Swissquote Bank: Everyone wants a deal with Saudi

March 30, 2020

By Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank

Not surprisingly, last week’s enthusiasm over the Federal Reserve’s (Fed) pledge to buy unlimited amount of assets and the US government’s historical $2-trillion rescue package didn’t last long.

The Dow closed Friday’s session 4% lower, as S&P500 (-3.37%) and Nasdaq (-3.79%) broke a three-day winning streak before the weekly closing bell.

Meanwhile, the national emergency situation in the US was extended to April 30 as the death toll increased past 2000, shattering Donald Trump’s hopes of seeing the economy getting back to a better shape before mid-April.

One thing is sure, the Western world is headed for a dim Easter 2020.

Asian stocks kicked off the week on a mixed note. The ASX 200 gained 4.95%, Nikkei fell 2.76%, as Hang Seng (-1.29%) and Shanghai’s Composite (-1.59%) traded in the red.

US and European stock futures were flat-to-positive however, hinting that investors are undecided on the direction they would take at the opening bell. The hesitation suggests that we may see a soothed volatility across the equity markets, although the energy-heavy FTSE 100 will likely remain under the shadow of a 5% drop in oil prices as a result of the cancellation of whatever was left from the Easter holiday plans.

The extension of containment measures across countries and through time will likely continue weighing on oil prices. WTI crude traded near the $20 mark in NYMEX. Decent buy orders should continue giving support to oil prices below the $20 handle, as supply should thin as pumping oil becomes meaningfully unprofitable for most nations. This situation is clearly favourable for Saudi Arabia, who wanted to curtail production to support the oil markets despite being the cheapest producer among all producers, and hostile for Russia, who refused to do so. Hence, oil prices so low increase the probability of Russia changing its mind and establishing a deal with the OPEC nations to stop the heavy bleeding. According to the latest news, US State Secretary Mike Pompeo has also reached out to Saudi Arabia inviting them to ‘reassure’ stability in oil, and hence, the financial markets. There are even rumours that the US would strike a deal with Saudi Arabia, which would include Saudi leaving OPEC. We are not sure how solid the latter threat is, but one thing is sure, with the size of the cake shrinking this fast, the fate of all oil producer countries depends on Saudi Arabia. The latest CFTC data showed that the net speculative long positions in oil increased last week on expectation of a necessary rebound in the foreseeable future.

Elsewhere, gold met resistance above the $1630 per oz. The net speculative long positions in gold retreated for the fourth consecutive week as investors left the market on gold’s decreased inability to hedge against the market headwinds and increased trading costs due to liquidity issues caused by a scarcity amid refineries slowed or ceased activity. Low gold output should however support gold prices in the short run. Support could be found above the $1500 per oz handle.

In the currency markets, the US dollar halted its decline as the investor sentiment soured again. The EURUSD retraced to 1.1068. Due today, the industrial and services sentiment indices may have dived to negative in March for the first time since 2013. Despite low expectations, there is potential for a harsh disappointment. Hence, the single currency could test the 1.10 support to the downside as a result of souring economic data. On top, preliminary inflation figures in Germany should suggest a fall to 1.4% y-o-y in March from 1.7% printed a month earlier. With the significant decline in overall activity and meaningfully lower oil prices, inflation in the Eurozone is expected to dive toward zero in the first half of this year, revive the dovish European Central Bank (ECB) expectations and limit the euro’s overall advance against the other major currencies.

Cable, on the other hand, remains offered past the 1.25 mark. Besides the recession worries, Britain heading toward a chaotic split from the European Union as a result of halted trade negotiations should continue weighing on sterling. Whether Boris Johnson’s contamination lead him to change his mind regarding his strict Brexit agenda is yet to be seen. At this point, the deadline should be postponed for at least six months, or ideally a year, to give negotiators the necessary time to consider at least a partial agreement.