Lockdowns are not good for oil sentiment

What did I miss? Markets in Europe steadied but failed to really bounce after a brutal sell-off on Wednesday saw all the major indices deeply in the red and trading at levels not seen for some time. The instigation of second national lockdowns in Germany and France rattled markets. Election nerves may also be present, particularly as the path to a stimulus package in the US will not become clear until after the results are known. We know that governments are supportive of business, but we also know it was a long slog out of lockdown last time and won’t be easy this time. Markets had become a little complacent about the recovery and secondary lockdowns tell a different story – it will be rocky and uneven. 

The S&P 500 tumbled 3.5% and closed below 3,300 with similar losses on the Dow Jones and Nasdaq. Vix futures rose to levels not seen since the sell-off at the start of September. Futures point to a higher open on Wall Street. US GDP figures later will give the first look at the Q3 bounce back.  The dollar rose back to the top of the recent range with the euro coming under pressure from lockdowns measures in the bloc’s two largest economies. GBPUSD was steady at 1.30 but won’t move until there is a significant Brexit headline.

Lockdowns are not good for oil sentiment. Prices slumped on the lockdown announcements but also felt the pinch from a rise in US crude stocks. EIA figures showed a 4.3m barrel build in US crude inventories. As we have been warning, the threat of falling demand leading to inventories flipping from draws to builds has been present and we can expect this trend to weigh on prices. 

Nevertheless, Shell raised its dividend after reporting better-than-expect earnings for its third quarter. Management hiked the divi by 4% to 16.65 cents – having made an historic cut to the dividend during the peak of the pandemic earlier in the year. Shares rose over 3% in early trade. Lloyds shares also rose after it swung back into profit and set aside less for impairments than feared – chatter around dividends returning will get louder, particularly as these results come in the wake of some pretty upbeat notices from the larger banks. The risk is that the fiscal support runs out and new lockdowns and depressed demand due to the chronic impact of the pandemic on consumer and business sentiment means impairments are going to rise later in 2021. 

It’s a big day for corporate earnings in the US and the focus will undoubtedly fall on the FAANGs with Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL) and Facebook (FB) all set to report quarterly earnings figures later. Earnings come amid heightened scrutiny on big tech as the US Department of Justice opened an antitrust case against Google’s parent company, Alphabet, whilst executives from social media giants faced a Senate hearing yesterday on reforming so-called Section 230 rules that give tech platforms immunity from prosecution over user-generated content. Shares in all fell sharply on Wednesday amid the market turmoil. 

With lockdowns in focus, today’s European Central Bank meeting will be of particular importance for European markets. Many market participants are increasingly betting on the ECB carrying out further easing in a bid to boost faltering economic growth and stagnant prices. The Eurozone slid into its second straight month of deflation in September and with further lockdowns being imposed across the bloc, the risks to the economic outlook have clearly deteriorated since the last meeting and the assumptions for growth contained in the ECB’s September look out of step with reality. Weakness in Friday’s PMIs highlight the concern among businesses, particularly in services. The threat of a double dip recession is real - Christine Lagarde recently commented that the resurgence of the virus is a clear risk to the economy - and that was long before the imposition of national lockdowns in Germany and France. 

Given the murkier outlook and dreadful inflation backdrop it seems all but certain the ECB will increase its bond buying programme by another €500bn by December - albeit it may choose to increase PSPP rather than PEPP – for the markets these acronyms won’t matter too much – it's the size and duration of the liquidity injection that matters, not how it is presented. Lagarde may drop some hints in the press conference to increasing PSPP/PEPP envelopes in December but will not over-commit. Moreover, with progress on delivering on the fiscal side slow, the ECB will feel obligated to step up.  

To get a flavour of the mood in the ECB, the usually hawkish Austrian central bank head Robert Holzmann said recently: “More durable, extensive or strict containment measures will likely require more monetary and fiscal accommodation in the short run.”  Fundamentally it will be more of the same from the ECB with it stressing it is ready to do more and the momentum is with the doves to ease more.