Daily Commentary BY THE CURVE TEAM –

Market Dislocations Continue

21st of April, 2020

As the curve continues to flatten, the impacts from Covid-19 have continued to cause unique dislocations in global markets.

It is clear now that the impact of the virus will be long lasting and wide ranging but just how these impacts occur is still largely an unknown. As a result of the virus, dislocation in the oil futures market overnight sent the price of the West Texas Intermediate April Futures contract for delivery in May to -$40 per contract.

Whilst this sounds alarming, this is simply an example of how the impact can have very unique and isolated market impacts. The market consensus is that the dramatic price movement was a result of traders looking to close out positions prior to the end of trade of that specific contract so they did not physically receive the barrels of oil. The reason being that stockpiles are already high and the cost of transporting and storing oil against a backdrop of declining consumption is simply uneconomic.

In a similar vein, this morning Virgin has announced to shareholders that they will enter voluntary administration. They will continue to operate in the short term to service their currently operated routes but unless they can find a new source of finance their long term outlook is dire.

These market dislocations and effects are unique and do have their own causes. It could be argued that the oil futures price movement was a rather technical element being the final trading day. Similarly, the financial position of Virgin was arguably already weak prior to the virus. The clear lesson from these two events is that the side effects of the Covid-19 virus and shutdown can be felt in almost any market and in any country and likely in ways many wouldn’t expect.

Since the ways in which these dislocations can occur is unknown, the import element becomes how we are acting to not only react to them but prepare. The key element of that preparation has been the financial stimulus from the government and RBA, the latter of which we will hear from twice today, with the release of the April board minutes at 11:30am and a speech by Governor Lowe at 3pm.

Matthew Dunshea

Client Relationship Manager