Fiscal Policy

Wall Street Set to Open In Red on Crude Oil Price Wars, Coronavirus Fears 

Crude Oil Price Wars
Crude oil price wars

Saudi declares crude oil price wars, global COVID-19 victim count escalates, sharp drop in US T.Yields, and fed rate decision outlook to pressure Wall Street into subdued opening later today. 

Summary: Global markets have started for the week on a dovish note as coronavirus woes, and the crude oil price war has put bears in the driving seat of market momentum. Asian market saw major shares and key indices painting the board in red as total coronavirus victim count from across the globe rose above 110,000, adding nearly 10,000 new victims since last Friday.

Further, an unexpected move by Saudi Arabia to slash selling price of all of its crude oil grades by $6 to $8 per barrel and plan to further boost production post the current supply cut agreement deadline which ends this month has caused the biggest slide in the crude oil price since January of 1991. The sharp drop in crude oil price and its domino effect which has caused a meltdown in energy sector shares has led to a sharp increase in global recession worries and also resulted in a sharp decline in global government bond yields.

While the general market mood is risk-averse, major global currencies are enjoying a field day against USD as the Greenback declined sharply given the sharp drop in long term US bond yields. US 10 yr yields saw a visible drop by more than half its value in just four sessions from 1.055 on 4th March 2020 to intra-day lows of 0.342 during the Asian session today.

The European market opened on a clear dovish note over cues from the Asian market and broad-based risk-averse tone. Major European and futures are seeing a sharp decline with FTSE & DAX seeing a 9% drop while a 30% decline in crude oil price and lockdown in Northern Italy caused STOXX 600 and Euro Stoxx 50 to drop by 6% in early session. 

Rare Metals: While safe-haven demand is on the rise and people continue to flock to assets such as bonds and currencies, profit booking activity has kept gold and other major rare metals trading within familiar price levels. However, the sharp drop in USD’s value and potential for gains in precious metals fund flow from emerging markets is expected to pour into rare metals in immediate and near future painting a positive outlook for Gold, Silver and other major precious metals. 

Crude Oil: Crude oil price saw a sharp drop of nearly $11 on both international benchmarks WTI and Brent. Following Russia’s move to back out from OPEC+’s latest supply cut move, Saudi Arabia has re-ignited the price wars last seen during 2014 in its bid to punish Russia the second-largest crude oil producer.

Aside from reducing the price of all its crude oil grades, Saudi also plans to boost its crude output above 10 Million BPD from April once the current supply cut agreement expires. This has caused the price of both WTI and Brent to trade within the $33 to $30 price range. 

DXY: The US Dollar Index which measures the strength of the greenback against several major global currencies saw price drop to fresh multi-month lows in the Asian session today. Saudi’s move to ignite price wars, COVID-19 woes and expectations for further rate cut from the US Fed in upcoming interest rate decision meeting later this month serve as factors pressuring USD in the global market. The sharp drop of US 10 and 20 yr T.Yields to fresh decade lows has also ignited fears of recession adding more pressure to US Greenback. 

On The Lookout: All eyes remain glued to virus outbreak woes and Fed interest rate decision outlook in the immediate future. A sharp drop in crude oil price and projection for global crude oil glut has weighed down trade-dependent European economy considerably while major energy sector shares from across the globe experience a double-digit plunge in the share price. Move by Saudi to reignite price wars is also a cause for concern given the unexpectedly large glut projections over the COVID-19 outbreak effectively reducing global growth forecast for the year ahead to near-zero levels.

The ECB interest rate decision later this week is also in focus but given the already deep negative rates in Europe, all eyes are focused on what sort of measures will be taken by newly appointed ECB head Christine Lagarde in this scenario as pressure for efforts from the central bank to support the economy continues to remain escalating.

On other side of Atlantic, following the unexpected rate cut by Fed’s earlier this month, investors have fully priced in an additional rate cut in the upcoming meeting during 18th March 2020 and a move to bring rates to zero during the meeting in April month creating an unforeseen change in market price dynamics compared to last week. 

Trading Perspective: Given the weak US Greenback, major global currencies are likely to remain trading positive in the global market during the North American session on the forex front. However, Wall Street is set to see major indices drop to historic lows on cues from the local and international markets. Pressure from rate cut expectations, COVID-19 outbreak escalation, and fears of a recession are set to push major indices and key stocks in the bearish move while energy sector share decline is expected to dictate price momentum.

US futures trading in the international market is down by more than 1.5%, providing a clear dovish outlook. On the release front today, the US economic calendar remains silent while the Canadian calendar sees the release of housing starts data for February, and Building permits data for January. 

Please feel free to share your thoughts with us in the comments below. 

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