- Oil price collapse continues, sending shivers through stock markets
- Trump signals bailouts for US producers, but paradoxically, that could worsen oil's plunge
- Dollar pares gains after Trump’s bailout talk, pound softens on Brexit comments
- Euro in focus as investors flee Italian bonds before tomorrow’s EU summit
Oil malaise infects stocks
Energy markets can’t catch a break this week, with Brent following WTI lower this time to touch a low last seen during the Gulf war, as the devastation in demand and excess supply have overwhelmed physical storage capacity, leaving investors nowhere to store oil. The June contract for WTI came under renewed pressure yesterday, signaling that the meltdown of spot prices into negative territory wasn’t an isolated phenomenon, but rather a symptom of a bigger disease.
And the problem is that we might see a repeat of the oil-crash movie in a month’s time, when the June WTI contract expires on May 19. In fact, next time might be even worse. The weekly inventory report from API yesterday showed a build of 13.2 million barrels, out of which 4.9 were stored at Cushing, the main US storage point. Cushing now has roughly 16 million barrels of capacity left, so if inventories build at a similar pace going forward, that facility will be filled to the brink by May 19.
The situation is getting so bad that both the US President and OPEC stepped in, the former announcing that his administration is crafting a rescue plan for distressed US oil companies, and the latter hinting at more production cuts.
Funnily enough though, a US oil bailout could depress crude prices further. It would keep many smaller, loss-making producers in business, not allowing for the market-driven drop in supply that would otherwise take place to stabilize prices, and denying the industry the healthy restructuring it so desperately needs. And if the US isn’t ‘playing ball’ with production cuts, then OPEC and Russia might not comply with their recent cuts either, for fear of losing market share amid the pandemonium.
Stocks finally take notice
The stock market didn’t escape unscathed either, with the S&P 500 losing 3% as risk appetite soured, even though the US Senate passed another rescue bill worth almost $500 billion to support smaller businesses. More broadly, the implosion in the oil market may have been a wake-up call for many investors as it illustrates that the Fed can backstop the bond and stock markets, but if the wheels are coming off the real economy, cracks will always show up somewhere.
That being said, European stocks are in the green today and futures point to a modestly higher open on Wall Street, so the market seems to be stabilizing, waiting for the next catalyst.
Euro in focus as investors flee Italian bonds
In the FX galaxy, things were relatively calm. The pound dropped without a clear trigger, perhaps spooked by a senior UK official implicitly saying that PM Johnson has no intention of requesting a Brexit extension despite the chaos produced by the pandemic. Meanwhile, the dollar gave back some of its early gains after President Trump hinted at oil bailouts, which may have reminded investors of just how much the US budget deficit will explode this year.
Looking ahead, it’s the euro that might be in the spotlight. Trouble is once again brewing in the Italian bond market, with the spread between German and Italian yields widening to levels that usually set off alarms at the ECB.
It seems markets don’t expect any meaningful relief measures for Italy at tomorrow’s meeting between EU leaders, and if so, that would almost guarantee that the nation’s credit rating will be downgraded by the S&P ratings agency on Friday. Hence, investors are pre-emptively dumping Italian bonds.
The euro hasn’t reacted much, but that might change as the continued turmoil could force the ECB’s hand into doing more.