Insight

A Trifecta of Problems Causing Crisis—Making Sense of It

The market correction that has been avoided during the longest market expansion in history has finally arrived—let's make sense of where the market goes from here.

Monday might seem like a gloom-&-doom scenario playing in your head, but it’s not. It is a reality. A combination of stagnation in the global economy that has lingered since last year, fear over the spread of a poorly understood virus, and an oil-price war that sparked over the weekend was all it took to have equities and the U.S. Dollar plummet. It is safe to say that fear and panic are driving markets, but let us try to break down each problem and where it may go.

The world economy’s drag is of no surprise since we are now aware of the struggle in finding guidance over trade-agreement negotiations. Barriers to trade have been a theme in markets since the Brexit referendum of June 2016, yet markets behaved without fear, and the mood was that the expansion could keep ongoing. Additionally, growth post-trade-talks would help in putting together a comeback in global demand. Unfortunately, doubts over trade now take a new meaning since oil relates to almost everything, and the domino effect is sure to take place.

The virus, in our opinion, has been a poorly handled situation that has only propelled unnecessary havoc across the global community. Lack of information and preventative action are now factors that led to closings, company shutdowns, and event cancellations. There’s no need for the Ph.D. to know that without activity, data will sink, and nothing will expand. The Fed’s move last week did nothing more than to verify that financial solutions cannot be thrown at medical threats without resolving the medical issue at hand first.

As bond yields, currencies, and stock value seek guidance, we strongly hope that communication between governments improves on this issue and that as it naturally fades in impact, that people can feel safe going back to work. Fear only translates into despair, and in all sectors as well as life, it is not something to which we should cling.

Finally, Saudi Arabia and Russia have only intensified a decades’ long battle over dominance in oil production. Without going too far back, we must think about the dynamics of prices during the existence of the Soviet Union. At one point, the Soviets led in oil production, and going into the 1980s, USSR had a solid footing economically because of the return to health after the energy crisis of the 1970s.

However, the Soviets had a high cost of production. When low-cost-producing Saudi Arabia’s Oil Minister Sheikh Ahmad Zaki Yamani reached the decision not to support the price of oil on September 13, 1985, the writing was on the wall and inevitably the Soviet Union economically collapsed. Other items played into this, but an oil price crisis embroiled and the Saudis came out big winners.

This time, it looks like the Saudis could not pressure Russia into lowering production to boost oil prices, so a battle has ensued. The strategy here is to see who can handle a lower bottom before going back to the table and analysis by energy experts points at Russia being the more prepared to withstand the punishment in the price dwindling. The Euro shall benefit from its carry-trade status as people get away from the greenback and oil contracts (denominated in USD).

The Japanese Yen will remain a staple of safety, and the mix of all three pains (trade, disease, and price-war) will leave a vulnerable world in an even more precarious situation. I said to the media in quoting President Franklin Delano Roosevelt that the “only thing to fear is fear itself” in assessing the quick downward swings, particularly in stocks. We think that this is all turbulence, and much like in a flight, relief is not too far away—but things certainly must be taken one day at a time. We stick to our weak-buck trend, which all things considered, is playing out, just in a more acute way than we could foresee.

Juan Perez Senior FX Trader and Strategist Tempus

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