The unbelievable moves in WTI dominated the headlines yesterday.
The WTI futures contract for May delivery lost over 100% of its value and entered negative territory. The market set a record for trading below zero – which essentially means oil producers would pay to get rid of the energy.
Stepping back from the ludicrous headlines, the WTI May futures contract expires today, and recently it has become a lot less traded than the contract for June delivery. The WTI June contract is a better representation of the underlying oil market. The contract in question lost approximately 18% of its value and settled above $20.00 per barrel. Once the May contract has expired, things are likely to settle down in terms of monumental price swings.
The rout in the oil market can be attributed to both demand and supply woes. Demand for oil is tipped to fall considerably on account of the coronavirus crisis. Last week OPEC predicted that demand for its oil in the second quarter will tumble to a 30-year low. Not too long ago, OPEC+ announced a historic output cut, but already there is a view in the market that it won’t be enough to offset the slump in demand.
In response to the painful fall in the oil market, it was announced that Saudi Arabia are considering cutting output ASAP, rather than waiting until next month to implement the cuts.
President Trump said he would seek permission from Congress to purchase oil, or else he would store it in the Strategic Petroleum Reserve (SPR). Mr Trump also claimed the US might consider halting shipments from Saudi Arabia.
The mega moves in the oil market had a huge impact on equities. Stock markets in Europe were dragged into the red due to the tumbling energy price. In the latter half of the session, equity markets shrugged off the negative sentiment of the energy products, and the FTSE 100, DAX 30 and the CAC 40 finished the session moderately higher.
After the close of the European session, the erratic behaviour in the oil market increased. The US major indices fell under the influence of WTI, and the S&P 500 closed down 1.8%. It was no surprise that stocks such as Exxon Mobil, ConocoPhillips and Occidental Petroleum all ended the session in the red. The negative move on Wall Street last night must be put into context against the impressive gains that were posted last week.
US lawmakers will be in focus as Republicans and Democrats are working on a new deal to inject a batch of funds into the Paycheque Protection Programme – a government backed scheme that provides loans to small businesses. Last week the scheme ran out of funds, which was nearly $350 billion. The US government and the Fed have made it very clear they are willing to throw enormous sums of money at the problem, so sentiment in US equity markets is unlikely to turn too sour. In addition to that traders are cautiously optimistic that some US states will look to ease their lockdown restrictions in the near term.
Equity markets in Asia are in the red as the negative sentiment from the US session spilled over into the Far East. China reported 11 new cases of Covid-19, while Hong Kong confirmed that its social restrictions will be extended for two weeks. There was a report circulating that North Korea’s leader, Kim Jong-un, is seriously ill after surgery, but there are questions over the accuracy of the report.
Gold gained ground yesterday as the declines suffered in stocks prompted traders to divert their funds into an asset that is considered to be lower risk. The move higher in gold was made all the more impressive because of the US dollar’s modest rally. Gold and the greenback tend to have a negative correlation, so it is possible that gold’s gains were capped on account of the firmer dollar.
The greenback attracted safe-haven flows yesterday as some dealers wanted to take cover from the volatile equity and commodity markets. The Canadian dollar took a knock on account of the country’s exposure to the oil market. USD/CAD rallied over 0.9%, but the upward move wasn’t that much when you consider the colossal losses endured in the energy market.
The pound’s underperformance yesterday was blamed on fact the UK has extended its lockdown into next month. In contrast, a number of eurozone countries, including Germany have loosened restrictions.
The UK will post a number of important labour market reports at 7am (UK time). The claimant count for March will be in focus, and economists are expecting the reading to be 172,500, which would be a big jump from the 17,300 registered in February. The unemployment rate is tipped to hold steady at 3.9%, while the average earnings excluding bonuses are expected to be 3%. The unemployment and the earnings reports are for February so they will be of less significance.
The German ZEW economic sentiment report for April is expected to be -41, which would be an improvement from the -49.5 posted in March. The report will be posted at 10am (UK time).
At 3pm (UK time) the US existing homes sales update for March will be released, and the consensus estimate is for a 9% decline.
EUR/USD – while it holds below the 100-day moving average at 1.1023, the currency pair could lose further ground. Support might be found at 1.0768, and a break below it might pave the way for 1.0636 to be tested. A move through 1.1023 might put 1.1147 on the radar.
GBP/USD – has been in an uptrend since late March and resistance might come into play at 1.2649 – 200-day moving average. Beyond that metric, the 1.2800 region might act as resistance too. A move lower from here might see it target 1.2360.
EUR/GBP – has been pushing lower since mid-March and should the bearish trend continue it might target 0.8618 – the 100-day moving average. A rebound might target 0.8865 or 0.9000.
USD/JPY – is in a negative trend and further losses from here might see it target 106.91. A move through 106.91 might put 106.00 on the horizon. A move above 109.38 could see it target 110.00.