective.

RBA killed off the idea of QE in Australia

In reviewing the conditions from overseas that pushed major central banks to undertake QE, Governor Lowe outlines several observations why the current state of the economy will not require a QE intervention.

Above all, the Governor highlights that despite the weakness in the economy, the growth prospects, banking system, demographic profile and inflation level have not reached the same levels seen in Europe and Japan that have triggered QE.

Two More Rate Cuts?

The RBA sees QE becoming an option to be considered when the cash rate would be 0.25% and not before that. The Governor acknowledges that there are circumstances that QE will help but investors take note that the RBA is cautious with QE and it would only be used as a last resort if needed.

“…if – and it is important to emphasise the word if – the Reserve Bank were to undertake a program of quantitative easing, we would purchase government bonds, and we would do so in the secondary market.”

The RBA did not close the door to QE completely but has shrugged off the idea in the near term.

The Australian Dollar

The local currency rose higher after the RBA hosed down the prospects of QE anytime soon. However, the momentum was shortlived as market participants now expect two more rate cuts in 2020. During the Asian session on Wednesday, the Aussie dollar underperformed against its counterparts especially after Westpac’s dovish RBA expectations for 2020.

Source: Bloomberg Terminal

Australian Share Market

A combination of positive trade news and rate cut expectations have triggered a rally in the Australian share market. The ASX200 was up by 6.9% and closed at a record high of 6,851 on Wednesday.

Source: Bloomberg Terminal

On Thursday, the rally has tamed down as President Trump signed the Human Rights and Democracy Act into law which could potentially strain the trade negotiations. However, the ASX200 held onto gains despite trade risks and weak business investment data to close at another record high at 6,864.

The RBA has toned down the expectations of unconventional monetary policies in the near term but failed to rule out further rate cuts.

Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice.

Deepta Bolaky, Market Analyst at GO Markets.

Read Our GO Markets Review

About GO Markets

GO Markets was established in Australia in 2006 as a provider of online CFD trading services. For over a decade we have positioned ourselves as a firmly trusted and leading global regulated CFD provider. Traders can access more than 250 tradeable CFD instruments including Forex, Shares, Indices and Commodities.


Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice.

World’s Biggest IPO: Saudi Aramco

  • World’s largest company
  • World’s biggest state-owned oil and gas companies
  • World’s cheapest oil producer
  • A leader in oil production
  • Second-largest proven crude oil reserves

All of the above would probably make this upcoming Initial Public Offering (IPO) one of the most hyped IPOs of all time. In 86-year of history, Saudi Arabia has officially stated its plan to float the company on the Riyadh stock exchange. After first being announced in 2016, the Saudi Aramco officially confirmed the IPO on November 3.

However, the size and scope of the IPO were unknown so far. On Sunday, Saudi Arabia’s officials have officially launched the IPO and confirmed that the domestic listing will take place in December.

Vision 2030

The primary purpose of the IPO is to diversify Saudi’s economy and its reliance on the oil industry. After the fall in the oil prices in 2015, Crown Prince, Mohammed bin Salman’s introduced the Vision 2030 which encompasses the desire to reinforce and diversify the capabilities of Saudi’s economy. The Prince has designed its vision on three main pillars:

  • Saudi Arabia’s status as the heart of the Arab and Islamic worlds.
  • Becoming a global investment powerhouse.
  • Transforming the country’s strategic location into a global hub connecting Asia, Europe and Africa.

Hence, transforming Aramco from an oil-producing company into a global industrial conglomerate is a key step in raising funds for the Vision 2030.

Lacklustre International Response

Even though the national oil company do have a high degree of independence, the Crown Prince has taken a more active role in the company over the years. As the purpose of the IPO is to raise funds to follow the plans to diversify the economy, the money will not be going to the company, unlike standard IPOs.

It is, therefore. a distinct consideration for the Aramco investor.

Bankers were unable to convince many international money managers of the merits of the deal which prompted Aramco to keep the IPO local. Shares will not be marketed in the US, Canada and Japan as originally expected.

The Domestic IPO

On Sunday, Aramco finally provided details on what could be the world’s biggest IPO. Currently, the Chinese online retail giant, Alibaba holds the record with an IPO of $25 billion.

Valuation

Aramco valued the company between the $1.6 trillion to $1.7 trillion which was below their Crown Prince’s valuation of $2 trillion. The new valuation implies that the investors will yield a dividend lesser than those from other leading oil and gas companies.

A Smaller Stake

Aramco decided to sell only 1.5% of its company on Riyadh’s Tadawul exchange which amounts about half of the amount that had been considered at an indicative price range of 30 Saudi riyals ($8.00) to 32 Saudi riyals per share.

At the top of the range, the company could raise as much as $25.60 billion beating Alibaba’s capital raise in 2014. The IPO will be split into two tranches:

  • 0.5% will go individual investors who will have until November 28 to sign up for the IPO
  • 1% to institutional investors who will have until December 4 to subscribe.

Despite the lower valuation, a smaller stake and an IPO limited to local investors, Saudi Aramco is confident that they will have sufficient Middle Eastern institutional investors and local demand for a successful IPO.

Setbacks in the Oil Market

Oil Demand

Oil prices have slumped in the last few years and have more than halved since mid-2014 mainly because of:

  • A glut in global supply
  • A lacklustre demand

The dramatic fall in prices has forced OPEC members to cut back production to help stabilise supply and cushion the fall in prices. US shale producers, geopolitical risks, tensions in the Middle East, trade tensions, and slowing global growth are key factors affecting the supply and demand dynamics in the oil market.

Oil and Gas Divestment – Climate Activism

Another crucial factor that has caused a shift in the oil market is the growing movement towards climate change which are subsequently pushing investors away from the oil and gas sector. The industry has faced intense pressure from activists and we might see the pressure intensifying as such high-scale IPO will undermine their fight against the climate crisis.

Saudi Aramco is among the top carbon dioxide and methane emitters. Those concerns are forcing portfolio managers to divest from oil and gas companies to embrace more sustainable investment.

Drone Attacks

The crippling attacks have caused major damage to Saudi Aramco’s facilities in Abqaiq and Khurais. Even though the company recovered quickly and resumed production, investors are taking note of the nation’s vulnerabilities to attacks. As of writing, it was also reported that Yemen’s Houthi rebels has seized Saudi ship carrying oil rig.

At a time where Saudi Arabia wishes to diversify and entice foreign investors, keeping the IPO as a local affair has undermined the efforts to open its economy to the world. The much-muted details of the IPO, setbacks in the oil markets and the gruesome killing of Jamal Khashoggi have trigger hesitations from international investors to buy Saudi Aramco at full price.

Saudi Aramco is a leader in the industry and will probably be able to cope with the current challenges of the industry until the industry is faced with the situation of peak oil demand.

Oil Prices and the IPO

The upcoming IPO will be one of the key determinants of the immediate price action of oil.

The public offering and the OPEC meeting are intertwined and oil traders should monitor these events carefully. OPEC’s de facto leader is Saudi Arabia and it is reported that the Saudis are set to push OPEC countries to make deeper oil cuts to keep oil prices higher.

On the trade front, even though there are some conflicting trade headlines, there is much optimism on the trade front to keep oil prices from falling to September lows.

All in all, those two main events provide some upward room for oil prices.

Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice.

 

Deepta Bolaky, Market Analyst at GO Markets.

(Read Our GO Markets Review)

About GO Markets

GO Markets was established in Australia in 2006 as a provider of online CFD trading services. For over a decade we have positioned ourselves as a firmly trusted and leading global regulated CFD provider. Traders can access more than 250 tradeable CFD instruments including Forex, Shares, Indices and Commodities.


Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice.

Germany Narrowly Avoids a Technical Recession

Europe’s largest economy and the world’s fourth-largest economy narrowly avoids a technical recession. A recession arises after two consecutive quarters of economic decline. In the second quarter of 2019, the German’s economy had contracted by 0.1% compared to a growth of 0.4% in the first quarter.

Source: Statistisches Bundesamt Deutschland

The preliminary GDP data shows a slim 0.1% expansion in the third quarter. The final figures will be published this Friday and any unexpected downward revision will again trigger fears of a recession.

After a decade of economic expansion, some cooling off was expected. However, Germany is currently being hit by several headwinds:

  • US-China trade war
  • Brexit
  • A major shift in the Automobile industry

Trade wars and Brexit are geopolitical risks that are impacting the overall global growth. However, since the automotive industry is a key economic factor that contributes to the success of the country, car industry woes are probably the core domestic challenges that the German’s economy is facing.

The country is facing a deep turmoil in the automobile industry which is reshaping its economy.

Automotive Crisis

Climate Change, Self-driving cars and the changing needs of customers are the deep and fundamental challenges that are reshaping the automotive industry in Germany.

The switch to electric cars and rigid European regulations on carbon dioxide are causing a structural shift in the auto industry. The electromobility era has arrived to help halt climate change and we are seeing global sales of electric cars rising significantly.

Self-driving cars are becoming popular which has forced German carmakers and suppliers to embark on an unprecedented collaboration in exploring the industry of autonomous cars. In the face of fierce competition, German high-end carmakers- BMW and the maker of Mercedes-Benz have joined hands to tackle the expensive self-driving car industry and catch up with American and Chinese rivals. Yet, all German companies are still lagging behind their competitors.

Uber and other ridesharing companies have also caused a shift in demand. The auto industry is finding itself in the midst of tectonic shifts. Companies like Uber are not only a threat to taxi companies but also to car companies. In many western countries, consumers are weighing the cost-benefit relationship and are moving away from car ownership.

Germany’s Economy

The services sector and the jobs market are flaring up well in Germany. We have seen robust growth in the services sector in recent quarters. However, for the month of September, Germany’s Services PMI Index came at 51.2 which marks a 37-month low and fuelled fears that the crisis in the manufacturing sector has spilled over to the services sector.

Also, the industrial sector led by autos has seen a decline in activity. The Manufacturing sector remains deep in the contractionary level. Even though the Manufacturing PMI ticked up from 41.7 to 42.1 in October, it remains close to a decade-low.

The rate of decline has eased which is providing a glimpse of hope but the manufacturing sector remains in a recession and there are concerns that the slowdown will spread across other sectors of the economy.

Exports to the Rescue

German’s exports have surprised in September with a stronger-than-expected increase. Exports rose to 1.5% and provided some relief that Europe’s largest economy will avoid a recession in the third quarter.

Even though a technical recession has been avoided, the German’s economy remains in stagnation. In the face of the global trade war especially threats of crippling tariffs on German cars, a shift in consumer trends, rising number of factory job losses, a slowdown in the manufacturing industry and Brexit uncertainties, the German government need to rethink the export-led growth model to revive growth.

The German government has room in the fiscal space to counter slower economic growth. However, the government has strived for fiscal soundness over the years and have been reluctant to run a budget deficit despite concerns over a growth slowdown.

The final figures will be released on Friday. Investors will continue to monitor if there will be considerations for an increase in fiscal stimulus and whether the German’s government will abandon the zero-deficit policy.

Deepta Bolaky, Market Analyst at GO Markets.

 (Read Our GO Markets Review)


About GO Markets

GO Markets was established in Australia in 2006 as a provider of online CFD trading services. For over a decade we have positioned ourselves as a firmly trusted and leading global regulated CFD provider. Traders can access more than 250 tradeable CFD instruments including Forex, Shares, Indices and Commodities.

Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice.