HistoryinthemakingandcuriousCorrelations

Sometimes when the history is being written, the perspective of people who are living through it is completely different from the historians or analysts who analyse it with the benefit of hindsight. Maybe the people who lost their shirts in 1929, 1987 or 2008 will give a different reasoning of why things happened in the real time. As a perfect storm brews may be we are again living through a historic time where the confluence of multiple factors impact all and sundry.

 Lets see what has happened over the weekend

• US 10 year Yields are trading at 0.53 against the Friday high of 0.90.
• Dow Jones futures are trading down again.
• Brent Crude is down by 30% to Friday levels.
• Yen is up by close to 3%.
• Stock markets across the world are falling.
• Domestic yields are at 6.06 (10 year) against 6.18.

Let’s try to give a context to all this:

The top news obviously is the vertical fall in the price of oil as the oil producing nations fail to reach an agreement on how to counter the demand shock given by the virus impact. The major oil producing nations hence have decided that the output cuts have to go and they will move ahead to pump as much as they want to garner the market share. The result was immediate and comprehensive with the Brent crude currently trading at 33$/bbl to the Friday price of 50$/bbl. Such a steep fall will have multiple effects of multiple orders. Oil buying nations will firstly rejoice but as surplus with oil producers goes down producers will cut down on the capital investments which they were doing. For India as the nation also receives a large portion of remittances from the ME region, the slowdown in ME impacts that inflow of money.

 The second news is of continuing impact of Corona Virus. The incoming reports are mixed as the number of new cases in China goes down but at the same time across the world whether in US or Italy the numbers are on rise. Italy has quarantined an entire region whereas US grapples with rise in unrelated cases.

Yen and Gold particularly as a hedge against the risk off mood have shown a significant move. Emerging market currencies have been trading lower whether it is IDR, KRW, ZAR or MYR. ZAR in keeping its status as a high beta currency has moved down by 4% in the opening session today.

 As the oil, interest rates, credit concerns, stocks all show a complete correlation on their way down, we remember an interesting story to sum this up. In 1998 when the LTCM the quant hedge fund was going down on the back of Russia debt default. One of their investments was in the Globalstar as a way of diversification. During the heady days of debt crisis a rocket carrying the satellites of Globalstar fell out of sky and exploded. The correlation between a rocket trajectory and a sovereign default went to one. In troubled times funny things can happen.