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Markets in chaos as coronavirus crisis meets oil price war

29-4-2020 10:08:16Stock markets have plummeted today as continued fears about the coronavirus combined with the fresh worries of a price war in the oil market has battered sentiment. 

Europe

Northern Italy, the epicentre of the health crisis in Europe has gone into lockdown, and the number of confirmed infections around the continent has increased. Dealers are terrified that more swathes of Europe will go into quarantine, and that has been a factor in the brutal sell-off in stocks. In this part of the world there are serious concerns that some economies could slow down or even get pushed into a recession.

Italy could be facing a recession in the near-term as the country had negative growth in the final quarter of 2019, so the coronavirus crisis at the start of 2020 could bring about another quarter of negative growth. The FTSEMIB is the worst of a bad bunch today.        

If the coronavirus wasn’t bad enough, the rift between Saudi Arabia and Russia in relation to the oil market has hammered investment sentiment too. The Saudi’s seem to be in a price war with the Russians, and the result is that oil prices have tanked. Saudi Arabia are determined to drive the energy market lower as a way of punishing Russia for walking out of the OPEC+ talks. London’s big oil stocks, Royal Dutch Shell and BP are down 16% and 18% respectively. Tullow Oil was struggling before this shock to the oil price, so a prolonged period of subdued prices could bring the group closer to the brink of bankruptcy.     

Ordinarily a huge fall in the oil market would help the airline sector, but the health fears are ramping up, so companies like Norwegian Air Shuttle, TUI and Air France are all firmly in the red. EasyJet is reviewing its flight schedule to airports in Italy amid the health emergency. 

Tesco shares are slightly higher this afternoon, which is impressive when you consider how much the FTSE 100 has fallen. The supermarket group will sell-off its businesses in Malaysia plus Thailand for £8 billion. The group will return £5 billion to shareholders via a special dividend, and £2.5 billion will be allocated to the pension fund.  

FirstGroup shares are in the red after Coast Capital said ‘there is material value to be unlocked’ if the US division is spun-off. The activist investor has been keen to break-up the firm for some time, but the London-listed group said it will outline its plans for the US units on Wednesday, which seems like a way of fending off the investment group.  

US

The US indices have endured major volatility. The index futures were in limit down for much of the morning – the circuit breaker mechanism kicked-in to prevent a meltdown in the market. Shortly after cash trading began the equity benchmarks went into limit down again, but since the resumption of trading, the markets have managed to recover some of their losses. The very fact the circuit breaker systems were used is a warning itself.

Oil stocks, such as Occidental, Chevron, Exxon Mobil, and ConocoPhillips are all in the red on account of the turmoil in the oil market. Oil services firms, Baker Hughes and Schlumberger are sharply lower too as big oil companies are likely to curtail their spending in future quarters.

Walmart shares are higher, which is good going on a day like today. Some consumers are going out and shopping excessively as they fear they will be on lockdown, and the retailer has benefited from the panic buying.       

FX

The US dollar index is down nearly 1% as US government bond yields fell to record lows. The aggressive move lower in the US dollar has pushed up EUR/USD to its highest level in more than one year. The euro has pulled back a little in the past couple of hours. German industrial production rebounded in January as it jumped by 3%, from the 3.5% fall posted in December. The eurozone Sentix investor confidence index dropped to -17.1 from 5.2, and keep in mind that economists were expecting -11.1.

It was a quiet day in term of UK economic data but GBP/USD given a nice boost by the big drop in the greenback. Sterling’s gain against the US dollar has been fairly small and that highlights the mediocre move in the pound today – it can barely muster a rally versus the US dollar when the greenback is coming under enormous pressure.        

USD/CAD is now lower on the session because oil has recovered some of its lost ground. The Canadian economy is closely tied in with the energy market so ‘the loonie’ is caught in the Saudi-Russian crossfire. Canada posted solid housing data as building permits surged by 4% in January, but it had little impact on the markets.     

Commodities

Oil saw its biggest daily fall since 1991 – during the Gulf War. Traders are terrified that Saudi Arabia and Russia are in a race to the bottom in terms of price as a means of getting back at each other. The mammoth fall in the energy market has sent shivers down the spines of traders as the spat between the two oil producers is brand new, so this standoff could last a while. The major fall in the energy market could spark deflation fears in the months ahead, which would probably hit demand expectations.

Gold is lower as some dealers are cashing in their long gold positions to cover margin calls on stocks. The metal eked out a fresh seven-year high early into the trading session but the aggressive sell-off in equities ended up hitting the metal. If we see a rebound in stocks we might see gold head back towards the $1,700 area.         

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