Equities continued to slide, while safe havens kept attracting flows as oil prices tumbled again yesterday. With storage tanks getting full, holders of oil contracts prefer to get rid of them instead of taking delivery and paying extra storage costs. As for today, we already got the UK CPIs for March, while later in the day we get inflation data for the same month from Canada.
Risk-off Trading Continues as Oil Tumbles Again
The dollar continued trading higher against most of the other G10 currencies. It gained the most versus NOK, GBP and NZD in that order, while it was found virtually unchanged against JPY, CHF and EUR.
The relative strength of the safe-havens suggests that investors’ appetite remained subdued for another day. Indeed, turning our gaze to the equity world, we see that major EU and US indices were a sea of red, though the negative sentiment eased during the Asian session today.
It seems that the driver behind the risk-averse mood was the same as on Monday. Following the plunge of the May WTI contracts into negative waters for the first time in history, the collapse in the “black gold” spilled over into the June contracts. WTI hit a low of USD 6.55 a barrel, to settle at USD 14.02 yesterday, while Brent’s low was USD 17.51 and its closing price at USD 19.33. The tumble continued during the Asian session today as well.
Remember yesterday we highlighted that the “stay at home” measures worldwide due to the fast spreading coronavirus resulted in much higher supply than demand levels, and this appears to be the case even after the OPEC+ members agreed to cut production amounting to almost 10% of global supply. With storage tanks getting full, holders of oil contracts prefer to get rid of them instead of taking delivery and paying extra storage costs. With regards to the May contracts, it appears that their holders were willing to pay in order to get them off their hands. Hence why the negative price on Monday, just a day before their expiration.
As for our view, it remains the same as yesterday. With the restrictive measures still intact around the globe, we cannot rule out further selling as demand remains subdued and storage space continues to diminish. Even if some nations decide to start loosening their lockdown restrictions, this may be a very slow procedure, and thus, demand is unlikely to return to its pre-virus levels soon. What could change things is a bolder cut by Saudi Arabia and its OPEC+ allies. Yesterday, the nation said that it is monitoring the market and is ready to take extra measures to stabilize prices.
With regards to the broader market sentiment, apart from the slump in oil prices, it may have taken an extra hit due to yesterday’s acceleration in both the coronavirus infected cases and deaths. This adds more credence to our view not to trust a long-lasting recovery in equity markets. Remember yesterday we noted that just a day of accelerations may be enough to revive fears and trigger another round of risk aversion. We believe that if indeed governments around the globe want to contain the virus, they should consider extending the restrictive measures. Even if they decide to start loosening them, the procedure should be a very slow one, as rushing into lifting the restrictions may result a new wave of exponential spreading. Thus, we see the case for the global economy to continue feeling the heat, and it remains to be seen how deep the wounds will be.
Euro Stoxx 50 — Technical Outlook
From around the beginning of last week, Euro Stoxx 50 continues to move sideways, roughly between the 2781 and 2955 levels. The price is currently trading below all of its EMAs on the 4-hour chart, which may be seen as a bearish indication. However, as long as the index remains inside that small range, we will stay neutral and wait for a clear break through one of its sides before considering a further directional move.
A drop below the 2781 hurdle, which is the lower side of the aforementioned range and is also the low of last week, would confirm a forthcoming lower low and more sellers could see an opportunity to step in. The price might then drift to the 2622 obstacle, a break of which may clear the path to the 2396 level, marked by the low of March 23 rd.
On the other hand, in order to consider the upside, we would need to wait for a break above the upper side of the previously-discussed range, at 2955, which is also the current highest point of April. This way, more bulls could run into the field, possibly lifting the index higher and bringing it to the 3090 barrier, which is the high of March 23 rd. Initially, Euro Stoxx 50 might stall there for a bit. However, if the buyers are still felling comfortable, a break of that barrier would confirm another forthcoming higher high and the price may rise to the 3193 level, marked by the low of March 6 th.
UK CPIs Slow, Inflation Torch Passed to Canada
The pound was the second loser in line, perhaps coming under selling pressure after the top official at UK’s foreign ministry said that PM Johnson may stick to his December deadline for reaching a trade accord with the EU.
Today, we already got the nation’s CPIs for the month of March. Both the headline and core rates declined from +1.7% yoy to 1.5% and 1.6% respectively, but the pound barely reacted, perhaps as the slides were in line with market consensus. In any case, the slowdown in inflation, further below the BoE’s objective, may increase the chances for the Bank to enhance its stimulus efforts to support the British economy from the coronavirus wounds.
Later in the day, we get more inflation data for March, this time from Canada. The headline rate is expected to have ticked down to +2.1% yoy from +2.2%, while no forecast is available for the core rate. Taking into account that the yoy rate of change in WTI fell further into the negative territory during March, we see the risks of the core rate as tilted to the downside. That said, with the BoC announcing an expansion of its QE purchases just last week, we don’t expect this data set to force policymakers to act again at the upcoming gathering, especially if the headline rate stays above the midpoint of the Bank’s target range of 1–3%. We believe that officials may decide to take the sidelines and monitor whether the already adopted measures have been having the desired effect on the Canadian economy.
GBP/CAD — Technical Outlook
From around the beginning of this month, GBP/CAD is seen moving sideways and seems that the pair is coiling, as it is trading between two short-term tentative lines, a downside one taken from the high of March 31 stand an upside one drawn from the low of April 6 th. We can also say that the pair is forming somewhat of a symmetrical triangle and as long as the pair remains inside that pattern, we will stay neutral.
If GBP/CAD exits the pattern through the lower side of it and falls below the 1.7387 hurdle, which is the low of April 21 st, this would confirm a forthcoming lower low, which could make the near-term outlook slightly more bearish. The pair might then slide to the 1.7255 obstacle, a break of which may set the stage for a move to the 1.7175 level, marked by the low of April 6 th.
Alternatively, if the rate climbs higher, breaks the previously-discussed downside line and travels above the 1.7696 barrier, marked by the current highest point of April, such a move may attract a few more buyers into the game. GBP/CAD could then rise to the high of March 31 st, at 1.7800, which could temporarily stall the pair. It may even correct a bit lower from there. That said, if the rate stays above the 1.7696 hurdle, the bulls might re-enter the field again and push GBP/CAD up. If this time it bypasses the 1.7800 obstacle, the next potential resistance zone to consider could be near the 1.7920 level, marked by the high of March 10 th.
As for the Rest of Today’s Events
Apart from Canada’s CPIs for March, we also get the US EIA (Energy Information Administration) weekly report on crude oil inventories. Expectations are for a 15.15mn barrels inventory build following a 19.25mn increase the week before. The API report was not released yesterday. Instead, it is expected to be out tonight. As it is always the case, no forecast is available for this report.
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Originally published at https://www.jfdbank.com on April 22, 2020.