Austria is considering border controls and has already prevented an Italian train bound for Munich from passing through, as a couple of passengers showed symptoms. Over the weekend the confirmed cases in Italy has risen north of 150 and the death toll so far is three. Towns in the northern part of the country have had strict quarantine rules imposed upon them, with schools and universities closed and people told not to come to work.
The market reaction is exactly as you’d expect; sell equities because lower growth will hurt profits, sell oil because lower growth means less fuel consumption, get out of the euro because it was having a hard time anyway and this only makes it worse and buy gold, because that’s the ultimate safe haven. Interestingly, Bitcoin is also proving itself as the 21st century gold alternative, with the chart showing a similar trading pattern to gold over the last few months.
The other currency acting as expected is the Aussie Dollar, which is now trading at its lowest level since 2009. The currency is used as a proxy for global growth as Australia’s commodities fuel China’s industry, which supplies the rest of the world with what we need (along with plenty of things we really don’t). A weaker currency isn’t the worst thing for Australia at the moment. It makes the dollar denominated commodities you are selling more valuable, It makes your Aussie dollar denominated exports cheaper, it also potentially stimulates foreign investment – potentially is the key word though, as it’s only of value if investors are up for investing. Australia’s central bank were pondering a rate cut off the back of worse than expected employment data and we wouldn’t be surprised if this is now a done deal at their next meeting.
Over the weekend there was a G20 finance ministers meeting and the post summit communique finally talks about looser fiscal policy being a priority! This is important for Europe, as Germany France and Italy sit within the G20 and it’s really the Germans that are in control of whether the rules in Europe can be rewritten to allow greater budget deficits (spending more than you’re bringing in).
European ministers can agree on the above, but it doesn’t seem like they can agree on what they want out of the Brexit negotiations… Reuters are reporting that the EU still haven’t tabled their preferred approach as they’re being hamstrung by competing interests from different states. Apparently the UK are behind Boris’ negotiating position, but many are concerned that services would be hung out to dry if we go down the Canada route, something that the government is yet to comment on.
Moving on; we’ve spoken of the bond market bubble a lot of late – and we’re going to keep doing so! Today, the FT has an interesting article on Kraft Heinz and Macy’s in the US, who have both been downgraded to junk status, with about $27bn of bonds between them. The FT draws parallels to 2005 when Ford and GM were both downgraded which ultimately led to GM going bust. These are smaller companies than those motor giants, but the symptoms they have can be seen across a wider market – a market which was $677bn in 2005 but $3.4trn today.
Also in the US; Bernie Sanders is the Democratic front runner following the Nevada caucuses. Over the next couple of weeks the candidates will be crisscrossing the country with a relentless schedule of votes. It could get to the point by mid-March that nobody can catch Mr Sanders in the race -potentially taking out months of further infighting ahead of the November elections.
Have a great day