Weekly View - Oil deal done
Last week a number of packages were delivered and not just by Amazon. As US jobless claims continued to spike, the Federal Reserve announced some USD 2.3 trillion of additional emergency measures, including purchases of select high-yield “fallen angels” and muni bonds. For its part, the Bank of England will now directly finance the state, enabling the UK government to bypass bond markets as it ramps up spending. Through their actions, central banks are clearly ignoring rating agencies’ procyclical responses in trying to avoid any liquidity issues. Meanwhile, European finance ministers finally agreed on a EUR 500bn rescue package to be put to EU leaders this week, which includes revised pandemic credit lines from the European Stability Mechanism bailout fund. Further fiscal packages were announced by Canada (5% of its GDP) and Japan (20% of tis GDP) and The Chinese central bank lowered its required reserve ratio for mid-sized banks as well as the interest charged on bank reserves. Risk assets rallied across the board, with the S&P 500 recouping 24% from recent lows.
Hopes were high that an OPEC+ production cut would stabilise oils prices after their recent -20% decline. While a deal was reached and delivered over the weekend, the 9.7mn barrel per day cut agreed failed to boost oil prices significantly. This leaves pressure on the major oil companies as markets appear unconvinced that the cuts are sufficient to compensate for the current demand-side shock. We remain underweight energy-sector stocks.
Looking to the week ahead, the banking sector will kick off the Q1 earnings season and might shed some light on what to expect in future quarters. It will also provide an opportunity to assess the extent of the earnings damage inflicted by the global coronavirus shutdowns so far, and whether disappointing data leads to price declines or not. After last week’s rebound, this week will serve as a real test for market confidence. We remain negative on equities given the potential for worse earnings than markets expect.