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The impact of the British mutant epidemic on the commodity market | New Bloc investment research

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For Bitcoin, it currently benefits from liquidity as a support.

Original author: New Bloc strategist Barry

In the past weekend, British Prime Minister Bob Rees said at a press conference that a new variant of the new coronavirus that is 70% more contagious than common strains has been discovered in southeastern England, which may overwhelm the entire British medical service system (NHS).

After that, British Health Secretary Matt Hancock also stated that the UK is not aware of the new variant of this highly contagious virus. It has been out of control, which has caused many countries around the world to suspend the transportation to and from the UK one after another, including cargo flights transporting food, and the market logic is changing rapidly as a result.

1. Background

In the early stage of the new variant of the epidemic, the prices of crude oil, copper, iron ore, rebar and other bulk commodities have risen significantly. Under the current market environment, the active fiscal strategy has brought inflation expectations to the market.

In anticipation of the arrival of vaccines and substantial fiscal stimulus in the United States, we can see that inflation expectations will rise from March 2020 It has been strengthening (as shown in the figure below). As an important indicator of US inflation expectations, the yield gap between 10-year US bonds and inflation-protected bonds has continued to expand to 1.91%, hitting a new high in the past 22 months.

Source:Bloomberg

Second, disturbance factors

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Inferred from the logical relationship: the epidemic situation in Europe and the United States worsens → crude oil demand falls → OPEC may fall into a prisoner’s dilemma → oil prices plummet → deflation expectations appear → debt Crisis

Vaccine is not the savior of the market

Infection of the new virus strain was found to increase by 70% in the United Kingdom, and the epidemic worsened and the city was closed again. The accelerated deterioration of the epidemic has led to an increase in the number of infections and mortality (the medical run due to a large increase in the number of infections will lead to an increase in mortality) . Although the mass vaccination of vaccines is close at hand, the popularization of vaccines is another matter. Adverse reactions and sequelae in vaccine experiments will cause panic and resistance among the public.

According to Reuters, half of the people are unwilling to be vaccinated, while only 15% of the people in Japanese opinion polls are willing to be vaccinated Vaccines, so the worsening of the epidemic should not be downplayed with the arrival of the vaccine, and more attention needs to be paid to the situation on the data side.

Crude oil is forcing reforms in the Middle East

Since the outbreak of the epidemic in early 2020, many countries have announced closures to curb the spread of the new crown virus. The decline in demand has brought about a drop in oil prices. After the breakdown of OPEC production cut negotiations, Saudi Arabia and Russia have increased production sharply, leading to a sharp drop in oil prices. In the second half of the year, OPEC After the production reduction agreement was reached, the effect of the fiscal policy of the United States appeared, demand rebounded, inflation expectations were strong, and oil prices began to stabilize.

Due to the low oil price in the first half of the year, the economies and fiscal revenues of the countries in the Middle East deteriorated, a large deficit and a large amount of foreign exchange reserves were consumed . Since the exchange rates of most countries and regions in the Middle East are pegged to the U.S. dollar, the simultaneous decline in oil prices and the U.S. dollar will put pressure on this pegged exchange rate system.

In the long run, the development of shale oil in the United States has seized a large market share and increased the financial pressure on countries in the Middle East. Due to the different economic strengths of countries, the solvency of foreign debts varies among countries. From the perspective of game theory, once the expected demand declines, it will be difficult for countries in the Middle East to reach an agreement again because of the divergence in their solvency.

As shown in the figure above, we can clearly see that since 2014, the current account has begun to fall. At the timing of the shale oil revolution, we can intuitively see the pressure that shale oil has brought to the Middle East. For example, Bahrain and Oman have maintained large deficits in their current accounts. With the impact of the epidemic, demand continues to slump, and the foreign exchange reserves of Middle Eastern countries may not be able to support them to continue to implement the exchange rate system linked to the US dollar. The following figure shows the ratio of foreign exchange reserves to total external debt, which is similar to the collapse of the Bretton Woods system.

Looking back at Mexico in 1994, when Mexico was still under a fixed exchange rate system, the currency was overvalued, resulting in a trade deficit, Foreign exchange reserves continue to decrease, and expectations of exchange rate depreciation diverge.

In order to curb the excessive reduction of foreign exchange reserves, the Mexican government implemented a currency devaluation strategy. In the middle of the night of December 19, 1994, The Mexican government suddenly announced a 15% devaluation of its national currency, the peso. This decision caused great panic in the market. Foreign investors sold pesos frantically and snapped up dollars, causing the peso exchange rate to fall sharply.

On December 20, the exchange rate fell from the initial 3.47 pesos to 1 dollar to 3.925 pesos to 1 dollar, a sharp drop of 13 %. It fell another 15.3% on the 21st.

With the rapid depreciation of the peso and foreign investors withdrawing funds in large numbers, Mexico’s foreign exchange reserves fell on the 20th and 21st The sharp drop of nearly 4 billion US dollars in two days caused chaos in the entire Mexican financial market. From the 20th to the 22nd, in just three days, the exchange rate of the Mexican peso against the US dollar plummeted by 42.17%.

As shown in the figure above, it can be seen that the negative correlation between the US dollar index and oil prices is very strong, but since the beginning of this year, the US dollar index has , Oil prices fell together, the U.S. dollar index showed a depreciation trend, the Middle East exchange rate pegged to the U.S. dollar would have inflation risks, and crude oil was scrambling for global share due to shale oil, and various OPEC members fell into a prisoner’s dilemma, resulting in a sharp drop in crude oil prices.

At present, the income of most countries in the Middle East mainly comes from the export of oil, and the exchange rate is pegged to the US dollar, while the US dollar is controlled by the Federal Reserve and the fiscal Driven by stimulus, it has been in a long-term depreciation trend. For countries in the Middle East that peg their fiat currency to the US dollar, imports are more expensive and exports are cheaper. As a result, their foreign exchange reserves are constantly depleted, and the peg of the exchange rate to the US dollar is under tremendous financial pressure.

If the US dollar oil system is decoupled, the Bretton Woods system and Mexico can be used as a reference. The exchange rate risk in the Middle East will affect the A shock to oil prices would lead to renewed deflationary expectations, a debt-deflationary vicious circle.

3. Summary

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If the price of crude oil plummets due to the exchange rate issue in the Middle East and the expectation of deflation appears, you can hold cash, treasury bonds and other assets as a safe-haven allocation during deflation, but low oil prices are very It is easy to break out of large-scale wars under the impetus of political pressure in various countries, resulting in a sharp rise in crude oil prices and inflation. When inflation occurs, gold and equity assets should be held. On the whole, it is recommended to short crude oil and long gold.

For Bitcoin, it currently benefits from liquidity as a support. When inflation expectations are strong, liquidity When it is sufficient, Bitcoin will have obvious upward expectations, and when it is deflationary, it is easy to cause liquidity risks, and it is recommended to avoid it in the short term.