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The sparkle at the end of the tunnel

By Marius-Cristian Frunza
Weekly Briefs

The latest statistics concerning the COVID-19 pandemic show that the growth of the cumulated number of infected people stopped and the speed of contagion may decrease in the following weeks.  

The more optimistic forecasts indicate that the curve of the pandemic spread may flatten by early June, while more pessimistic point towards August. The real question is how the world will look like after the pandemic? Which companies will survive? What will be the real unemployment? How will people travel?

Under all scenarios, the answer to all these questions is not optimistic. The economy may undergo a structural change, unemployment will increase, and people will travel less. The economy enters a pattern of deglobalization that will touch mainly the countries relying heavily on global trade. A reshaping of the workforce is necessary and like after every other crisis, there will be a shift towards lower wages.  

There is a sparkle of light announcing the end of the global lockdown, but the colour of light is not green.

God made the two great lights - the greater light to rule the day and the lesser light to rule the night - and the stars. Genesis 1:16

Market overview

Against all the odds, the stock market had an astonishing week, the Dow Jones testing the resistance level of 23,500.  Why are markets moving up, when everything else is collapsing? The price we currently observe is nothing else that a discounted value of the future in the present.

Thus, there must be something positive in the predictions that could support the current market prices. One of the positive outcomes of this crisis could be a lower cost of labour, which could lead to an increase in the expected profits for the companies that will stay in the game. The market does not price in the profitability of a company, but its likelihood to avoid default.

Bitcoin's price follows the moves of the stock market, thereby raising serious questions about the share of institutional investors in the cryptocurrencies arena.  Thus, the idea that Bitcoin is a safe-haven investment does not hold water, Bitcoin being nothing more than a glorified stock.

Meanwhile in the Commodities market…

End of the oil price war

After a week-long marathon of negotiations, the world's leading oil producers agreed to reduce the global crude output.  OPEC+ agreed to cut 9.7 million barrels a day, similar actions to be undertaken by other countries including Canada, Brazil and Mexico.

This agreement aims to support the oil price, massively affected over the last month by the impact of the global pandemic on demand. It is premature to assess the potential impact of this action in the long run, but over the current week, a surge in the oil price is expected.

CO2 Emissions price

The price of the CO2 European Allowances listed on Intercontinental Exchange had a strong rebound last week. After retreating in March amid the COVID-19 crisis, the carbon market bolstered by over 20%, supported by a recovery of oil prices and major stock indices.

The leading players of this market are the big energy companies that anticipate a foreseeable increase in the industrial output and consumption that would lead to a rise in the carbon emissions. It sends without any doubt to all markets a positive signal concerning the return to normality.

Market outlook

The reopening of the economy seems not to take place before early June. It won't be long until the stock market incorporates the subsequent Q2 GDP loss and undergoes a double-digit correction.

Under the scenario of a second dip, gold and Bitcoin may observe significant losses in the short term. Bitcoin needs to move up faster before May halving; otherwise, it may face structural challenges.

General Disclaimer

The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial in- strument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.

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