FTSE plunges as oil tumbles

FTSE plunges as oil tumbles

Ipek Ozkardeskaya

Global stocks started the week in the red after the oil producers failed to reach an agreement in Doha meeting over the weekend. Crude slumped the most in two months and is currently continue digging lower under the $40 mark. There could be more potential on the downside given that hedge funds were positioned relatively long before the meeting and have room to unwind their long position after having reached a 9-month high on hope that Doha meeting would have resulted in a better shape.

Stocks, bonds and the FX markets are all reacting aggressively after a quite heavy disappointment this Monday morning. In summary, Saudi is still not ready to step back from its aggressive strategy to increase the market share. Iran, which has not been part of Doha talks, is boosting production after sanctions were lifted since January and is clearly rejecting any limits on its production before reaching the pre-sanction levels. Russia appeared softer, leaving the door open for a future agreement.

Money is coming out from the Aussie, the Canadian dollar and the krone at the start of the week going into the US dollar, the franc, the yen and the gold. The US 10-year yields hit a 7-week low, the short-end of the curve is more heavily impacted.
The yen hit a 7-month high. Besides the global risk-off, the earthquake also backed the yen’s strength in Japan. Japan's PM Abe is now called to increase the fiscal stimulus and to delay the rise in sales taxes following the disaster.
FTSE stocks opened under a decent selling pressure due to the global risk-off and tumbling oil prices after the 'no-deal' disappointment from Doha meeting. Miners and energy companies are taking the hit in London. Energy sector was down by a 3.5% at the open and is clearly dragging the entire market along.

Unfortunately, the Brexit talks are adding further tension in the UK as mounting Brexit risks are also keeping investors sceptical vis-à-vis the UK's stock market. UK Chancellor George Osbourne claims that the economy may shrink by a significant 6% in the case of a 'Brexit'. According to Osborne, such an event could cause a permanent, rather than a temporary damage for the UK's economy.

Appetite in UK banks and financials is also very much limited as the Treasury Select Committee is now looking to examine whether the financial institutions hold sufficient capital to hedge against potential losses as we move into the June 23rd Brexit vote.