Fear Not Government Debt

Analisi Giornaliera - 19/03/2020

How will this mountain of debt ever be redeemed?


The rush to throw cash out of the fiscal trough into the weakened economy is remarkable. It is late but necessary, if mostly for psychological support reasons, in order to avoid panic. As Europe and the US were caught flat footed, unprepared for this pandemic, a great deal of the cash will go to waste. A huge question is who will pay for it. The short answer is the debt holders or bondholders. As the funding for this spree will come from the sale of bonds, for which demand is enormous, as it is the only asset sought during the crisis, gold itself is selling off.

US Dollar as King of Cash kings

The general panic is causing traders globally to do the market equivalent of an animal or fugitive “going to ground”, meaning to seek absolute shelter and safety. For traders this means holding as much cash and as little of anything else on the market. Even gold, the classic “safe haven” asset is selling off. As such, the best cash according to market indicators is the greenback. The US dollar index is above 100 today.


Too much crude, not enough storage

When we consider the OPEC production strategy of overselling into a devastated market with the resulting oversupply, storage capacity is selling for a premium. Many marginal tankers are being used to store. The owner makes an income with reduced outlay. Meanwhile the shortage of tankers means freight rates are rising. That will be the limiting factor for how much OPEC can put onto the market. Maximum storage capacity.


Fear and panic sends DAX down

Most of the reaction we see by traders and political leaders is panic driven by real fear. Fear is a powerful motivator and the charts show graphically fear turned to panic. The Dax at 8338 is a notable decliner. In response to the continuing coronavirus crisis the ECB announced a €750 billion ‘Pandemic Emergency Purchase Programme. The DAX futures has lost 8.64% on the weekly performance metric and 38.75% on the monthly.


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