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Tags: oil | virus | economy | fed | stocks

Scared Investors Should Stay With US Bonds Amid Oil Panic

Scared Investors Should Stay With US Bonds Amid Oil Panic

By    |   Monday, 09 March 2020 11:56 AM

There are a couple of things going on in the global economy today that are of interest to financial markets and thus of interest to investors.

The first focus would appear to be the oil price. Saudi Arabia has effectively declared a price war in the oil market. The price of oil has collapsed by more than 20 percent. It’s its second worst one day loss of since the Gulf War in 1991.

By the way, West Texas Intermediate (WTI) biggest decline on record was in 1991 when it fell by one third, Reuters reported.

Yes, there are quite a few issues here. For investors it’s important to remember that oil is not as significant in the global economy as it used to be. An oil price move, in fact any oil price move, simply transfers money between oil buyers and oil sellers. In this case therefore, there is an economic benefit to net oil consumers.

What is new, is the threat to higher cost oil producers, which includes Iran, where there may be political considerations from any economic shock, and shale producers, which is relevant to the U.S. high yield bond market.

The interesting economic question is how much of the oil price decline will be passed on to the final consumer.

No doubt, these are unusual times and it may be that companies that are concerned about cash flow will see this oil price decline as a windfall assistance and thus not pass on the oil price decline or only pass on a part of it. To the extent that consumers do benefit, we are likely to see that showing up in the rebound in the global economy later this year.

More disposable income because of a lower oil price may not lead people to rush to buy airline tickets today, but they may well do so when the coronavirus fears fade.

The second focus is fear of the coronavirus, which was over-stimulated by the social media over the weekend. For example, social media has gone viral with reports of panic buying of toilet rolls around the world. The outbreak of fear has been traced to Australia. Australia produces 80 percent of its own toilet paper, so quiet an interesting question why there is so much panic there remains a bit of a mystery, Reuters reported.

Panic buying of a non-degradable good isn’t much of use, economically speaking, it’s simply pulling forward purchases. If you stockpile today you don’t buy tomorrow. In fact, it comes down to a form of boosting consumer spending during the first quarter at the expense of consumer spending during the second quarter.

What would be an economic positive is if people were to start panic buying degradable goods like fresh foods for instance as they are less likely to use to stockpile in time and then would have to buy the goods all over again in the future.

Over in Italy, fear of the coronavirus has to be balanced with irritation against government policy. Irritation reduces panic behavior. If you think policy is overreacting, you are less likely to overreact yourself.

Reuters reports that Italy ordered a virtual lockdown across much of its wealthy north, including the financial capital Milan, in a drastic new attempt to try to contain a further outbreak of the coronavirus that saw the number of deaths leap again sharply on Sunday.

It might be interesting to take notice that shutting down the Lombard region, but with the news leaking first, has led to some people rushing to leave the region before the shutdown. That might suggest that irritation rather than fear is the dominant emotion.

Economically, the northern Italian region will still function in terms of production. Universities and sporting events are closed.

In the meantime, elsewhere in the world of finance, Lebanon has frozen bond payments and is seeking a restructuring of its debt, which is for financial markets not a huge surprise. Reuters reports that Lebanon will not pay a USD $1.2 billion Eurobond due today, March 9.

I think investors should above all try to keep calm. In my opinion the “rout” isn’t over yet and time will come to step back in, but not today.

In the meantime, I would remain invested in the prefect cash equivalents of U.S. Treasurys, as I’ve said here before so many times.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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For investors it’s important to remember that oil is not as significant in the global economy as it used to be.
oil, virus, economy, fed, stocks
Monday, 09 March 2020 11:56 AM
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