Historic fall in oil prices exposes the deep economic damage caused by coronavirus pandemic

Coronavirus is not just once in a lifetime event, it’s something that is bringing a stream of once in lifetime events. Oil prices turning negative for the first time is the latest example of it. It perfectly depicts how grave the ground reality of economic turmoil is. Since there was a lack of demand, and supply was very high the huge imbalance caused prices to go even negative for some time. Due to COVID-19 crisis, oil has shed the tears, but what’s the sentiment of global markets and economy?

World Health Organisation (WHO) expects that in the next 6 months, cases in Africa can reach up to 10 million. So it seems virus will continue to impact the global economy for quite some time directly and even for longer indirectly.

International Monetary Fund expects a developed economy to fall at a faster rate than emerging countries and global GDP is predicted to decline by 3 per cent in 2020. Developed countries are expected to decline by 6.1 per cent while emerging economies will fall by 1 per cent. IMF expects global GDP to revive next year and grown by 5.8 per cent where China and India are expected to lead the way.

Countries in Europe are opening up, so currently it seems that dawn is approaching.However, there is a risk of the second wave which experts expect to be even more dangerous.

If we look at data, Chinese GDP fell by 9.8 per cent in the Jan-March quarter as compared to the previous quarter, retail sales industrial production across the globe are witnessing declines. Inflation is subdued, job losses are ramping up. So yes we know things are currently very bleak, but how would they emerge in future? Well, that all depends on sentiment. The sentiment of consumers, businesses, CEOs and also politicians.

As per the poll by Young Presidents' Organisation (YPO), 60 per cent of CEOs across the globe expect U-shape recovery. CEOs feel the rapid change has created a lot of uncertainty and some of them are fearful about the survival of their businesses. In Germany, the businesses are opening up but consumers are not coming in large numbers. In the UK, it's reported that footfall in shops started dropping even before lockdown by the government. So that means even after lockdown opens people will refrain from coming out in large numbers. IHS Markit’s Household finance index (It measure how households view their financial condition) fell sharply in April as compared to March.

In Japan business confidence is reported to plunge at decade low and for the next few months, it may fall even further. While in Australia, the central bank (Reserve Bank of Australia) expects economic activity in the country can remain subdued till September. In India, lockdown is going on but the financial condition of small and medium business has taken a serious hit, Since a large amount of Indian workforce belongs to the unorganised sector, so fall in business and consumer sentiment can be expected. In the US, Michigan consumer sentiment index (Survey about consumer sentiment by the University of Michigan) declined sharply and the same trend is forecasted for conference board’s consumer confidence index. So all this shows that even sentiment of business and consumer suggest tough road ahead.

Even geopolitical tensions are persistent. Brexit negotiations involve a lotof stress. In the European Commission, member states are not agreeing on issuing corona bonds as there are underlying tensions between countries like Germany, Netherland on one side, and southern countries like Italy, France and Spain on the other. In Middle-East, the US and Iranian ships came quite close to each other recently and now US President Donald Trump has instructed the United States Navy to shoot down Iranian gunboats if they harass US ships. Even in North China sea, the US sent its warships as it believes that China is bullying in disputed waters. Recently China also arrested various prominent activists in Hong Kong which again irked the US. Not to forget political backlash against China in the whole world regarding coronavirus.

In fact, countries across Asia and Europe are tightening their FDI rules to prevent a hostile takeover of their domestic companies by foreign firms. The feeling of protectionist has increased. Although all this won’t lead to deglobalisation all these geopolitical tensions will pose an additional hurdle to economic recovery.

For financial markets, Oil gave a reality check to the broader market as investors realised that economic damage is quitedeep. Still, equity markets seemed to be higher as compared to economic reality. Why?

Well, the market is so broad that there is always some segment where the money is flowing. Investors may feel refrain for some time due to uncertainty but then their investing brain (also impulse) starts churning up and they look for new attractive pursuits. Currently pharma and tech stocks like Netflix, Snapchat are enjoying the attraction. Given the interconnected system, other companies that are part of their ecosystem also enjoy some benefit

Since there is always some sector or company that gains due to aparticular situation, the money keeps flowing there and that even drives the whole market up.

Now, there is massive liquidity and lack of attraction broad range of asset class like real estate, physical investment by consumers (Propensity to save during tough times increased) and businesses (No positive future expectations), commodities (Low or no demand) and even bonds (very low or negative yields). So due to lack of attraction in other asset class, the money is flowing in the equity market. This may be why the market has rebounded to some extent.

(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)