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Weekly Markets Round-up: 20 July - 24 July 2020

Oil, AC/DC and Gymnastics

West Texas Intermediate (WTI) oil futures going negative was well publicised in late April and it has been something that has been in my mind in the months since. Delving beyond the mathematics that caused the event, we will see in the coming months whether it was the death knell for the American oil industry or not. What caught my eye this week was some data out of America showing inventories are rebounding. Alongside this, WTI continued to soar all the way from -$20 to $40. As AC/DC would say, it might be ‘rock or bust’ for American oil.

Fears about Covid and its resurgence, which the market seems to be pricing in, is the primary cause of current downward price pressure. Additionally, recent court judgements granting Native American tribes over 50% of Oklahoma’s land meaning shale oil supply is easing as tribes see the environmental cost of oil as too steep. As inventories are building, especially in Oklahoma where, as it happens, the lack of storage space heavily contributed to April’s sell-off, producers are bullish.

To what degree is wholly dependent on one’s degree of belief in a Covid resurgence. Market participants are effectively gymnasts trying to balance on a bar, unsure as to which way to move to avoid another fall. For obvious reasons, another fall would be detrimental to producers. Schlumberger has laid off 21,000 employees. Chevron has completed its acquisition of Noble Energy. There will not be much room for such cost reduction measures if oil goes negative again. However, negative oil is as damaging, if not more so, to buyers.

Supply is stable if and only if prices are stable. Negative prices necessitate the usual bankruptcies and restructurings that work towards depleting supply in a haphazard manner. Taking the airline industry, which operates on forward capacity, a downward price spiral could make securing futures contracts on oil for large orders quite difficult, as the market liquidity declines due to the risk profile becoming quite niche and suppliers simply disappearing. This would eventually reduce capacity on routes as larger planes can no longer be fully fuelled, thus eating into profits. This story would play out across the entire equities space. It is a story everyone should care about.

Members of the Organisation of Petroleum Exporting Countries (OPEC) and their concerns about their respective bottom lines is creating momentum to push oil above $40. Saudi Arabia’s Prince Abdulaziz bin Salman sees the $40-43 range as unsustainable and appears to be leading the battle to ease supply across the Middle East excepting Iran whose own non-monetary considerations will complicate this saga. Assuming OPEC’s aims are achieved, as they usually are, sustainable price supports will be created and WTI futures will more than likely never go negative again. Indeed, some analysts believe a consolidation in price could provide energy for a return to $150. I believe this to be unlikely, but the underlying analysis is worth careful study as we decide oil’s place in the 21st century. Regardless, my advice to the oil industry is to ignore AC/DC’s advice to ‘play it fast and loose’ for the time being.

By Robert Tolan - University of Dublin, Trinity College

This Week in Markets: 20/07 to the 24/07

Sino-US tensions were the major driver of worldwide markets, forcing indices down. Coronavirus case numbers also continue to be of note to investors. The sentiment was definitely bearish across the markets, especially towards the end of the week.

Source: TradingView, with data showing a five-day period

This week was mixed in the US. Early in the week, tech stocks faltered, as other stocks that have been more affected by Coronavirus rallied. Throughout the week, case numbers in Florida and Texas still continue to rise. The highly anticipated second round of stimulus is still being debated by Senators, causing a sell-off later in the week. One of President Trump’s favourite economic indicators - the jobless claims report - was also weaker than expected. This points to a stalling job market, which may hamper further economic recovery.

Some earnings reports from major companies like Tesla and Microsoft also came in below expectations and caused a sell-off in the sky-high tech stocks that have led the market higher for weeks. Tesla especially seems to have boosted profits this quarter to become eligible for the S&P 500, but this may cost it in the second half of the year. Intel also declined due to production delays. US pharma stocks also fell late in the week as President Trump signed an executive order that aimed to reduce drug prices.

The US dollar also fell significantly this week approaching a two-year low, causing some to move out US stocks and into other markets. If this dollar weakness continues, European markets could rally, as they have previously when similar dollar falls have occurred.

Investors also became increasingly focused on Sino-US tensions. The US caused Chinese outrage by forcing the closure of a Chinese Embassy in Houston earlier in the week. The Chinese then forced the closure of the US embassy in Chengdu. The increasing tensions are not a good sign for US stock markets. If this eye for an eye conflict continues and escalates further, I would expect a significant sell-off in US and Chinese stocks. These tensions already caused a worldwide sell-off on Friday.

Next week, US investors should be focused on the stimulus bill, which is still expected to pass at some point, although some analysts are estimating that it will take until mid-August. Chinese tensions will also be a focus. If the bill never materialises or tensions keep worsening, then the US markets may fall.

In Europe, there was some positive news. Early in the week, strong earnings reports started a rally when combined with the announced EU recovery fund. However, it quickly became a US dominant week, as tensions rose and cases increased.

Source: TradingView, with data showing a five-day period

On Friday, European data was positive but overshadowed by the negative US sentiment. French business activity beat expectations as did German manufacturing data. UK retail sales for June were also unexpectedly high. This points to a stronger European economy, which, when combined with the EU recovery fund, has led to some analysts expecting European stocks to outperform. Although this must be taken with a pinch of salt, similar claims have been made for years.

Despite this positive data, European markets fell on Friday with the US markets as rising case numbers and Sino-US tensions caused investors to fear for the near future.

Asian markets started the week bullishly on vaccine hopes but quickly lost momentum. The rest of the week was driven by Sino-US tensions, causing markets to fall.

Source: TradingView, with data showing a five-day period

Once again, the week was dominated by a US focus that caused bearishness. The markets continue to be volatile and unpredictable. The coinciding conflicts between China and the US, and the world and the Coronavirus pandemic will presumably continue to dictate sentiment for the foreseeable future.

By Charles Heighton - VP of Trading at King’s Global Markets

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