US Oil Playing Into Renewed Risk Aversion

Risk aversion is returning to major financial markets. The good newsflow of countries beginning to reduce their lockdown conditions seems to have been priced in now. Reaction is coming off the huge sell-off on West Texas Intermediate oil (US light sweet crude oil) and how the front month futures contract expiry has precipitated a remarkable sell-off into negative territory.

The massive oversupply but also oil storage at Cushing in the US reportedly fully booked, there is nowhere to store oil once it has been bought and taken delivery of. To an extent, this is kind of a technicality in the market which distorts the real outlook. With volumes of futures trading already having turned to the June contract, no one wanted to take delivery and hence being paid for taking oil. The June contract is still trading at over +$20 and so the situation will be resolved tomorrow. To add to concerns, overnight news of the ill health of North Korean leader Kim have added to a risk negative sentiment. A destabilisation and uncertainty of the geopolitical outlook on the Korean Peninsula is not what is needed right now. Subsequently, we see a retreat of risk appetite this morning, although not especially pronounced yet. Volatility on equities has picked up and is usually associated with negative pressure on equities. Treasury yields are falling, the US dollar is performing well and the Japanese yen is a key safe haven outperformer.

Wall Street closed sharply back lower yesterday with the S&P 500 -1.8% at 2823. US futures are again slightly weaker (albeit off their earlier lows) with the E-mini S&Ps -0.1%. The Asian session has been impacted by the US close but also marred by fears of geopolitical destabilisation again with ill health of North Korean leader Kim Jong Un. The Nikkei was -2.0% lower whilst the Shanghai Composite was -1.0%. In Europe, the early outlook is following the Wall Street close, with downside on FTSE futures -1.4% and DAX futures -1.4%.

In forex, the risk aversion is growing once more, with USD performing strongly, but the main go to currency is JPY. The higher beta NZD is the main underperformer with RBNZ Governor Orr talking about the need for additional stimulus in May. Also, amidst the renewing risk aversion, AUD is a slight relative outperformer this morning after RBA minutes suggested a resilience to the banking sector, however it did also say that GDP could decline significantly in Q2 and remain subdued in Q3.

In commodities, there is a degree of consolidation on gold, with silver falling back by around a percent. Looking at oil;, the WTI front month has rebounded to flat (from a close of -$37.60 last night), whilst Brent Crude is a more reasonable reflection, trading -2.8% lower.

Once more, there are some important European data to watch out for this morning on the economic calendar. The UK Unemployment stats for February are at 0930BST and are expected to show the rate once more at 3.9% (3.9% in January) whilst Average Weekly Earnings growth is expected to dip slightly to +3.0% (from +3.0% in January). There is though also the UK’s Claimant Count for March which is expected to jump to 172,500 (from 17,300 in February) and will show the first signs of strain of Coronavirus on the UK labour market.  The German ZEW Economic Sentiment is at 1000BST and is expected to show a marginal improvement in the data for April up to -42.3 (from -49.5 in March). On to the US data later in the session, the US Existing Home Sales at 1500BST is expected to see a decline of -8.1% in March to 5.30m (from 5.77m in February).


We have been seeing increasingly moderating moves on forex in recent weeks. Markets seem to have been settling down from their incredible volatility of February and March. The chart of Dollar/Swiss shows this calming of market swings very well. Since the rebound off 0.9190 hit the buffers at 0.9903, the market swings have been losing magnitude with each successive swing.

We have seen the retracements of the 1.0022/0.9190 big November to March sell-off acting as key turning points in recent weeks. In the recent two swings lower around 0.9510 and 0.9605 have acted as very good gauges. The latest bounce higher has tailed off to consolidated a shade above 0.9700. It is like the ripples in the pool have become calm, and as such we are neutral until we see key levels breached. The market is in need of a breakout for direction now. Ticking higher this morning, the initial level to watch is resistance, so a close above 0.9725 would edge a slightly more positive move for a test of the April high around 0.9800. Initial support around 0.9650 is protecting the reaction low at 0.9590, where a closing breach would imply a negative bias to open 0.9500 again.

Good Trading,


Dominik Stone

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