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In a week of mixed results in the medical war on Coronavirus, including China reporting the first day of zero new cases since the outbreak began; Italy’s death toll surpassing that of the Asian country; and the proclamation from the WHO that Europe is now the epicentre of the Covid-19 pandemic, the world’s governments, seemingly acting in unison, began to step up to the plate from a stimulus perspective.
Coronavirus – Commodities & Nickel
It is currently a challenging time for the commodity markets with the novel coronavirus weighing heavily on world markets and set to have a drastic impact on global GDP for 2020. This has resulted in a correction in the price of base metals, including nickel.
China, believed to be the source of the virus, also seems to be the first to emerge from its self-imposed lockdown period, given the lack of new cases. From a stimulus point of view, now that it appears to be through the worst of it, many are predicting big developments, including infrastructure spending, where commodities would play a big part.
According to a Reuters exclusive this week, the Chinese government could ramp up spending to as much as US$394 million as it sets a new GDP growth target of 5% in 2020, from the previous 6% target set prior to the crisis.
The UK’s Sunday Telegraph has also reported that proxy indicators out of China are already indicating improvements in consumption with steel demand and coal use both up from a month earlier.
“Rising domestic air travel, traffic congestion and pollution also suggest China’s coronavirus-hit economy is starting to bounce back as factories, offices and shops reopen.
“Steel demand has rebounded sharply to catch up to last year’s levels, while coal consumption of electricity producers is now down just a 10th year on year, Goldman Sachs revealed.”
A Chinese central bank official was also quoted by Reuters this week as saying that recent policy measures are helping improve the Chinese economy and that he expects significant improvement in economic indicators in the second quarter. Given that China is the largest consumer of most commodities, this indicates green shoots may be seen in the second quarter for the commodities market.
Wood Mackenzie, the global natural resources research and consultancy company, indicated that whilst Covid-19 is having a severe near-term impact on the nickel market, there will be little to no impact on the longer-term fundamentals and therefore, have maintained their long-term view on nickel.
Coronavirus – Global Stimulus Packages
Across the world, reserve banks and governments have begun to pull the levers and loosen the purse strings. Not necessarily to revive economies at this point, as the virus is clearly not yet under control, but to ensure that the very fabric which holds societies together, as well as basic infrastructure and public services, remain intact and functioning, in readiness for a strong restart, whenever the play button is pushed at the end of this unprecedented global crisis.
A rush to cash, especially US dollars, and a general risk-off attitude, has seen a liquidation across most asset classes, from equities to commodities to bonds, and everything in between.
Market commentators have also noted that while the Global Financial Crisis of 2008 led to a decrease in revenues in a number of sectors for a number of years, this time around it is more of a 100% loss of revenue over a much shorter period, particularly for some sectors (think hospitality and airlines), which brings about its own set of challenges never seen before.
Much of the current stimulus relates to helping companies simply stay alive at this time and not have to shut down and retrench staff, while also helping those individuals that have been let go. Examples here include: the removal of business rates in the UK for smaller companies, deferred mortgage payments, and President Trump’s proposal of the US Government sending cheques directly to US citizens.
Interest rate cuts have also started taking place and massive bond buying programmes have also been announced. A natural stimulus is the oil price which has hit $20 per barrel this week, levels some thought would never be seen again.
Overall, the initial numbers being pledged by governments are staggering and show their intent on avoiding long-term economic recession from developing, once normality resumes. How long that will take is anybody’s guess, however many are already looking towards the second half of 2020 to early 2021, as a time where most countries should have a better handle on things.
Among these are the US$1.3 trillion rescue package announced by the US, which represents about 6% of GDP, as well as the UK government’s announcement of the 330 billion pounds of guaranteed loans, equivalent to 15% of U.K. GDP. European countries have also made big pledges, and the IMF says it is ready to unleash its $1 trillion of lending capacity when required.
While there is clearly still a long way to go in this saga, governments’ two prong attack strategy of getting ahead of the virus and ensuring the economic fallout is limited, seems to be an appropriate strategy to ensure the world’s economy gets back on track as soon as the worst is over.
Summary & Our Takeaway
The US, Germany, Britain, France and Italy are estimated to have committed ~$7.4 trillion (23% of GDP) to fight the pandemic. According to The Economist, central banks have committed around 80% of the $7.4 trillion. To put this into context, the Global Financial Crisis stimulus of the G20 was around $2 trillion or ~1.4% of Global GDP. This could present an opportunity for investors to make substantial gains by buying into key recovery stocks in the crisis, including stocks with good cash positions in commodities/construction/construction materials.
