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Oil off highs as demand remains key concern

Trade of the Day: Oil clings on to gains after deal; Stocks tumble on earnings jitters.

Quote of the Day: “The Federal Reserve’s move to prop up even the junk bond market is further evidence that truly free capital markets are a thing of the past. It is clear that for the Fed, moral hazard is no longer a cause for concern if ever it was through the past decade. Emergency policies have become the norm as the US establishment continues to feed a mistaken belief that equity markets must rise forever and that economic cycles should not exist. Investors may continue to make hay buying risk assets again. At the same time, the inevitable day of reckoning for the US economic system will have to wait but may come sooner rather than later,” said Gary Dugan, CEO at Purple Asset Management.

Stock of the day: SoftBank fell as much as 3.4% after it said its Saudi-backed Vision Fund had suffered a ¥1.8 tn ($16.7 billion) investment loss because of “the deteriorating market environment.” The technology conglomerate said it expects to report its biggest ever annual operating loss of $12.5 billion in the year to March.

Number of the Day: 10.6% – Moody’s Investors Service’s baseline forecast for global default rate for 2020. This is seen rising to 11.3% by the end of March 2021, from its March 2020 level of 3.5%.

Tip of the Day: “There continues to be an exceptional degree of uncertainty around both the economic and market outlook in Asia, as elsewhere. In addition to being long bonds in our portfolio in China and Singapore, we are also adding exposure to bonds in Korea and Malaysia (both on a currency-hedged basis), and in the Philippines,” Deutsche Bank strategists said in a note.

Analysts fear low demand for oil 

Oil prices rallied after OPEC and its oil producing allies struck a deal on Sunday to cut production by 9.7 million barrels per day – the single largest output cut in history. But gains could not be sustained in holiday-hit trade as analysts worried demand would still fall short. 

“Though the decision has been a long time coming, the size of the cut will only make a dent in the declining oil price given that global demand has dropped by more than 30% since the start of the pandemic. Some smaller European countries are talking about a slight easing of lockdown rules but to put it into perspective, they have already said that they will keep their borders closed and not allow international travel and holidays until there is a vaccine,” said Matt Weller, Global Head of Market Research at GAIN Capital.

WTI crude was up 1.4% after rising as high as 3.9% and Brent was 2.7% higher, also off highs.

“This means that the two main strands of oil demand, demand from cars, buses and jet fuel demand for the airlines, are unlikely to seriously tick up before the autumn. Now that OPEC and Russia have made their move, the rest of the support for the oil industry will have to come from elsewhere. At today’s G20 meeting, it is possible that the other countries will be asked to either commit to lower production or to buy more oil for their strategic reserves to take some of the surplus out of the market. The ball will be mainly in the courts of the largest producers, including Canada, Mexico, Brazil and the US,” Weller said in a note.

Staggering contractions

Stocks across the region were spooked ahead of the earnings season, amid worries about the extent of the hit on corporate bottom lines even as the economic data is expected to reveal staggering contractions.

Stocks were also weaker as demand constraints and growth worries dampened investor sentiment. Japan’s Nikkei 225 was down 2.33%, China’s CSI 300 was off 0.42% and Korea’s Kospi index fell 1.88% with most of the other major exchanges closed for Easter holidays.

India’s Sensex was down 1.33% as investors worried about the country extending its lockdown beyond the April 14 deadline. The Reserve Bank of India released minutes of the monetary policy committee meeting of March 24, 26 and 27, 2020. At the earlier than expected meeting, India’s central bank had cut its repo rate, widened the LAF corridor and reiterated its accommodative stance.

“Critically, the minutes show that MPC members recognize the need to look beyond the inflation mandate, given the unprecedented crisis posed by the outbreak of Covid-19. Overall, we retain our view of a further 90bp of repo rate cuts over the coming months, with risks of larger policy action” Barclays strategist Rahul Bajoria said.

“Following the release of the CPI print tonight, and given expectations that the second phase of the lockdown to persist in a majority of states, we expect RBI to consider cutting rates as early as second half of April by 40-50bp, possibly in another emergency policy meeting,” he said. 

Umesh Desai

Umesh Desai is the Executive Editor at Asia Financial. Prior to this he spent over two decades with Reuters News as Asia Pacific Chief Correspondent in Hong Kong and Bureau Chief in Bombay. Before becoming a journalist Umesh was a credit ratings analyst with Moody's arm in India - ICRA. A chartered accountant by training, Umesh began his career as an equity analyst. His Twitter handle is @umesh_desai


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