US equities were down slightly overnight but European markets saw heavier falls as investor sentiment turned weaker amid growing concerns on the second wave of coronavirus cases.
Asian stocks look set for a mixed start today as traders digest the latest news on U.S. stimulus negotiations amid a resurgence in Covid-19 cases in some parts of the world.
Despite economic and Covid-19 thunderheads ominously hanging over the market, investors took comfort in the fact a U.S. stimulus deal most certainly remains on the table. House Speaker Nancy Pelosi told Democrats that a Covid-19 relief package wouldn’t wait until January as she was scheduled to have another call with Treasury Secretary Steven Mnuchin, while President Donald Trump said he’d go over US$1.8 trillion in the stimulus.
The markets’ on again off again love affair with an impending stimulus torrent masks the fact that investor uncertainty is bristling ahead of an expected choppy period in terms of headline risk, including Brexit, the U.S. election, and perhaps the most horrifying troubles of all, the second wave of the coronavirus that could trigger more intense lockdown worries.
Investors are also struggling to set aside the implications of vaccine trial setbacks. Even more so without the much comforting U.S. stimulus package safety net, that always conveniently papers over that Covid-19 wall of worry and always eases those pandemic fears.
But with the March coronavirus crash still not a distant memory, the French curfew spooked investors. At the same time, London is also moving to Covid-19 Tier 2 this Friday as politicians call for further national circuit breakers.
Germany’s new case count increased by a record daily amount is did other parts of Europe. Some of this reflects far more widespread testing than seen earlier in the year. The acceleration is proving sufficiently worrisome to provoke new containment measures.
Arguably, the recent market gain was overextended as investors started to price in a lower chance of contested U.S. elections given Biden’s poll lead.
But investors remain confident that even if a stimulus deal is not imminent, the first item on the Democrat agenda post-election will be to rubber-stamp a mammoth stimulus package.
In February and September, the market sold off very aggressively after options expiry as protection rolled off. Are we in the midst of a repeat performance in October?
US oil inventories down
US crude stocks fell by 3.8 million barrels last week as lower crude production (due to Hurricane Delta) offset lower refinery throughputs. But bullish for oil markets is that oil product demand has been improving over the last month compared to seasonal norms, with consumption improving gasoline and distillates.
The recovery in risk markets on stimulus talks also found an echo in oil markets. And beneath the choppy surface, China’s data for September so far is indicative of an economy that is firmly in a cyclical upswing and supportive for all commodities, including oil.
Oil prices roared back from the depth of Covid-19 despair as diminishing U.S. oil and product stockpiles offered up some glimmer of hope that the fragile demand recovery is rebalancing at a better pace than expected in the world’s largest consumer of oil, the U.S. markets.
Indeed, a significant draw in commercial oil inventories, with a notable draw in distillates, helps drain those elevated product stocks bullishly for oil prices.
There have been reports of a push for a delayed easing of production cuts among OPEC members. The critical players in OPEC+ recognise what is at stake.
There is a high probability of a supportive decision from the OPEC+ meeting at the end of November if the demand outlook remains cloudy, especially with Covid-19 spreading rampantly across Europe and with flashpoints igniting in other parts of the world.
With Covid-19 fears ravishing the world, I am unsure if an OPEC extension of current quotas will still be considered the magic bullet for the oil price recovery.
However, it will provide a significant crutch for the market to lean on.
Equity and Oil markets analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi