After equities indices plummeted the most since 2008 crisis (last week), finance ministers and central bankers of the G7 decided to have a teleconference this Tuesday (March 3rd) to consider the options to respond to the COVID-19 virus outbreak.
Last Friday the FED chair had already said that appropriate tools and acts will be used to support the economy. Today it was the BoJ (Bank of Japan) turn to promise more liquidity and apparently Trump has mentioned to be studying eventual tax cuts to help the markets.
Investors are optimistic to a new round of stimulus, even though it might not be enough to take consumers out of home if the coronavirus contamination is not contained.
In Japan classes are being suspended for a month and in the rest of the World multinational companies are limiting the travel of their employees, also helping to reduce the flow of passengers at airports and causing the cancellation of flights on several routes.
The impact on GDP growth is already certain, the size of the potential loss, however, will depend upon the duration of the not yet declared “pandemic” and obviously on the control of the disease – with the return of economic activities to normal.
The fear has led people to purchase extra food and medicines causing, in some cases, shelves of supermarkets to be (temporally) emptied and lowering the availability of some products, like sanitizing gel, for instance.
In China, workers are returning to their posts and stores have been reopened, the problem is how much people are willing to do something outside of what is strictly necessary, such as going out on a discretionary basis.
The CRB erased not only the gains it had in January, but it traded back to June 2017 level, pressured mainly by the melting prices of oil, gasoline and heating oil. Among the components of the basket only coffee, orange juice and soybeans moved up in the past five sessions.
Arabica coffee in New York has managed to isolate itself from risky assets liquidation, staying above US$ 110 cents per pound, even though the Brazilian Real has made new nominal historical lows with the US dollar trading above R$ 4.50 for three consecutive days.
The detachment of the “C” performance from the BRL can be partially attributed to low inventories at the hands of the Brazilian farmers.
The strength of the market may also be justified by the differential firmness across all producing countries. In Colombia it is due to lack of availability, since the main crop seems to have been practically sold out, which is a similar situation to Honduras and other mild-origins as a large volume of coffee was sold during the rally at the end of 2019. On top it there are rumors of shorts still running after coffee to cover their positions.
On the trade side, those who are carrying some stocks are being disciplined enough not to let go the coffee without prices compatible with replacement levels and the coffees seated at consuming countries are no exception, but these beans have attracted more buyers due to the proud offers on a FOB basis.
It is difficult to predict if the bounce experienced today in risky assets will sustain and it seems unlikely that coffee will remain immune if a new wave of selling hits the markets again.
In favor of a continuation of the rally, besides the arguments mentioned on the paragraphs above, we could consider a potential decrease in shipments leading to a greater usage of inventories at destination and strong demand in the short term caused by additional purchases by consumers who are stocking up food.
A sharp usage of certified coffees would make it more visible and bulls are betting on it as these coffees become increasingly attractive from a commercial standpoint (at least the coffees that are not yet sold and simply being carried until delivery).
On the negative side there is the potential macroeconomic scenario melting with global growth being compromised, risk aversion, the rains in Brazil perceived as favorable for the crop that will be harvested in a few months, the Brazilian Real devaluing much more and robusta prices in London legging the move.
I must say though that the funds who shortened coffee not considering the lack of selling that created this void that we are seeing and that will likely last until the arrival of the Brazilian crop (as we mentioned in one of our reports a couple of weeks ago) might suffer a bit more.
May20 contract is in overbought territory, but the settlement was quite positive making next upside objectives 118.40 and 124.45. Support levels are at 111.35, 109.70 and 106.15. London is threading water in a relative tight range between 1,269 and 1,323 dollars per ton.
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