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Daily Wrap Up: World Equity Markets Edge Higher Despite Oil Plunge to 2002 Lows

Daily Wrap Up: World Equity Markets Edge Higher Despite Oil Plunge to 2002 Lows

30 Mar 2020 08:52 PM

Global equity edged higher on Monday despite a drop in oil prices to their lowest levels since 2002, as central banks and the United States tried to contain the damage from the rapidly spreading coronavirus that has upended the global economy.

Stocks markets trying to go back to the green

On Sunday, US President Donald Trump extended the government's stay-at-home guidelines until the end of April, halting a harshly criticised plan to get the economy up and running by mid-April after a top medical adviser said more than 100,000 Americans could die from the outbreak.

JP Morgan now predicts that global gross domestic product (GDP) could contract at a 10.5% annualised rate in the first half of the year. As a result, central banks have started an all-out effort to boost activity with interest rate cuts and massive quantitative easing (QE) measures, which have at least eased liquidity strains in markets.

On Monday China became the latest to add stimulus, with a cut of 20 basis points to a key reverse repo rate, the largest in nearly five years.

In early trading, the Dow Jones Industrial Average rose 0.05%, to 21,648.12, the S&P 500 gained 0.73%, to 2,559.99 and the Nasdaq Composite added 1.05%, to 7,580.92.  This is considered to be one of the fastest corrections in nearly 30 years.

Investors continued to seek the perceived safety of bonds, with bond yields falling in Europe and the United States. Benchmark 10-year notes rose in price to yield 0.63%, down from 0.74% late on Friday.

The drop in yields have combined with efforts by the Federal Reserve to pump more US dollars into markets, dragging the dollar off recent highs.

Oil dips below $20 as oil price war shows no sign of ending

These really are extraordinary times where oil prices have had another woeful start to the week, with WTI dipping briefly below $20 a barrel and Brent nearing $26, its lowest point since late 2002. Saudi Arabia and Russia appear no closer to ending the price war which has hugely exacerbated the supply/demand problem in these already troubling times.

The price of oil is now so weak that it is becoming unprofitable for many oil firms to remain active and higher-cost producers will have no choice but to shut production, especially since storage capacities are almost full.

There will be additional casualties in the war, with US shale expected to come under considerable pressure. The US is still pumping near-record amounts of crude, but the latest oil rig data suggests that this may not last much longer. It’s been on a downward trend for a while now, but last week’s plunge was quite significant. Goldman Sachs analysts reported that demand from commuters and airlines, which account for about 16 million barrels per day of global consumption, may never return to previous levels.

Besides the demand shock, the oil market is also under pressure from a price war between Saudi Arabia and Russia, after the collapse earlier this month of a three-year deal to limit supply between the Organization of the Petroleum Exporting Countries (OPEC) and other producers led by Moscow.

US President Donald Trump said he planned to speak with Russia’s President, also stating that Saudi Arabia and Russia “both went crazy” following the collapse of the deal to cut output, as oil prices were pushed down by an economic slowdown caused by the need to slow the spread of the coronavirus.

Crude oil prices remain under unabated pressure in a context dominated by the lethal combination of supply and demand drivers. Also adding extra pressure, there is still the possibility that Saudi Arabia could carry on with its plans to increase oil exports by more than 12m barrels per day (bpd) next month. A potential relief in this low-lower prices scenario could come in the form of a US intervention, which is expected to morph into some sort of agreement between the US, Russia, Saudi Arabia and some other countries.

Technically the WTI is retreating 7.77% at $20.11 and a breach of $19.95 would expose $17.36 followed by the $15 marked as 30 simple moving averages. On the upside, the next resistance aligns at $23.40 followed by $26.77 and then $30.37.






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