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Crude oil fallout weighs on risk sentiment

Despite starting the week in a positive fashion yesterday, markets here in Europe have opened sharply lower after last night’s plunge in the oil price dragged on sentiment into the US close, as well as in the Asia session. Concerns about the health of North Korean leader Kim Jong Un have also hampered risk sentiment in the region.

Yesterday’s historic plunge in US oil prices into negative territory may have made headlines and split opinion about the importance of a contract that is due to expire today, has little volume and is trading on very low liquidity, but it can’t disguise what it tells us about the state of the global economy, as well as the oil market.

The very fact that the May contract even traded into negative territory tells us a sobering truth about how much supply is out there relative to demand, and while June prices are still trading at $21 a barrel, that doesn’t mean that they won’t go the same way and fall sharply in the coming days, given that we saw net inflows into US oil ETFs yesterday. How long before these long positions also start to bail out?  

If the Saudis and Russians want to cut back on production even more than they have already agreed, they may well have to act sooner rather than later, given that Brent prices are once again being dragged lower today. Throughout all of yesterday’s excitement, Brent crude prices remained steady at $25 a barrel, however the weakness of oil prices in the face of the recent OPEC+ agreement to cut production by 10m barrels also has significant consequences for oil companies across the world in general.

With demand for oil down by over 20m barrels a day as people stay at home and aircraft remain grounded, it is unlikely that demand will pick up enough to work off the current surplus with any great speed, even if lockdown measures are lifted in the next month or so. This means that oil companies that have break even prices above $40 a barrel, which is pretty much all of them, will be burning through cash extremely quickly, unless they take further measures to cut costs. This could mean further capex cuts as well as threats to the dividends of these pension fund staples.

We’ve already seen a host of UK companies cut their dividends in recent weeks and what have been significant blows to pension fund incomes. Could the dividends of BP and Royal Dutch Shell be next in line for the axe? BP is set to announce its latest quarterly numbers next week, and has significant exposure to the US shale patch due to its $10bn purchase of BHP Billiton’s shale assets in 2017.

This morning, BP shares are already under pressure, along with Royal Dutch Shell, and though we have recovered off the lows from last month these were still levels that we last saw in the mid 1990s, with both share prices down over 45% from last year’s peaks.

The collapse in prices also has consequences for US banks, who currently have around $200bn worth of loans to the US shale sector. Last week US banks set aside between $20bn to $25bn worth of loan provisions aside in respect of credit losses, due to the sharp rise in US unemployment in recent weeks. Given recent events in the US oil market, they may well have another area of the US economy to worry about.

Primark owner, Associated British Foods released its latest first-half numbers for the current financial year, announcing a charge of £309m in respect of the closure of its stores, for the period ended 31 March. It also said it wouldn’t be providing guidance and wouldn’t be paying a dividend. While Primark isn’t its only business, ABF doesn’t have the luxury of having an online business like its peers, which means its other businesses have become much more important in the context of maintaining cash flow. As part of various government furlough schemes, the business can mitigate some of the damage, however management have said they won’t reopen Primark stores, which closed on 22 March, until they can ensure the safety of their employees and customers. Pre-tax profit came in at £298m, while revenues unsurprisingly came in slightly short at £7.72bn.

It’s been a fairly decent first quarter for London Stock Exchange, with total revenue up 10% year on year to £ 535m, helped by a robust performance in its equity trading business, and higher than normal clearing activity, contributing to the outperformance. Management have said that good progress is being made in terms of the integration of Refinitiv. The group said it intends to pay its final dividend in respect of the previous financial year.

French automaker Peugeot said that they expected to see a decline of 25% in auto sales in Europe this year and a 10% decline in China. In the first quarter revenues fell 16%, while sales fell 29% to 627,024. The company has shuttered all of its car plants across Europe and has no plans at the moment to reopen them.

European budget airline Wizz Air confirmed this morning that it was eligible for the Bank of England’s Covid Corporate Financing facility. 

The pound was little moved from the release of the latest UK jobs data, as unemployment for the three months to February nudged up to 4%. The latest UK jobless claims numbers for March also told us little about the health of the labour market here in the UK. It would appear that the data only covers the period until the second Thursday in March, before the lockdown came into effect, which means the April numbers will paint the most accurate picture of where we are in terms of the rise in claims, and they aren’t expected to be pretty, with unemployment set to rise up beyond the levels we saw over a decade ago in the wake of the financial crisis. Of course, the April numbers may not include furloughed employees which are part of the government's business bailout scheme, but nonetheless they will still paint a much more accurate picture to the one we have now.

The weakness being seen in the Asia and European sessions, looks set to manifest itself into a lower US open later today, after yesterday’s oil-inspired declines.

On the earnings front we can expect to get the latest numbers from Netflix, which has seen its share price hit new record highs in the past few days on expectations that it is likely to have benefited from a big subscription surge as a result of the recent lockdowns. There are risks from the likes of Disney and Apple, however Netflix remains the market leader. Its guidance for Q1 was a little disappointing when compared to previous Q1s, with expectations that it expects to add 7m new subscribers overall, while generating revenue of $5.73bn, and profits of $1.66 a share. Expectations are high that it ought to beat these numbers.

IBM shares are also likely to be in focus after disappointing on revenues with its latest numbers last night. Revenues fell 3%, with the company withdrawing its guidance for the year.


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