When silence is golden
How much will financial markets react to companies’ first-quarter earnings data in light of the effect of the coronavirus pandemic?
Markets Weekly
09 April 2020
4 minute read
Week ahead
As companies’ first-quarter earnings kick in, investors will pay close attention to next week’s macro data.
Both the US and China publish retail sales and industrial output figures for March on Wednesday and Friday respectively. Both sets of data for China were both negative in February, with retail sales plummeting by -20.5% year on year (y/y) and previously strong growth in industrial output collapsing to -13.5% y/y.
The March data are likely to remain weak as lockdown is lifted in Wuhan and activity gradually restarts. Final economic growth figures for the first three months of the year in the country also come out on Friday, providing more insight on the impact on the economy of activity grinding to a halt during the period.
US retail sales and industrial production contracted by 0.5% and grew by 0.6% y/y, respectively, in February — raising concerns about how much the pandemic may have hit the economy in March. Given that COVID-19 is spreading globally, and despite the surge in US infections of late, the next set of figures are expected to be mixed as the effects of the epidemic spill over to some macro data.
The American jobless claims data on Thursday will undoubtedly be the main focus of the week, with the indicator hitting 6.6m in the week to 4 April after the record high of 6.9m a fortnight ago.
In the eurozone, the final inflation rate for March, out on Friday, is set to confirm subdued price rises, after the initial reading fell by -0.5 percentage points to 0.7% y/y. Disruption to output, from the effects of the pandemic, is growing and any inflationary pressures in the bloc are being offset by fundamentally weak demand and a lower oil price.
Chart of the week
Oil market: finding a balance
The oil price initially rocketed above $30 a barrel on 2 April following a tweet from President Donald Trump. The tweet suggested that representatives from Saudi Arabia had agreed to cut oil production by 10 million barrels per day (mbpd) following discussions with Russia. While it is likely that the two regions held talks, the notion that Saudi Arabia will instigate such an output cut always appeared unlikely considering it benefits from the most favourable cost of production.
As the chart shows, the cash costs of production is the lowest for Saudi Arabia ($3.50 per barrel) and Russia ($7 per barrel). In contrast, the US has much higher production operational expenditure. While those numbers are low, they do not reflect the full-cycle breakeven costs, which would be higher as they would include exploration and development capital expenditure for new wells and projects.
The talks between Saudi Arabia and Russia have resulted in the OPEC+ group, comprising the members of the Organisation of the Petroleum Exporting Countries (OPEC) and allied producers, agreeing to come back to the table on 9 April.
Though the above is a positive development, any potential cuts only solve half of the problem, the supply of oil. With governments across the globe implementing strict quarantine measures, demand for the commodity has collapsed and in turn altered the initial Saudi-Russian calculus. Expectations were for approximately a 5mbpd drop in demand at the beginning of March and are now closer to 20mbpd.
With strict containment measures, potentially remaining in many economies until the end of June, the recovery in economic activity, and so oil demand, will occur in the latter stages of the year. We expect the market to come into balance towards the end of 2020 and for oil to average $31 a barrel this year.
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