Market Overview

10 July 2020

Oil Pulls Down the Dow Jones and S&P500 with Greater Uncertainty

The triumvirate of major stock indexes in the United States closed on a mixed note on Thursday, while the market's volatility surprisingly spiked. Energy assets led a quick selloff just after Brent and West Texas Intermediate (WTI) oil prices fell by about $1.5. The words of Anthony Fauci, director of the U.S. National Institute of Allergy and Infectious Diseases about the growing number of infections in the United States served as the catalyst.

Fauci said during a podcast hosted by the Wall Street Journal that new COVID-19 cases in the country were seeing “exponential growth.” Then he developed his statement by saying: “It went from an average of about 20,000 to 40,000 and 50,000 [in daily numbers]. That’s doubling. If you continue doubling, two times 50 is 100... Any state that is having a serious problem, that state should seriously look at shutting down. It’s not for me to say because each state is different.”

With 98 coronavirus-related deaths in one day, Texas set its record for the highest single-day fatality figures on Wednesday. The state also reported its second highest number of daily new cases at 9,979. The University of Mississippi Medical Centre has more patients than rooms, the centre’s vice chancellor said on Thursday. Florida reported 120 Covid-19 deaths a day earlier, a single-day record for the state, and 48 hospitals there had no more capacity in its intensive care units, which is down from 56 two days earlier, the state Agency for Health Care Administration said. The viral situation is also severe in Louisiana and California, which was one of the first states to implement restrictions. Some investors are concerned about whether these states or some other territories are really threatened by a probability of a new shutdown.

A little bit later, Dr Fauci added that maybe states should opt to pause reopening measures rather than revert to a complete shutdown. This partially smoothed out the unpleasant effect of its original wording, so the stock indexes stopped falling, and then rebounded to some higher levels. However, they behaved differently. The Dow Jones 30 index, which is the most dependent on the energy sector, recovered less than others and lost 1.39% at the end of the day. The S&P 500 broad market index performed better losing only 0.52%. The high tech Nasdaq Composite index even rose by 0.63% to close at record highs for the second straight day, as many investors are seeking a refuge in "stay at home" assets or other internet-related stocks at a risky moment when coronavirus come back threatens the normal recovery processes.

It is not an accidental that both Amazon at $3182.62 (+3.29% for one day) and its Chinese Alibaba Group competitor at $261.58 (+1.51%) have rewritten their all-time peaks again, as Amazon shares have jumped in price by more than 15% since the beginning of July, while the price of Alibaba stocks was almost the same 15% lower just a week ago. New historical records were set by Netflix, which opened the day above $508 per share and closed nearby after a short decline in the area of $495. Apple traded above $380 per share for almost all the time of the trading session and closed at $382.60 with a zero daily result, but more than $20 higher than the previous Thursday. Google fell just seven cents short of updating its personal record, while Microsoft has been setting new highs for the second week in a row. Apple, Microsoft, Google and Amazon collectively make up about 40% of the Nasdaq index, which therefore closed higher. 

Oil prices could not avoid losses as U.S. crude stockpiles increased by 5.65 million barrels for the week-ended July 3. Another difficulty for oil prices is that the disruption in Libya's Messla oil field production has ended. There have also been reports that total oil purchases at bargain prices in April and May filled almost all oil storage facilities in China to the brim. There are almost no tanks left in the country where any additional volumes of oil could be poured, as storage capacities in mainland China are used by 69%, which is only 1% less than the safe technological limit, Caixin reports, citing data from Oilchem China.

Some analysts said that China's stockpiling dwarfs what other nations have done in response to cheap prices. "China is the only country that has been buying like crazy. They went out and bought the dip," Matt Smith, director of commodity strategy at ClipperData commented. Of course, other countries similarly took advantage of the spring oil crash to bolster their emergency stockpiles. "If you're a big energy consumer, you'd be buying with two hands," said Ryan Fitzmaurice, energy strategist at Rabobank. On June 29, 59 tankers were anchored off the coast of China, holding a total of 73 million barrels on board. Nothing like this has ever happened in history - even in the crisis of 2015, when the market was heavily overflowed. Of course, overflowing storages make it difficult for oil prices to continue moving higher since there are probably not enough market participants to buy new volumes at more expensive prices.

For those reasons, industrial stocks and indexes may pull down the S&P500 broad market index, and it may even launch some limited profit taking in more prosperous high-tech assets from the Nasdaq index list at some point before the end of the week or soon after the weekend. At the same time, the Nasdaq index may withstand, climbing higher into the blue sky. As for the gold spot price, it dipped at one moment, approaching $1795, as some profit taking took place. However, the price is picking up to levels around $1,800, feeding the hopes for more gains in close approaching days.


Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

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