Market Overview

6 April 2020

Some "CIRCLEstances" for Both the Stock Markets and the Oil Prices

This week has started with a convincing rise of the American stock futures already in early Asian trading hours. In particular, the US broad market index S&P500 climbed up 98 points, hour by hour, and came close to the 2600 mark before the European morning and generally continue in a positive range during the afternoon so far. All stock indexes in Europe, including the British FTSE, the German Xetra Dax and even the Italian FTSE MIB in Milan, opened immediately from three to four % higher with large gaps. So far they have only slightly moved lower from these initial gains.

The "rally" happened today in the absence of any strong fundamental news as among the messages that came over the weekend that there were still a lot of negative economic forecasts. For example, Moody's ratings agency published a rather strange extrapolation that if the US gross domestic product (GDP) decline continues at the current speed throughout the entire Q2 of 2020, then the total US GDP may temporarily fall by 75%. The forecast came with a disappointing phrase about the expected gradual expiration of quarantine restrictions, which will probably only be realised by the summer, without the deadline even being specified. This estimate looks like one of the prophecies from the book of the Apocalypse, and such mental associations do not add optimism to the week before Easter, which citizens of most countries of the world will celebrate even in times of self-isolation.

It is unlikely that the growth of the markets could fully be explained by the explanation that "equity investors took solace as the death toll from the coronavirus slowed across major European nations including France and Italy" and that "U.S. President Donald Trump expressed hope the country was seeing a "levelling off" of the virus crisis", as described by Reuters in one of its reviews this morning.

The market majority is still focused on the dynamics of the cases and deaths in the Old World and/or in the New World, waiting for stable confirmation that the peak of infections and deaths is achieved, or at least will be finally achieved, so that the authorities could be able to talk to the public about specific time of quarantine removal or to begin the "opening up" of the US and European economy, step by step.

As long as it hasn't happened yet, unfortunately, all news around the government's bailout packages for businesses, including a €0.5 trillion package which is expected to be agreed between EU Finance Ministers by April 7, are only a necessary urgent aid to support businesses and banks suffering huge losses. These packages are also needed so that businesses are not left flat broke since all their activities are tied to enormous credit lines in the absence of fresh income for at least 4-6 weeks or even more.

Perhaps, it would be correct to declare two real reasons (or just excuses) for today's growth. One of them is a rather technical reason as Friday's closing prices did not go deep enough and this means that the end of the second week in a row is no longer accompanied by large-scale sales of flagging assets. Previously, such sell-offs at the end of successful trading sessions or at the end of rather positive weeks were triggered mainly by orders from large pension funds or other private investment funds, but now these sentiments have become moderate. The subsequent growth on Monday for the S&P500 index is well prepared technically by trading closing on Wednesday, Thursday and Friday as the closing prices were noticeably higher than the landmark support zone of 2380-2400, which was mentioned in earlier reviews on March 27 and March 30.

The second reason for the present upward movement might be deep and fundamental. But it might give a better understanding of the consequences of pandemic for the world economy without the emotional shocks that took place in the first weeks. That reason is that the market majority has come to terms with the prevailing expectations that all the situation is going round in circles, circles of despair for an uncertain time, that may continue for a couple of months. Another justification for "CIRCLEstances" could be derived from the concept of a short-term economic "cycle", which is clearly expected by the investment community in a certain V-shaped form. The "V" letter indicates a very sharp angle of downturn and upturn which are expected by investors. The consensus in the market is that a complete recovery of the economy may come either by Q3 or Q4 2020, or even by the H1 of 2021. But the public's attention is mainly focused on the consensus expectation that the bottom of the "V" letter could be hit somewhere soon. However, it maybe deeper.

If the S&P500 index is able to break above the technical resistance of 2650 over the days to come, then it might soar at some moment to the 2800-2900 area. But it might be unlikely that even such a brilliant movement could mean a longer term change to the "CIRCLEstances" mood. Although the base scenario for this week may keep fluctuations of the average price for 500 main shares of the New York stock exchange in the range from 2400 to 2700 points.

This same moderately positive mood has also captured the oil market. The cut of oil cards was described in details in the previous article on Friday.

Today oil opened with a big gap down to around $31.65 per barrel for the Nord-Sea Brent benchmark after high closing near $35 on Friday. The main driver for such a slump was the postponed conference call of the OPEC+ countries from April 6 to April 9. The change of date was prompted by an unclear position of Texas and other American producers while the US federal authorities have no juridical right to be a party of any agreements to reduce production due to antitrust legislation in the US. Nevertheless, the consensus is that Donald Trump has already spurred the oil horse and will not let go of the reins, so in a few hour prices covered the gap and rose almost to the closing levels of Friday. This may mean that oil prices volatility may remain high until Thursday, April 9, and possibly even until the official hearing in Texas on April 14 where the US side may finally confirm any informal agreements concluded before April 9.

This volatility may even increase with an upward bias with Brent prices to beat $37-38 or even higher levels. However, it is unlikely that crude prices may enter any stable uptrend: it is most likely that they may hold temporary to a slightly higher range. Within this range, hedge sellers from shale producers could become very active with many small and large oil industry companies also joining in to "secure" themselves from extremely low prices. The overall mood is expected to be determined not by the volume of supply cuts, whether it would be 10 million bpd or even 15 million bpd, but by the volume of demand, and especially by expectations of how soon the normal demand will recover. In other words, the concept of "CIRCLEstances" could still play its leading role on this stage too for several weeks or even for months.


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