Wednesday, February 26, 2020

Oil Crashes on Fears of Global Economic Crisis

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What’s happening: Crude oil dipped 3% to its lowest level in two weeks, as the coronavirus spread beyond the borders of China. Fears were further fanned by WHO saying it is not clear how the virus is spreading.

What happened: US WTI (West Texas Intermediate) crude oil nosedived to a two-week low, settling below $50 per barrel on Tuesday. Fears of a global slowdown sent prices lower for a third consecutive session. Crude oil prices had shed almost 16% through January.

Why oil prices are falling: There is a rise in new cases of coronavirus from other corners of the world, forcing investors to flee from assets perceived as risky towards traditional safe-haven assets, like gold and US Treasury Bills.

The virus, which emerged in Wuhan, China, is now spreading to Europe, the Middle East and other parts of the world, fueling widespread fears of a possible disruption in the supply chain and a severe hit to global economic growth.

WTI crude for April delivery tumbled 3% to end at $49.90 per barrel, its lowest since February 10. April Brent crude fell 2.4% to settle at $54.95 per barrel, the lowest finish since February 11.

Why it matters: At least 80,000 persons worldwide have been diagnosed with COVID-19, the official name for the deadly coronavirus. Although China has reported a decline in the daily number of new cases and has lowered the emergency response level in three more regions, reports of infections from other countries are on the rise.

South Korea reported 169 new cases this morning, taking the total to at least 1,146 with 11 confirmed deaths from the virus. China’s National Health Commission had confirmed 52 more deaths by the end of Tuesday, taking the toll to 2,715 since the outbreak began. China also reported 406 new confirmed cases, which takes the total to 78,064 cases.

Austria has halted trains to Italy. Saudi Arabia, Kuwait, Iraq, Turkey and Afghanistan have imposed travel restrictions on Iran, after it reported 43 cases of the virus.

Meanwhile, a spokesperson for the World Health Organization said that infections were emerging in people who had neither traveled to China nor had any contact with confirmed cases. Margaret Harris added that it is “not clear how the virus is spreading” and that there are cases “that don't have a clear epidemiological link.”

The OPEC+ (Organization of the Petroleum Exporting Countries and its allies) is meeting next week to consider the next steps to decide on production levels in a bid to contain the decline in oil prices. However, rising tensions between Saudi Arabia and Russia have caused uncertainty around the OPEC’s ability to make the production cuts actually happen.

The American Petroleum Institute reported a gain of 74,000 barrels of gasoline for the week ending February 21, after a decline of 2.67 million barrels last week. Distillate inventories declined 706,000 barrels for the week, while cushing inventories climbed by 411,000 barrels.

What to watch: The US EIA (Energy Information Administration) is scheduled to release its weekly petroleum supply report today. Any unexpected rise in supply will exert further pressure on oil prices. Announcements by the OPEC to lower output may support oil prices.

The Markets Today

     

Investors will be watching French stocks today, amid rising coronavirus-related concerns. Some major economic releases from the country could provide support to the markets.

Context: The French CAC 40 tumbled to a fresh three-month low yesterday due to uncertainties around how the coronavirus may impact the global economy. The downward trend continued after stocks fell in the previous session.

Details: The French index suffered the deepest downturn in major European markets, after reports of the coronavirus spreading in Italy and other countries. There were more than 80,000 confirmed cases around the world, with Italy reporting more than 280 cases and 7 deaths. Switzerland also confirmed its first virus case yesterday.

The CAC 40 lost 1.94%, while the SBF 120 index was down 1.89%. The largest declines were in the Gas & Water, Foods & Drugs and General Financial sectors. BNP Paribas, TechnipFMC and Societe Generale were the worst performers of the CAC 40 index. Share of Carrefour SA and Danone SA provided some relief, although gains were small.

France is the world’s most visited country, with close to 90 million tourists visiting the country in 2018. There has been a massive 30-40% decline in the number of tourists since the coronavirus outbreak began. Analysts expect the impact on tourism will deepen further, with more countries imposing travel bans.

The EUR/USD pair rose 0.3% to 1.0882, while EUR/GBP slipped 0.3% to 0.8363 in the previous session.

Why it matters: After a weak performance by French stocks in Monday’s and Tuesday’s sessions, all eyes are on further economic releases scheduled for release today. A strong consumer confidence reading could provide some relief to investors.

What to watch: France's consumer confidence indicator, which rose to 104 in January, is expected to decline to 103 in February. Investors will also keep an eye on initial jobless claims.

Other Markets: Most European indices closed lower on Tuesday, with the UK 100, German 30 and French 40 down 1.94%, 1.88% and 1.94%, respectively.

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What else to watch today

     

Mexican retail sales, Brazil’s net payrolls and US new home sales, MBA's index of mortgage application activity, state street investor confidence index and business expectations and uncertainty indexes.