The pullback from insanity, crude oil slides

4 mins read

By Han Tan, Market Analyst at FXTM

Asian stocks on Friday extended the previous day’s declines, following the latest rout on Wall Street. The Dow Jones index saw prices sandwiched between its 100-day and 200-day simple moving averages, before ending the session 6.9% lower to register its largest single-day drop since March 16.

The sharp descent in US equities appears to be a technical pullback after what has been an overextended rally since the multi-year low on March 23, with the Dow now shedding its overbought status.

However, US futures are gaining, suggesting that a positive end to the trading week is in store. Despite the VIX index surging back above the 40 line and returning to its highest level since April, it’s still too early to determine whether markets will see another period of heightened volatility a la March.

Still, the apparent catalyst for the selloff suggests that coronavirus-related concerns remain the dominant driver in the markets. The rising number of Covid-19 cases in Florida, Texas, California and Arizona implies that investors cannot yet rule out the risk of a second wave of Covid-19 cases that may trigger another round of lockdowns.

The city of Houston is reportedly “getting close” to reissuing stay-at-home orders, even as broad swathes of the States press on with restoring economic activity. While Treasury Secretary Mnuchin eschews the idea of shutting down the world’s largest economy again in the event of a resurgence of Covid-19 cases, the ensuing impact would still be a hit to the gut for consumers, workers and businesses that are craving some form of normalcy.

For market participants who may have been lulled by the stunning gains in stocks over recent weeks, it’s now clear that risk sentiment remains fluid amid an outlook that’s riddled with uncertainties.

Investors are expected to continue reacting to significant developments surrounding the coronavirus outbreak and evidently have little qualms shifting into risk-off mode seemingly at the turn of a dime. More overt signs of a resurgence in Covid-19 cases could see the further unwinding of gains in riskier assets, while restoring safe havens to recent highs.


Oil slides as markets shift into risk-off mode

The risk aversion in the markets has prompted Crude Oil to unwind most of its month-to-date gains as it slipped below the psychologically important $35/bbl level before retracing. WTI futures are now on course for their first weekly decline in seven weeks.

Oil markets are looking past the recent extension to the OPEC+ supply cuts, as demand-side uncertainties return to the fore. Should the spike in Covid-19 cases in some US states gather momentum and derail the economic recovery, that could clear the path towards lower prices for Crude.

The fact that US crude inventories reached a record high of 538 million barrels last week also undermines the notion that Crude can be swiftly restored to pre-pandemic levels. The Fed’s dour outlook on the US economy has also dented WTI’s trajectory.

Oil bulls require more concrete evidence that the recovery in global demand is on a surer path or they risk the $40/bbl handle slipping further away.



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