14 September 2020
“What goes up, often comes down again” is the markets’ motto so far this month. Oil prices have tumbled back to June levels, whilst Tesla has seen its price crash 26%. And the eurozone moved into deflation.
We focus on Brent as the global benchmark.
Prices slid again last week to close below $40/bbl for the first time since June. Traders lost no time in starting to sell as the size of the supply surplus began to become clear, as the chart confirms:
- The first warning sign came from reports that floating storage was having to be used again to store surplus product
- Then there was news that the US EIA was cutting its forecast for world oil demand in 2020
- And it added that US production was now expected to be higher than previously thought
Supply/demand balances are therefore moving into surplus again. China and India have long been the major sources of oil demand growth. But China ‘s storage is still full from its bargain-basement purchases, as discussed last week. And India’s demand is likely to be worst hit of all the emerging economies, as the lockdowns continue.
We focus on the US S&P 500 Index as the world’s major stock market index.
The market slipped again last week, closing at 3340 and losing its August gains.
This issue, as we suggested last week, is that August’s rally was based on record levels of ‘call option’ buying for a few “hot” stocks:
“Buying short-term options in this way is speculation at its most extreme. And last week’s action in the tech-heavy NASDAQ Index – down 10% from its peak at one stage – suggests the unwinding of this excess may have further to go.”
Payback time is now underway. Tesla is down from $502 on 31 August to $373; Apple is down from $134 to $112; Facebook from $302 to $266; Alphabet from $1720 to $1520, Amazon from $3531 to $3116 and Microsoft from $231 to $204.
We focus on the US 10-year rate, as this is the “risk-free” benchmark for global markets.
Last week was an easier week for the 10-year rate, which fell back from 0.72% to 0.66%.
Conveniently for traders, the pre-Labor Weekend “scare” that China might sell 20% of its $1tn holding of US Treasury bonds came just before last week’s monthly US Treasury auction. It allowed them to push prices lower (yields move inversely to prices), and then push prices higher again as yields fell. As Marketwatch commented:
“The strong showing by buyers at the sale helped to spur higher bond values, erasing the earlier weakness at the start of the session.”
Both sides are complicit in this “game”. Treasury are happy for the traders to make a quick gain as it encourages them to return to buy next month – and traders love the idea of easy profits.
But despite these market “games”, the chart confirms we continue to see a pattern of ‘lower highs’ since June’s peak of 0.95%.
It would therefore be no surprise if traders now use the excuse of oil and stock market weakness to push rates lower again, to see if a “lower low” below August’s 0.50% is possible.
Eurozone moves into deflation
Central banks have been promising for over a decade that they would “make inflation happen”. But as the chart shows, they remain a long way from success:
- China is still exporting deflation via its Producer Prices, despite the impact of the lockdowns and the floods on supply chains
- The eurozone has now moved into deflation at -0.2%, even thought the major lockdowns have ended
- The USA and UK have only seen a slight uptick in rates, even though oil prices had doubled and demand rebounded after the lockdowns