26th May 2020
Big trouble in big China
Over the past week, it felt as if the new normal of enforced idleness paired with less stringent lockdown
rules and summer weather would lead to a happier mood across Western Europe, including the UK. The
same applied for investors, whose portfolios also enjoyed some time in the sunshine. However, the outlook
began to cloud over somewhat again towards the end of the week.
Stock markets jolted upwards at the start of the week on news that a viable coronavirus vaccine may
become available before the start of the next cold season. A surprise announcement by Germany and
France that they supported the issuance of quasi-joint European bonds – to the tune of half a trillion €-
Euros – with the aim of pump-priming the European Union’s post-COVID-19 recovery added to the
positive air within markets. Some thought such Eurobonds could become a very powerful counterweight
to US Treasury bonds and help overcome one of the core fiscal and monetary weaknesses of the Eurozone.
Oil is back
Time has started to have little meaning during lockdown, but it was just one month ago when the financial
world looked on in collective awe at a ‘never-event’ in the oil market. Just as economies around the world
were shutting down, OPEC+ (OPEC led by the world’s largest producer, Saudi Arabia “plus” other
producers, led by the second largest, Russia) ended the previously-agreed production restraint and began flooding global markets with oil, resulting in a monumental supply-demand mismatch. This meant the West
Texas Intermediate (WTI) benchmark for US oil prices, sank into minus territory.
The massive fall in oil demand was no surprise. At the beginning of April, nobody was driving around. All
the storage was filled with unused oil. With no tanks of their own, traders had to pay somebody to take it
off their hands. Contracts for American crude went as low as -$37 per barrel (pb). It wasn’t just in the US.
Negative spot prices occurred in Russia’s markets. Brent crude, a more international benchmark, avoided
negative prices but still touched intraday lows of around $10pb. Over the last four weeks, both indices
have staged steady recoveries. At the time of writing, WTI and Brent are trading at around $34pb and
$36pb respectively. So, is this another case of ‘crisis averted’ in the oil market?
Amazon & Walmart: two winners – but who loses?
We are, so politicians keep telling us, all in this together. Lockdown measures, and the deep recession they
have brought, impact all sectors of the economy. But while all businesses are equal under COVID-19, some
are more equal than others. With the world still mostly under quarantine, online and delivery sales have
been booming. Unsurprisingly, the companies reaping the benefits are those with an established online
presence and delivery network. In the US, the two that stand head and shoulders above the rest are
Amazon and Walmart.
Aside from their online retailing expertise and technological know-how, these two firms share one key
advantage. Both have tremendous economies of scale that few competitors can match. They have their
own national and international distribution networks, a wealth of experience in logistics and deep data on their consumers’ preferences. Such scale allows companies to turn a profit at prices that would be ruinous
for most other retailers. This has entrenched their positions as leaders, not just in their own sector, but
among equity markets at large. In the first quarter of 2020, companies across the board saw plummeting
profits as the world economy went into hibernation. Meanwhile, Amazon and Walmart reported strong
sales growth. Recession? What recession?