Monday Musings: March 9, 2020

Mar 09, 2020


Public Trust Credit Team
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A plea for more measured market responses

This morning, the stock market experienced the first circuit breaker since the “Flash Crash” of May 6, 2010. A circuit breaker is a trading halt that is intended to stop irrational behavior. The temporary halt allows traders to take a pause and let cooler heads prevail. Public Trust continues to believe that the current market volatility is little more than fear of the unknown and irrational hysteria. That said, there is little evidence supporting a cataclysm in the North America economic picture.
Today’s halt was triggered when the Dow Jones Industrial Average fell 7% within the first 30 minutes of the open. The dramatic sell-off was due to continued fear surrounding COVID-19 as well as the announcement that Russia and OPEC have entered into a crude oil price war. Russia, formerly a component of the so-called OPEC+ consortium, is among the world’s largest crude oil producers with enough available capacity to threaten Saudi Arabia’s dominance in setting oil price (Saudi Arabia is the second largest oil producer in the world). After recent OPEC+ discussions failed to achieve consensus, brinkmanship ensued this morning with Brent crude oil futures dropping nearly 18% in early trading. Some analysts have said that prices could fall further still, meaningfully harming oil producers and oil dependent geographies including west Texas. However, neither Russia nor Saudi Arabia are able to sustain $20-$40/bbl in the long-term, and the current price war is expected to be a painful but relatively brief race to the bottom.
The timing of the announcement perfectly coincided with an already skittish market that is seizing on new instances of COVID-19. Public Trust recognizes that there is a dearth of information on the virus, and market participants are positioning for the worst case scenarios. After all, irrational trading and hysteria are common threads in many market meltdowns. Still, each passing day provides higher quality and more reliable data on the virus. South Korea, the country with the second highest number of confirmed cases, has had a robust response to the virus and is demonstrating that it can be controlled. Their data shows that the mortality rate may be less than 1%, lower than the Spanish flu of 1918 (estimated to be at least 2.5%), but is not to say that the impact won’t be damaging to the economy. For North America, there are likely to be measurably detrimental consequences as analysts have already revised 2020 earnings estimates down 1-2%, but we believe the market’s hysterical response is way out of proportion. Public Trust remains vigilant in monitoring client portfolio and counterparties to ensure that assets are protected.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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