Fed is breaking bad, analysts spread panic

24 mar 2020

The main news yesterday was the Fed's announcement of a number of programs to support the economy and financial markets. We will not list them all, because the main thing is not even that. The key thing is the fact that for the first time there are no restrictions on the amount. This support is not for $100 billion, or $1 trillion. This is conditionally infinite amount. That is, the printing press is turned on full and whatever happens.

Judging by the reaction of the stock market, investors took this news quite restrained. This means that the market sentiment is still bearish, so we will use any rise in stock prices as a reason for sales.

We believe that the short-term effect of such actions by the Fed will probably be positive for economy, but in the future these are very dangerous steps. The United States in the coronovirus race has already broken into third place and at such a pace country can finish this week if not in first, then in second place.

In addition, analysts compete whose forecast for the US economy in the second quarter will be worse. Goldman Sachs, for example, expects a drop of 24%, and Morgan Stanley - by 30% in US GDP for the 2-nd quarter. But the most scary was the President of the Federal Reserve Bank of St. Louis, James Bullard, who expects a fall in GDP of 50% (!) With a simultaneous increase in unemployment to 30%.

As the result we recommend to sell the dollar (first of all against Japanese yen), as well as to buy gold.

Italy, meanwhile, tightened quarantine measures even more, which led to an almost complete halt of industrial production in the country. In this light, we remind about our recommendation to sell EURGBP. Although it is worth noting that the decision of Germany to provide assistance to the economy in the amount of 750 billion euros may well have a positive effect on the euro. But in this regard, it is better to buy the euro against the dollar.

Of our other positions, we keep on recommend medium-term oil purchases. Motivation: the current force majeure for the oil market, in our opinion, has created a rather unique, but temporary situation. Unique because of the scale of the price drop due to the simultaneous negative impact of a drop in demand (the coronavirus epidemic and the economic consequences of it) and a sharp increase in supply (the actions of Saudi Arabia). But both of these factors are temporary. China has shown that the epidemic (at least its active phase) is rather limited in time and even provided guidance on the duration of the extreme phase - a couple of months. The position of Saudi Arabia is more like an exponential gesture, the purpose of which is obvious - to increase the level of Russia's compliance. With all the bravado, not one of the key oil producers is satisfied with prices near $ 20, which means that there will be an agreement sooner or later. We also note that so far, in fact, production has not been increased significantly. According to Reuters, Saudi Arabian exports totaled 7.3 million barrels per day in March, not 10 million barrels threatened by the Saudis. Thus, it is only a matter of time before the drivers of lower oil prices converge on oil and change their direction of impact from south to north.