Market Close Apr 20

Oil glut, earnings outlook rattles markets

Concern over high US oil storage levels hammers WTI; earnings outlook hurts stocks

Oil glut, earnings outlook rattles markets
The price of US crude has crashed to below $14 a barrel, the lowest level in 21 years, as storage terminals are filling up at a time when demand has collapsed. File photo: AFP

(ATF) Hong Kong: Financial markets surrendered early gains on investor jitters ahead of the earnings season, which will see some abysmal earnings and poor visibility in regard to when businesses may return to normal.

The Europe Stoxx 600 was flat after Asian markets retreated despite a strong opening. Futures on the S&P 500 were down 0.7% indicating a weak opening on Wall Street as the earnings season gets underway in earnest.

At Wall Street, S&P 500 companies’ profits are expected to drop by 12.8%, and earnings are expected to fall 13.6% in 2020 before rebounding 22.8% in 2021, according to Refinitiv.

West Texas Intermediate crude crashed to below $14 a barrel, the lowest level in 21 years, as storage terminals are rapidly filling up, at a time when demand has collapsed and created an unprecedented supply glut.

JPMorgan analysts said that although this month’s OPEC+ agreement was largely panned as insufficient to deal with the scale of the demand collapse, it was urgently required to keep world storage from maxing out and hold the market over until demand hopefully begins to recover.

“It is still not clear how the market will choose to clear the surpluses in 2Q. With the cuts only being implemented from May 1, the storage constraints will likely start to bite in May/June. This in turn should flare the frontend 'contango' structure to facilitate storage in high-cost production regions. As storage becomes increasingly scarce in some locations, prompt benchmark prices (Brent and WTI) could drop into the teens,” they said.

Asian markets had opened on an optimistic note as more economies indicated a roadmap for reopening but the oil collapse dampened sentiment.

But China’s equity markets bucked the trend as sentiment was lifted by a central bank rate cut. The PBOC cut the 1-year LPR by 20 bps to 3.85% and reduced the 5-year LPR by 10 bps to 4.65%. This is the largest cut since the LPR reform in August 2019.

“September should mark the point when the PBoC hits the "ultra-low" interest rate level. After that, the PBoC may need to rely more on reserve requirement ratio (RRR) cuts than rate cuts. The PBoC may use RRR cuts more than rate cuts before September to delay its policy rates touching ultra-low levels,” ING Bank Chief Economist for Greater China Iris Pang said.

ING projected that by the end of 2020, the 1 year LPR would be 3.35%.

ATF China Bond 50 Index:

The ATF China Bond 50 Index climbed 0.1% 107.95. 

Also on Asia Times Financial

Markets this week: Economies reopening, earnings watch

More cuts expected even after China lowers key lending rate

Hubei securities firm starts 5-bn-yuan bond issue

 

Foreign Exchange: China again eased monetary policy significantly.

Asia Stocks

· Japan’s Nikkei 225 slid 1.15%

· Australia’s S&P ASX 200 dropped 2.45% 

· Hong Kong’s Hang Seng index dipped 0.21%

· China’s CSI300 edged up 0.31%

· The MSCI Asia Pacific index fell 1.24%.

Stock of the day 

GOME Retail rose as much as 35% after it proposed a 200 million convertible bond issue which would convert into shares at a premium of over 20% to the day’s closing price.