April 22, 2020

Brent Hits Century’s Low, ECB To Discuss Junk Bonds

Brent Hits Century’s Low, ECB To Discuss Junk Bonds

Brent oil has tumbled to a 21-year low and touched this century’s low. The spread between the US Crude and Brent has started to narrow. Nonetheless, the chances of Brent falling to zero, or below zero, are small. Having said this, the sell-off in oil is brutal, and it is highly likely that we are close enough to find a bottom.

Here is why:

There is no doubt that this could be the deal of the century because if we look at the factors (that drive the oil price) beyond COVID-19, they haven’t altered much—I mean our daily consumption of oil. The world is still very much dependent on oil, and once we are through this storm (COVID-19’s influence on global growth), the demand will pick up.

The sell-off that has been trigged in the Brent prices today is highly likely to put more pressure on OPEC+ to cut the oil production more. Of course, it will be Saudi Arabia that needs to cushion the additional burden.

I believe it is likely that we may see another emergency meeting becoming a reality within a week from today because the reality is that Saudi Arabia’s economy is heavily dependent on oil trading, and the COVID-19 situation has already left a massive dent on its economy. It is in Saudi Arabia’s interest to push other members to the table and discuss the oil production cut. The moment one sees the production cut chatter becoming a reality—an actual meeting, I think it may not be a bad idea to start putting the long bets once again.

ECB and Junk Bonds

Back in Europe, it is all about the junk bond’s discussion when it comes to the ECB’s call, scheduled today. The Fed has jumped into a high yield space and traders are hoping that the ECB will follow in their footsteps. It is expected that some favorable announcement will be made with respect to junk-rated debt.

Countries such as Italy have been hit the most due to Coronavirus and there is a mammoth amount of junk-rated debt that no one wants to use as collateral.

Companies with junk-rated debt are caught in a liquidity trap, and if they aren’t bailed out, the number of bankruptcies will spike. The higher the bankruptcies, the higher the structural issues due to a surge in unemployment numbers.

S&P Global Ratings is expected to announce its decision on Italy’s credit rating on Friday, and currently, it is two notches above the investment grade. If the rating agency downgrades the country’s rating, it is likely to exclude the third biggest economy of the eurozone from the ECB’s asset purchase program.

The bottom line is that the meeting is likely to bring higher volatility for the Euro and we could see some intriguing price action for the STOXX600 index as well.

Gold To Touch $2000

As for gold trading, the precious metal remains an attractive choice among investors. The chances are higher for the equity markets to revisit the COVID-19 low. In fact, there will be no surprise if the prices fall by another 10 percent.

Earnings are uniformly weak, and their outlook is weaker. The earnings season for the next quarter is likely to be even worse, and the economic numbers are not going to get better any time soon.

I believe that it is likely that gold prices will continue its journey towards the $2000 mark, and it is only a matter of time before we see that mark.

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