OIL-A risk on scenario has dominated markets in the last few days

A risk on scenario has dominated markets in the last few days. Central banks' huge easing decisions and growing expectations for a relatively quick solution to coronavirus - or at least for ending the lockdown – are giving some relief to oil with the June contract of WTI recovering to $14. The modest gains have been achieved despite ETFs rolling over their contracts well in advance of the actual expiry of the front-month contract order to avoid a similar situation to what happened last week when the May expiry turned negative in its final day.

FOREX-Optimism triggered by several countries

Support for risk related currencies is dominating the FX narrative in the early part of Wednesday’s European session, with the euro the star performer in gaining almost 0.5% versus the dollar. The single currency’s resurgence is remarkable, considering that Italy had its credit rating downgraded by Fitch yesterday and now sits just one notch above junk. Optimism triggered by several countries entering a less stringent phase of their lockdowns and further enhanced by a recovery in oil prices is driving the resurgence of risk appetite in the markets, appearing to indicate that investors also feel positively towards the upcoming Fed and ECB announcements. 

EUROPEAN SHARES-Elsewhere traders welcomed lower trends of coronavirus cases

European stock markets opened lower on Tuesday as energy shares led benchmarks down following yesterday’s historic rout on oil. Analysts and traders clearly didn’t expect black gold to go below zero and this has unsurprisingly had a negative impact on European oil majors like Total and Eni, which are currently trading 5% lower and in such a bearish environment their bottom may still be considerably lower still. 

Elsewhere traders welcomed lower trends of coronavirus cases from many of the worst-affected areas, which helped sustain positive market sentiment for non-energy sectors. However, all eyes will be on today’s earning reports with many large caps such as Procter and Gamble, Texas Instrument, Netflix and Lockheed Martin publishing their Q1 results and this could significantly increase market volatility in the afternoon. 

The Stoxx-50 Index is trading lower, just above the lower band of its bullish wedge pattern and this usually indicates a continuation of the underlying trend, which is currently bearish. Even if the price remains inside its current chart pattern, the RSI indicator showed a break-out of its bullish trendline and currently challenges its 50% neutral line and a break-out of the market below 2,800pts could quickly lead the market much lower towards 2,300pts.

OIL-Sinking to levels not seen in this millennium

The price of crude oil has plunged, sinking to levels not seen in this millennium. For the first time ever, we have seen the price of WTI (expiry of May) fall into negative territory.

The mix of two black swans, namely the tragic spread of coronavirus and the missed agreement between OPEC+ has been the trigger for this dramatic collapse. Even though the producers’ alliance did finally reach an agreement earlier this month for a cut of 9.7 million of barrels a day of production, the oil price has crashed further still. The deal was simply not enough with analysts estimating a fall on the demand side of close to 30 million barrels per day, three times the cut reached by OPEC+.

Although Brent has fallen noticeably, the collapse has been even more dramatic for WTI, the benchmark for US oil, with the May contract dropping below $0 a barrel, plummeting to an incredible -$40.32 at its most extreme. Oil has become so unwanted that traders were simply paying to not receive physical delivery of crude.

However, with the May contract having now expired, the sharp contango in the market has seen the price to increase again. On CME, the June WTI contract is already trading at $21.22, while July it is just below $27. If we look further out to September, the price is even higher and is above the psychological threshold of $30. 

This huge contango is driven by the enormous oversupply that is drowning prices in the short term. Some of this surplus should start receding in the medium to long term once the global lockdown, which has effectively turned the tap off on demand, eases. Another factor to add into the mix are storage costs, which are particularly high in this scenario with the majority of tanks already full.

Therefore, any investor seeking to take a position on oil, be that on futures, CFDs or EFTs, must factor in all these considerations and fully understand the implications of contango on prices before taking the plunge in these dramatic times.

FOREX-The plight of crude oil yesterday painted the most vivid illustration

The plight of crude oil yesterday painted the most vivid illustration so far of the havoc being reeked in financial markets by the economic fallout from the coronavirus. The US dollar emerged as one of the ‘winners’ in this unprecedented situation, becoming the clear choice for investors when turbulence and uncertainty take over. The Dollar Index climbed more than 0.3% during the early part of Tuesday’s session, gaining ground against other currencies in a clear safe-haven trade by concerned investors, as market sentiment turned bearish following the plunge of the May contract of WTI crude oil to negative prices. In the current environment more greenback gains are likely.

EUROPEAN SHARES-Trading stance remains uncertain

Stocks opened mixed in Europe on Monday with most benchmarks little changed as the trading stance remains uncertain for the beginning of the week. There were no important announcements or developments to disturb market sentiment this weekend and with no significant economic data release today, there is a high chance investors will keep their focus on both corporate results as well as on any sign of improvement in the struggle against the pandemic. Market participants were happy to notice fewer daily deaths in New York, Italy, Spain and the UK even though we aren’t out of the woods yet. Despite those reassuring numbers coming from the most impacted areas, there is still a lingering fear that economies may reopen too hastily. Investors will then pay close attention to how the situation is going to evolve in the next few days in Germany after the country reopens stores today, a first step to the end of the virus crisis and a real experiment for other nations, especially in Europe. On the corporate side, most investors will be waiting for quarterly results from companies like IBM, Vivendi and Virbac in order to have a clearer idea on how business has been impacted so far. 

The Euro Stoxx-50 Index is trading sideways while the German DAX-30 is the eurozone’s best performer. The market is still trading above 10,650pts, its first available support before 10,620pts, but has slowed down since testing the 10,775pts level. A break-out of its first support could quickly lead prices lower, towards 10,620pts and 10,545pts by extension, where a wide gap of more than 200pts remains open.