Content:The Corona world crisis as we experience it today will go down in history. The rare phenomenon that supply and demand collapse simultaneously leaves traces. How are we affected and what are important mechanisms? The scenario corona is analyzed here.
Introduction: From mid-February to the end of March, the SMI, Swiss Market Index, lost 28% of its value. Investor sentiment was bad and they all left the markets in a hurry to find security somewhere. Due to the Corona crisis, there is generally less oil demand and the oil price war between Russia and Saudi Arabia led to sharp oil price reductions, in March by 30%, the lowest level in 18 years.
What political tensions arose in the oil industry? The proposed funding cuts of 1.5 million barrels per day, which the OPEC countries proposed to stabilize the price in the second quarter, created tensions. It would be a 1.5% decline in global oil production, but Russia did not want to support the cut in production with a view to the American fracking industry because the United States would have benefited. This swipe from Russia, which is now punishing the US for interfering in Nord Stream 2, is just one of many political conflicts in the time of Corona. President Trump is meanwhile consulting with the U.S. oil bosses to discuss measures to stabilize the oil price. On the one hand, the US state is supposed to provide aid to industry, on the other hand, punitive tariffs on Saudi Arabia's oil exports could be another means. The price war between Russia and Saudi Arabia also leads to an oversupply in the USA, which causes prices to fall. Russia calculated its budget planning with an oil price of $ 42 and since the price has already fallen below this mark, as well as the sale of the ruble, the strategy of its own economy is harming. Saudi Arabia's reaction and price strategy show a direct attack on Russian producers in Europe, so that the conclusion can be drawn: As long as the flooding of the market continues, protectionist measures by the countries involved cannot be ruled out and the oil price war damages the industry, which formerly served as the cornerstone of globalization.
What are the considerations behind Trump's demands against Saudi Arabia to increase oil production and thereby lower prices? And what influence does this have in the times of Corona? The president always wanted to lower prices so that the American people would have to spend less on gasoline and thereby consume more. This move would boost the economy, but it would make oil producers less profitable. The conclusion would be that investments would be canceled and the economy would be burdened again. The main problem is that US fracking companies are heavily in debt. This means that they have taken out bank loans and are keeping themselves alive by spending high yield bonds, i.e. junk bonds, with interest rates of 10% and up. If we now focus on the corona crisis and the problem of the resulting rising interest rates for junk bonds, we see that the risk of US fracking companies going bankrupt has increased immensely. Because the oil industry plays such an important role, a negative development on the US gross domestic product can also be assumed, which in the end increasingly points to a worldwide recession.
Where are investors fleeing to on the stock markets ?: This emerging recession is also recognizable in investor behavior. They are fleeing the stock market because of fear and uncertainty worldwide. Investors are now investing in government bonds, even though they are at a record low. This means that if an investor lent money to the US state for 30 years, they would only get a return of 1.2%. In Germany, the 10-year federal bond was down to minus 0.7%, which means that investors have to pay money to the state, that they can borrow this money. Already during the financial crisis of 2008 there were various counter-movements on the bear market, as can be seen now in the stock market, until it formed a bottom in March 2009. The volatility index VIX is currently at 41.67 points, which shows the nervousness and uncertainty in the market. The corona crisis caused new earnings estimates to be made, so dividend cuts should be expected. Credit defaults should also be expected, especially in the area of high-yield bonds. The bright minds of the financial world would rather accept the disadvantage of government bonds, because there is great fear that the stock market would suffer even more losses.
History will show us whether the stock bubble is about to burst.