Covid-19’s impact on different markets and assets

Market Analysis / 6 Min Read
30 Mar 2020

Covid-19 Special Feature on Market Impacts

The Covid-19 exogenous impacts

With so much to cover in a Covid-19 environment I'm going to touch on some common themes, but bring them down a level and explain how all these measures and causality effects touch and impact everyday lives as the world moves further into a global lockdown scenario. 

Covid-19 Impact on Government Fiscal Policy 

“Governments are competing over the size of their stimulus plans” – Stephen Innes (AxiCorp) 

At times it feels like we're walking through Wonderland; at certain points it all seems to make sense, but when do we know we’re falling down the Rabbit Hole?

Governments are showering their economies with fiscal love and dolling out Readers' Digest prize draw-style giveaways of USD 1,000 for every adult. This will be most welcome for everyone who’s lost their job, but it’s also part of the problem: a $1,000 check buys lots of toilet rolls but, in a lockdown, it doesn’t save jobs at a bar or cinema. Giving cash toconsumers focuses on phase two – supporting the bounce back – but has less effect on avoiding a double demand dip (phase one).

Covid-19 impact on Central Banks 

“Nobody ever accuses a firefighter of using too much water” – Stephen Poloz (Bank of Canada Governor)

The central bank response to Covid-19 has been swift and actionable – none more so than what we saw from the US Federal Reserve this week when it pledged not only to monetize all US government debt, but also provide central banks around the world with an adequate supply of US dollars. Indeed, drastic times call for extreme measures to instill an orderly functioning of the capital market across the globe. In lockstep to the Fed, unprecedented liquidity deluges from central banks around the world have been the order of the day.

Covid-19 impact on economic forecasts 

Every week, economic teams around the world, along with central bankers, are downgrading economic outlooks and we’re moving into the fourth level of their downward revisions.

As lookdowns and travel restriction intensify, we've already seen four global GDP downgrade revisions from some of the best economic minds in the world in the span of two weeks as we morphed from a transitory health scare to the next possible great depression.

But, currently, most of the people getting rolled out by the media are running with the assumption that while this tumult will be the deepest recession in modern-day financial history, it will also be the shortest. But if you follow my blog you know I never follow Wall Street in the media, instead deferring to banks and my quant analysis, which is devoid of opinion. 

So, with that in mind, since it's impossible to quantifiably gauge the ultimate economic impact or the duration of the Covid-19 pandemic for weeks or possibly months, until we reach that point the sustainability of any rally in stocks is questionable. 

Covid-19 and the use of non-traditional data 

Who would have thought traders would start using OpenTable restaurant data and TomTom traffic monitors to gauge the extent of the Covid-19 impact on the real economy? Well, that's precisely what's happening. Economics in the time of Covid is a different beast, with the best data being real-time that provides insight into the extent of the slowdown. One of the more interesting ones is traffic data from TomTom; it shows the speed with which cities went into a virtual shutdown – here’s the link to play with: TomTom Traffic Application

Covid-19 impact on Orange Juice

One of the unintended consequences of an exogenous market event is the impact on your grocery bill, and a prime example is the buying frenzy on orange juice.

Orange Juice (futures) have been one of the biggest gainers in the markets as both demand and supply factors are contributing to the upward squeeze on orange juice markets. Coronavirus is squeezing the pips out of the juice market, with prices surging as consumers hope the vitamin C-rich drink will help fight the disease, analysts say.

The price of a pound of orange juice soared by more than a fifth to strike a one-year peak of 122 cents on Thursday in New York, where the commodity is traded, before paring some of its gains.

"Both demand and supply factors are contributing to the upward squeeze on orange juice markets," AxiCorp Chief Global Market Strategist Stephen Innes told both the BBC and AFP.

"Orange juice has been in huge demand due to belief in its immune-enhancing properties to ward off the 'flu, but this demand bounce has been compounded by two supply constraints."

Innes added that the global shutdown in world aviation as a result of the coronavirus outbreak had imposed supply constraints on the market while, at the same time, virus-linked lockdowns and changing labor practices around the world meant there were fewer fruit pickers available to pick oranges.

The pass-on effect will be quick as orange juice producers pass the price rises onto to supermarkets and other buyers. So, expect your grocery bill to balloon if you drink a lot of orange juice.

Covid-19 Impact on Gold delivery 

The most significant event last week was the dislocation between physical spot and exchange-traded gold futures. In essence, this will make for a fantastic white paper study of the consequential impacts of an exogenous market event (aka lockdowns). Due to the following sequence of events, the gold market literally went into a total state of disarray:

On Monday night Prime Minister Boris Johnson closed down the UK; immediately there was concern about moving physical gold out of the London Bullion Market (LBMA).

At the same time, all the refineries in Switzerland closed (70% of the world's gold goes through Switzerland). With the prospect of being unable to settle the futures contracts with 100oz bars, the Gold EFP – the difference between gold spot and the front future – which generally trades at around a 5bp basis, blew out to around 5% – the future trading above the physical cash – widening by a factor of 100.

In my 25 years of trading gold both as a speculator and market maker, this is unprecedented; it caused tier-one market makers around the world to stop quoting or widen spreads dramatically to reflect the scarcity premium in the physical cash markets. 

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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