Weekly View - Oil shock
The topsy-turvy markets of the last two weeks have put pressure on the weakest links, shining a flashlight on the most vulnerable companies. We have seen the collapse of UK based regional airline Flybe. Despite monopolising most of its routes, the airline struggled to turn a profit on many of them, registering losses for most of the decade ahead of its 2018 delisting. On the same day as Flybe’s fate was sealed, India’s central bank seized control of Yes Bank, one of the country’s largest private lenders. Shares of the heavily indebted Yes Bank plummeted and panicked customers queued to withdraw their deposits. Volatile markets leave the riskiest assets exposed and at the onset of a credit crunch, we reemphasise quality in credit and our underweight in high yield in portfolios.
In an attempt to stave off virus-triggered economic hardship, the US Federal Reserve announced an intra-meeting rate cut last week as countries around the world launched fiscal stimulus efforts. This week, we will watch what the European Central Bank (ECB) does to support Europe’s small and medium enterprises in particular. Meanwhile, China’s health system will be tested after it impressed the world with its 10-day coronavirus-treatment hospital construction in Wuhan in response to the outbreak. As the USD retreats against defensive currencies, we reiterate our positive stance on the latter.
The oil price, which had already taken a beating on concerns of a slowing global economy, plunged by 30% after a collapse in OPEC discussions with Russia over production cuts. The oil price war is bound to have serious implications for the energy-heavy US high-yield market, for energy-related stocks and for financial markets in general. This week, in fastmoving markets that are starting to anticipate a serious recession, eyes will be focused on the possibility of coordinated policy responses, both monetary and fiscal. On a brighter note for equities, the yield offered by 30-bond Treasuries is now below the dividend yield level for the S&P 500.