The litmus test for the global economy

pH Outlook – connecting the dots of the global economy

20 July 2020

China is now being hit by its worst floods in decades. And Covid-19 virus cases are surging in a number of major US states.

 


Oil

Global economy suffers second hit – Brent crude oil

We focus on Brent as the global benchmark.

The market closed up $0.50/bbl at $43.13, virtually unchanged from the previous week.

Prices continue to operate in the very narrow ‘flag shape’ shown in the chart. This is typical of a market preparing for a major move – as we forecast on 1 March based on a similar flag shape, when suggesting correctly that:

“Oil prices (then at $50/bbl) seem highly likely to soon be back at their long-term average, below $30/bbl.”

The flag shape is a sign that the bulls and the bears have battled each other to exhaustion.

At first, the market saw a steady upward rise, as it rallied strongly from April lows. But since June, momentum has slowed, with prices moving in cents per barrel, not dollars. It is also clear that prices face major headwinds:

  • The vast inventories built up during Q2 have still to be unwound – US distillate stocks are  26% above their 5-year average
  • US gasoline demand growth has also stalled as lockdowns are imposed/reimposed
  • Whilst in China, the catastrophic floods are starting to have a major impact on the economy.

One measure of the reversal is that the US is close to becoming a net exporter of oil again. Prices have risen high enough for many shale wells to reopen, whilst demand growth is slowing.

 


S&P 500

Global economy suffers second hit – S&P 500

We focus on the US S&P 500 Index as the world’s major stock market index.

The market shows a similar pattern to Brent, moving in an ever-narrowing range since June to close on Friday at 3224. As the chart shows:

  • It took off like a rocket in March when Federal Reserve stimulus cash was announced
  • It was given a second wind when frustrated sports betters started gambling stimulus cheques on Hertz and other bankrupt stocks
  • But bubbles need more and more air to keep being pumped in, and since June the market has stalled

Congress returns this week, and will no doubt agree to maintain some form of stimulus payments, given that lockdowns are not ending as expected. But whilst this will be good news for furloughed employees, it won’t help the thousands of businesses who are seeing demand disappear again.

 


Interest rates

US treasury Interest Rates

We focus on the US 10-year rate, as this is the “risk-free” benchmark for global markets.

The rate closed down 0.01% at 0.62%, having traded in a narrow range between 0.57% – 0.65%.

Interest rates continue to be “the canary in the coalmine” warning of further problems ahead. Typically, bond markets are more in touch with reality than stock markets, as the role of passive and high frequency trading is lower. Large bond funds often still carry out their own research, rather than relying on “tips” from the sell-side.

And as the chart shows, bond investors have never bought seriously into the concept of a V-shaped recovery, which has driven the rallies in oil and stock markets. They toyed briefly with the idea in early June, when rallying to 0.95% – but quickly fell back again.

 


China floods and US lockdowns

Global economy suffers second hit – floods

Further major disruption is underway in the world’s two largest economies as the charts confirm:

China’s floods have been building since May, and look set to badly impact the economy over the next few weeks, just as it was starting to recover from the Covid pandemic.

US lockdowns had been easing, but now an increasing number of state officials are having to reimpose restrictions, or impose them for the first time.

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pH Outlook team

About The pH Report – Paul Hodges Paul Hodges
Paul Hodges is a Global Expert with the World Economic Forum: he speaks regularly at international conferences and writes for the Financial Times.
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About The pH Report – Daniel de Blocq van Scheltinga Daniël de Blocq van Scheltinga
Daniël de Blocq van Scheltinga Is Hong Kong-based with a background in investment/ corporate banking; he was the first foreigner to run an SOE’s finance department in China.
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David Hughes David Hughes
David Hughes is an expert on the Middle East, and worked in Saudi Arabia for 5 years.
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Paul Satchell Dr Paul W Satchell
Paul Satchell understands financial markets, having been an equity analyst with several leading investment banks.
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Disclaimer

This Research Note has been prepared by IeC for general circulation. The information contained in this Research Note may be retained. It has not been prepared for the benefit of any particular company or client and may not be relied upon by any company or client or other third party. IeC do not give investment advice and are not regulated under the UK Financial Services Act. If, notwithstanding the foregoing, this Research Note is relied upon by any person, IeC does not accept, and disclaims, all liability for loss and damage suffered as a result. The pH Report and pH Outlook are published by IeC. © IeC 2020