Olymp Trade’s Expert Review on Global Financial Crisis

COVID-19. Three Scenarios and a Bit of Optimism

Hardly anyone would have thought that the epidemic of COVID-19 coronavirus would lead to the global quarantine, border closures and the state “piggy banks” openings. The world has experience fighting different types of influenza, SARS and other dangerous diseases with a high mortality rate, so the world’s response to COVID-19 has been mostly late.

However, the gradual recognition of the danger and quarantine measures were the first domino in the chain of negative processes. And until the pandemic is officially defeated, one should not hope for economic and stock market recovery.

In general, the situation can develop according to one of the following scenarios:

1. Gradually, the mortality rate will be reduced to minimum values. At the same time, quarantine restrictions will weaken. In this case, the economic recovery may take years.
2. An effective vaccine will be created. Until then, countries will spend huge resources to contain the impact of the pandemic, but once the vaccine becomes available, economies will start growing rapidly.
3. The pandemic will come to naught, but there will be new COVID-19 or its mutation outbreaks.

The fact that sooner or later, the pandemic will end, gives us optimism. A little over a century ago, the world suffered from the Spanish flu, which claimed between 25 million and 100 million lives. In total, about 30% of the world’s population was affected. Doctors say that the modern coronavirus is much less dangerous.

 

The Worst Situation Since the Second World War

Commenting on the COVID-19 situation, International Monetary Fund Managing Director Kristalina Georgieva said the following: “We anticipate the worst economic fallout since the Great Depression”.

Governments, central and commercial banks are now trying to calculate the volume of economic recession they are going to face this year. According to preliminary estimates, U.S. GDP may decline by one-third in this quarter.

Analysts of the Swiss bank Credit Suisse wrote the following: “US economy will shrink 33.5%. This means the period from April 1 to June 30 is shaping up to be the worst quarter on record going back to1945”.

Bank of America experts, who were among the first to dare to state that the U.S. fell into recession, forecast a GDP decline of 12%.
 

If we compare the current situation with the financial crisis of 2008, we can conclude that the current crisis will be much harder. For comparison: in the fourth quarter of 2008, the drop in GDP was limited to 6.3%. At the same time, the fall in the S&P 500 index during this period was about 30%.

In other words, the recent 35% correction of the U.S. stock market with a subsequent upward bounce was just the first signal. Probably for this reason, gold has been in high demand since the beginning of the year. In April, the value of the precious metal broke the record of the last seven years.

But it would be the worst of both worlds for those countries whose economies are closely linked to oil exports.

Oil: Russia’s Demarche and a Payback by Saudi Arabia

Black gold exporting countries stepped up the moves to cope with the supply and demand balance in 2016, when key players in the oil market concluded the so-called OPEC+ agreement – a deal to reduce oil production for a limited period of time.

However, after several contract extensions, there was less and less unity among the parties. The market did not pay attention to the statements of small exporters, such as Ecuador. However, Russia’s refusal to approve additional reductions in the volume of produced crude meant the end of the OPEC+ deal.
 

On March 6, the parties failed to agree to another cut. Russia, Kazakhstan and Azerbaijan refused to support the reduction of quotas, to which Saudi Arabia responded with a well-known trick from the 80s — it reduced oil prices and announced an increase in production rates. By April 1, black gold had gone down in price by more than half: Brent dropped from $50 to $23 per barrel, WTI fell from $46 to $20.

U.S. President Donald Trump intervened in the oil standoff by bringing together the top officials of Russia and Saudi Arabia to resume the dialogue. By the way, the U.S. specialized departments allowed the possibility of imposing sanctions against both Russia and Saudi Arabia, if these countries do not find a compromise.

But while the oilmen were negotiating, the whole world stopped denying the seriousness of the COVID-19 epidemic and started taking radical measures. A slowdown in business activity, a drop in sales and a disruption of flows of export and import led to a decline in oil consumption, but production has not stopped.
 

The Market Needed to “Be Bled”

Investors calmed down for a while after OPEC+ participants agreed to reduce production by almost 10 million barrels per day. However, the growth in inventories led to a new wave of sell-offs.

At least 13 million additional barrels were recorded weekly, so traders quickly started talking about depleting storage capacity.
 

The market was in urgent need of discharge, because the tension was really high. It led to a phenomenal collapse in WTI crude futures. The contract for May delivery was not just cheaper. For the first time ever, the oil price closed in the negative zone and reached -$40 per barrel!

Of course, the specifics of this type of instruments played its role — the futures have a limited circulation period, and traders began to get rid of these contracts before their expiration (no one needs real oil delivery).

But if we don’t go deep into the subtleties of exchange contracts, we can conclude that now oil can cost neither $100 nor $50. This is evident from the excess stock of raw materials in storage facilities, a drop in demand for it, and the global recession.

Low prices for black gold will primarily affect countries whose budgets are closely linked to revenues from oil exports — for example, Middle East states, Mexico, Norway and Russia.

Normally, they could easily survive such a situation thanks to accumulated reserves. But the economic crisis provoked by the COVID-19 pandemic requires much more spending.

 

Will the Oil Industry Show Positive Dynamics?

We received a comment on this issue from an independent expert from the energy sector:

“If Saudi Arabia, the U.S. and Russia do not act quickly on the agreement to reduce production, prices will fall further in the current demand environment.

The only non-catastrophic way to raise the price is to increase economic activity in both China and the US. In that case, if consumption starts to outpace production, we will see a gradual increase in quotations. However, based on global economic conditions, this is very unlikely to happen.

In the past, markets have often been ‘rescued’ from excess supply in the market by the outbreak of hostilities in one or more oil-exporting countries. For example, conflicts in Libya, Iraq, and Venezuela over the past few decades have led to an increase in oil prices.

Good traders will be watching the oil-producing regions for the sudden rise of ‘military operations’, as soon as the news of conflicts, as well as reduced supplies from these regions, will help support oil prices.

Without any significant conflicts or extreme production cuts, oil prices will decline or balance at low levels by the end of this year. Only closer to 2021 will the world economy have a chance to gain momentum after the COVID-19 pandemic (provided that the pandemic has ended by that time).”

Major producers are expected to start implementing the new terms of the OPEC+ agreement in May. Additional measures to reduce production volumes are also not excluded. For example, the Mexican president promised to consider shutting down all new wells.

Another possible way out of the situation will be the emergence of a new oil alliance between the US and Saudi Arabia. It is known that U.S. officials are already working on the implementation of this idea, but as for now, Washington’s priority is to cope with the epidemic and at least partially lift quarantine restrictions.

 

Financial Apocalypse: Yes or No?

As mentioned above, investors have been feeling the onset of the global correction for a long time. Being a traditional safe haven asset, gold began to grow in the summer of 2019 and has added more than 20%.

However, not everyone agrees that the financial apocalypse will come very soon. We talked to the trader who is going to go short on gold CFD using a multiplier.

His analysis is based on Elliot Wave Theory. In short, when using this method, traders consider the chart as a set of waves, then classify them and get the answer to the main question “Where will the price go?”

The advantage of this method is its complete independence from fundamental analysis. The statement that trends have a wave-like structure is taken as an axiom. And all combinations have already occurred before. Since there were too many news factors, we wanted to get the opinion of those traders who do not follow them.

From the correspondence:

“Gold responds enthusiastically to what’s happening in the world. Wave norm (B) of the senior level is fulfilled. Perhaps there will be a major decline to $900 per ounce as part of wave (C) “.


 

Survival Race and Distribution of Trillions

Just like any crisis, the current turmoil will be fatal for someone. For example, Argentina can no longer agree on debt restructuring with its major creditors. By and large, it became the first country that went bankrupt.

On the other hand, China, which gained a temporary advantage as it almost fully recovered from the epidemic. China’s authorities are actively stimulating business to support the labor market, but at the same time, Chinese officials note that there is a decline in exports — other countries have indeed started buying much less.
 

The variety of possible consequences of the current moment is alarming. No one can be sure that recovery programs developed by governments will help to overcome the recession.

Nevertheless, the record-breaking US stimulus measures of over $6 trillion are shocking. The $2 trillion rescue package will be used for direct payments to all citizens of the country, and $4 trillion will come in the form of soft loans to support business. Thanks to prompt measures, the U.S. dollar did not get volatile and is now serving as a safe haven currency.

The Japanese government is also discussing a serious aid package. A stimulus package worth $1.1 trillion will be deployed to support enterprises and citizens. Prime Minister Shinzo Abe believes that these steps will lead to GDP growth of more than 3%.

The EU authorities are following the same path: they intend to inject half a trillion euros into the EU economy. In addition, there is a heated discussion among the leaders of the euro zone countries about the “coronabonds” issue. Those eurobonds can help the worst-hit European countries recover.

What a Trader Should Look For

Second tier countries are less generous with incentives. Traditionally, they are more sensitive to a crisis due to inefficient systems and lack of economic diversification. These regions are highly dependent on global trade, but they can demonstrate high growth rates.
 

If you really want to capitalize on the future growth wave, pay attention to developing countries such as Brazil. You can make long-term investments in ETF MSCI Brazil 3x. This portfolio includes Brazil’s leading companies.

You can also opt for stocks of major U.S. companies that show the characteristics of a monopolist, such as Facebook and Google. Both companies are major advertising platforms, and these corporations are not afraid to invest in development even in times of crisis.

Google produces smartphones and improves web technology. Facebook tries itself in the role of a payment tool and hopes to repeat the success of the Chinese WeChat. Unlike governments, IT companies are well aware of the market needs and get ahead of their moves. This pattern most often brings profit to investors.

 

Bitcoin as a Safe Haven for an Investor

In the first quarter of 2020, bitcoin managed to experience both growth to $10000 and a collapse to $4000. The media said the asset was following the dynamics of the stock market.
 

However, as the situation in the world economy deteriorated, the cryptocurrency reveiled a feature unrelated to it — the craving for stability. This can be confirmed by its return to the level of $7000, where the coin was trading at the beginning of the year.

And another really alarming factor is the growth in the trading volume of bitcoin in the exchanges. Every day it records about $30 billion worth of trades, while in Q4 it was about $20 billion. That is, the market demand is growing.

We do not whether its price will increase, but a flat always becomes a trend. Our task is to take the right side. And if we take into account that bitcoin is not controlled by any country, is not subject to inflation and is limited in emission, it has all chances to become the main safe haven for investors.

Wherever the crisis turns, remember — the factors outlined in this article are the key to understanding what is happening. Markets will recover, things will get back to normal for the humanity, but until then we will see stock rallies, strong bullish trends, collapses and bankruptcies. This is what we will be dealing with and making money from.