Macroeconomic Pathogens

As Andrew Bailey warms up to his new office as governor of the Bank of England, he has a weather pattern that doesn’t sit well. He must wield the hand of a strained monetary policy in an upcoming Brexit world, and look to his fellow BoE economists in the impact modelling of Covid-19 on the UK. He knows the effectiveness of his institution is being tested, and as the rain pours down on thread needle street, the Dow Jones Level - 1 circuit breaker is hit.

Level 1: A drop of 7% from the prior day's closing price of the S&P 500 triggers a 15-minute trading halt. Trading is not halted if the drop occurs at or after 3:25 p.m. ET.

Level 2: A drop of 13% triggers a 15-minute halt. Trading is not halted if the drop occurs at or after 3:25 p.m. ET.

Level 3: A drop of 20% triggers a halt for the rest of the trading day, and trading resumes the following day.

Viruses and the economy

A pandemic is an interesting economic scenario, because it really has an open rule book to how it behaves, depending on the origin. It typically hits supply first, instead of demand. No matter how high the want for Parmesan cheese may be. A closed factory with a quarantined workforce in Italy will not meet the consumer demand. Take this with the additional pressure from panic buying, and we have an inverse relationship occurring.

In December, in a small district in the city of Wuhan, China. A local food market formulated, under the correct conditions Covid-19 that became the kick-starter to the correction of the world economy and largest global pathogenic outbreak in the industrialised world. Covid-19 has taken advantage of our interdependent infrastructure and supply chain. Bringing the economic might of China to a halt, and has now spread beyond borders and across the globe. Now with halted production, the dynamic borrowing small & medium enterprises in China depend on are becoming the first economic casualties.

Troubled water for the fishes

March was always going to be a difficult month. Fragile OPEC talks took place whereby leading oil producing states turned hostile in talks. Already having to deal with an economic slowdown from the virus, led to a terrible disagreement on supply cuts in order to combat the decline in oil receipts. This combined with negative data ensuing from the previous week, made markets on the 9^th of March hit the circuit breakers on US indices.

What further impact will be felt, is still early days, however these corrections will turn the portfolio manager to dive deeper into their folder and see which institutions and corporations are weak on the cash side and are “zombies” to this economic stagnation.

Airlines usually are the first ones with blood in the water and will be an interesting case with the crippled airline manufacturing issues from Boeing. However, they are hit in two ways. A reduction in sales, though also a reduction in fuel costs as now Jet fuel futures turn cheap. Yet, sales will take precedent, in combination to employee costs from the Covid-19 impact. March is the main month that fills the balance sheet and with the high ratios of the industry of net debt to Ebitda, the sharks will be circling for the bite.

Passing of the Baton to Fiscal

The last ten years has seen the largest global injection of cash into financial markets, with central banks fighting the faults of a stalling global economy. Yet, there are some human elements central bankers cannot solve, and where politicians will have no choice but to step up, as monetary policy shows its limit.

Government bonds took up the majority of the capital flight as US and European notes hit historic highs and as the fed made an emergency cut of 50 basis points, the central bankers of the world reaffirmed their position. Fiscal policy needs to step to the plate. 

Despite these warnings for many years, few economies are willing or able to act. The US congress passed a $8bn emergency corona virus response bill, to help struggling industries, though the euro-zone's export animal Germany needs to act fast, and reduce it's bickering on the purse string to the €1tn budget for the euro-zone. Despite having year-on-year fiscal surpluses Berlin has yet to relieve the several quarters of weak growth to fiscal policy. 

Closing remarks

After some further debating, OPEC will reach an agreement after their economies woo on sentiment. Yet, depending on the global fiscal response to small and medium sized industries, the a short lived bear could be an underestimation.

This brings me to my most beloved index. The VIX made it's comeback from the volatility and mania of 2008 on Monday, and acts as a careful reminder to governments and institutions, of the many weak spots the economy still has, if left unbalanced.

The Arctic, Russia and the West

The Arctic, the final frontier and one of the most unexplored regions for oil; it has stayed very unexplored for a reason. Shell this week announced their suspension of their drilling, this included France's Total. Combined spending of these two companies within the region is estimated at approximately $7-9Bn. This has occurred due to countless safety problems and the high guarantee of not being able to contain a spill if occurred. ENI and Exxon Mobil though still have their hands hooked into the exploration of the Russian Arctic, but progress has yet to be made, or is it really Russia's Arctic?

Countless disputes between Norway and Russia over the northern territory have continued, leading more secondary companies to conduct their northern drilling explorations from Greenland, yet progress is still yet to be made, one of the suffers of $1Bn yet to make a comeback is Cairn Energy. Russia may though, as well as BP be drawing a quick line under their exploration problems, if the long battle zone of TNK-BP joint venture can be settled.Therefore rebidding of Rosneft (Russia's state oil company) can start again, bringing BP back into the Strategic oil club, and more importantly growing in size since it's asset sale to cover it's remaining Gulf of Mexico disaster repayments.

If the deal with Rosneft is completed soon, BP could quickly become the largest licensed drilling holder within the Arctic. The company is known to be at the front of hard drilling conditions, but also for their failure to operate safely. If BP through the help of Rosneft throws $12Bn give or take, with their newest Arctic technology, they could become successful in domineering the one fifth of the worlds, untapped oil resources.
The company is now finalising the selling of two refineries in the US, leaving it desperate to grow more. Taking a more primary/tertiary model of growth, will be beneficial for the company, though refining oil is turning into a more profitable area of the oil sector. Many new companies are entering this market such as Marathon Petroleum and buying refineries of the likes of BP.

If success is seen in Russia, the strategic energy chart will be weighed more heavily towards the old bears, as the unrest within North Africa and the Middle East continues. Though the slowdown in economic growth has, allowed for the demand price of oil to drop to lows of $108.00 bbl, showing that as much as oil production risk may have increased, the demand has dropped. Though I think it is safe to assume that OPEC will drop supply if it decreases "too much".

Another attack from Europe is occurring. Just before this winter the EU began a probe into GazProm (Russia's state gas company) for it's price fixing to Europe, but more on that in the next entry.
Tata GE

How to dismantle an atomic Eurozone, Putin Punches & Barrels of Black

After some weekend back pressure, Spain eventually retracted from their denial, they needed money.However... the speed in which it took, was like a bullet leaving a gun, when comparing it to the other euro-bailouts, which leaves our dear Gothic analyser in pondering. How long till the others start renegotiating their bailouts after Spain's easy cash injection?

The weakness of Europe couldn't be better portrayed this week as the value of currency continues to fall, as the markets speculate the eventual truth...The euro-zone will never be the same.

On Tuesday it was announced that the banks of Europe will now be interlinked into a european banking system infrastructure that could be complete by January next year, though that is to say that we will still be looking at the same Europe by then. The banking entwining is just an extra stepping stone in the pond towards the european fiscal union. But like so many european policies an extra stepping stone might just be delaying, the eventual splash and dampness of the ever so deep Stygian pond.

Taking a leap to Syria and we see the real site of Strategic economics and Geo-political heavyweights Russia, not leaving any breathing space and taking full advantage of gaining more political might in the middle east by the revealing of arms and now helicopter gunships support to Syria. This is nothing new for Russia to supply Syria even before the Arab spring uprising first began.

In a way it is an inevitability that Russia would do this, as it is in a current position of just turning into a fuel supplier if it were not to challenge itself to keeping the fight in its corner of the ring, plus with a troubled financial world it's the best time for Russia to do it's dirty deeds.

At the same time OPEC meets in Vienna to see what to do about the collusion oil breakers Saudi Arabia, that has continued to break its quota on oil production, though as markets predict economic slowdown. Mr Gothic economist can only say, that it could be in your interest to fill up your tank before the week is out, as Saudi Arabia will either reduce its supply; or the others will.

I had a befuddled moment of clarity, where I remember how god had created economists to make weather forecasts look good. In economics we can an only assume; and as a Gothic economist I can only assume the worst, Good day to all

P.S. Do not prithee peace, it shall not be soon!