Weekly Market Insight

Daily Covid-19 Market Update 23rd April 2020

23rd April 2020

Dublin Property Update | Huge rally in oil price to above $13 a barrel | PMI sank to a record low of 13.5 in April

With the oil market continuing to be the main focus of attention in recent days, the WTI saw a huge rally in price to above $13 a barrel. Influencing this surge was the order from President Trump to the US navy, to destroy any Iranian gun ships that were harassing US ships.

You can see the uncertainty in investors in markets at the moment. In the two days prior to yesterday, the crash in oil sent investors into a panic believing the price crash showed the true condition of the economy, yet markets were up yesterday on the back of some better than expected earnings reports with investors believing they could see the light at the end of the tunnel.

The Purchasing Managers Index (PMI), an estimate of private sector activity in the Eurozone, sank to a record low in April. A measure above 50 indicates expansion and below 50 indicates contraction. The PMI tumbled to the lowest ever reading of 13.5, down from 29.7 in March. This is a reflection of the decision to lock down countries to contain the virus as new business dries up. The worry for businesses is that to prevent another outbreak, recovery is set to be slow.
 
The target rate of inflation over the medium term for for the UK and Euro area is close to 2%. The UK has revealed statistics indicating a slowdown in the economy. Inflation stood at 1.7% in February but fell to 1.5% yoy in March. This is noteworthy as this data was collected before lockdown was implemented in the UK. When a fall in inflation arises due to reducing demand, disinflationary pressure is created which makes it difficult to stimulate economic growth. The fall in inflation leads to a fall in prices, which benefits consumers, but a stable rate of inflation would provide much more beneficial to the public as it means the economy is in expansion.
 
In an environment that has already shown it can drag down credit ratings, the ECB has made a fresh move to prevent turmoil and changed its rules so that the Central Bank can accept bonds from “fallen angels”as collateral and thereby ensuring continued access to Central Bank lending facilities. This rule change can now ensure banks can access much needed liquidity where otherwise ability to access loans may have been severely hampered by downgrades. The ECB’s move was specifically aimed at holdings of affected corporate bonds. While efforts from Central Banks and Governments are seen across all sectors to improve economic activity, rating downgrades move against this by restricting access to loans and prove a significant hurdle for companies to overcome in their effort to improve economic activity.