After Iran-US flare-up subsided, we saw oil prices fall and get technically weak. Oil prices are unlikely to breach 52-week lows. We will probably approach them but I doubt that we go much below that unless this virus situation becomes a reality for the global economy, says Peter Cardillo, Chief Market Economist, Spartan Capital Securities.
2020 started off with the US-Iran issue and now coronavirus is taking a toll on the markets. What is the outlook for the commodity as well as equity markets based now?
The numbers are going up, not only in China, but also in other parts of the world. In fact, in the US, the third case was confirmed and this is probably going to impact the markets. Now the markets are somewhat vulnerable because they are already at such high levels. But obviously there is fear of coronavirus epidemic not only in China, but even in other parts of the world. But it could take a toll on economic activity, especially in China.
We all know that the country is basically locked down and many enterprises have been shut down and this will have a negative impact in terms of economic activity in China. The only hope here is that this virus can be contained and it does not spread any further. If that is the case, then the selloff could be attributed to a cause. But there is no question that the initial reaction in the US is going to be on the negative side.
We also remember that many of the Asian markets are shut down for the Lunar New Year and perhaps the decline will be minimal and we have to take into consideration that it is a very busy week in terms of macroeconomic news, the Federal Reserve meeting and the key as to whether or not the market can continue to rally if the flow of earnings will begin increasing this week and over the next several weeks. For now, it will have a negative impact, but it is going to be a heavy decline because other factors that can counter the virus news.
As we speak, five cases are already confirmed in the United States. The crude market is taking a huge hit. Goldman Sachs came out with a report last week saying that the virus could actually impact the crude prices by about $3 but they are already seeing a downward slide. How much of impact can it have on demand? You have to remember that oil prices had turned weak. The virus scare is certainly not helping but the market had already weakened prior to the emergence of the virus. One, there was a huge build up in inventories and that probably is going to simmer down because some of that may have been weather related. Those buildups in inventories are probably going to subside and the other factor was when oil popped over $62-63 level after the Iran-US faceoff, that certainly gave oil prices a boost. But then when that subsided, we saw oil prices fall and they got technically weak and for the moment, oil is in a technical downward spiral.
The question is do we break last year’s 52-week lows? I do not think so. We will probably approach them but I doubt that we go much below that unless this virus situation becomes a reality for the global economy.