The Daily Dose; Knee-jerk reactions mask baked-in negativity

-Market factors drive market factors

-US unemployment figures a disappointment  

Crude oil prices, along with major equities, turned lower early in the Friday session on word the US president, his wife and a top aide tested positive for COVID-19. The knee-jerk reaction to the news this close to the election spared not even safe-haven assets like gold, which saw spot prices retreat by just a hair in early morning trading. The VIX, meanwhile, was up 10%. Early comparisons were made to the late-April recovery for British Prime Minister Boris Johnson, but the overwhelming influence of US news on the market meant this announcement has more weight. But US news is US news. In the oil sector, Norwegian major Equinor is trimming staff just as eurozone inflation sinks deeper into negative territory. Supply-side strains persist, meanwhile, with resurging Libyan barrels. Fighting in the Caucasus continues.

The price for Brent crude oil was down 3.9% as of 8 a.m. ET to trade at $39.33 per barrel, losing grip on the psychological threshold of $40 per barrel. A retreat was somewhat expected though given some trade patterns in the previous session.

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US President Donald Trump announced through his Twitter account shortly before 1 a.m. ET that he and his wife, Melania, tested positive for COVID-19.

“We will begin our quarantine and recovery process immediately,” he stated. “We will get through this TOGETHER!”

A top aide, Hope Hicks, also tested positive, though US Vice President Mike Pence and his wife, Kathy, tested negative early Friday. Former US Vice President and presidential nominee Joe Biden is expected to be tested on Friday as well.

Trump’s age, 74, and a weight considered slightly obese for a man of his size (6 ft 3 in) put him in the risk column for COVID-19 complications. Brazilian President Jair Bolsonaro, 65, tested positive on July 7 and spent weeks in quarantine. Honduran President Juan Orlando Hernandez, 84, survived a dangerous challenge before returning home from hospital in early September, but has made no public appearances since. Former Italian Prime Minister Silvio Berlusconi, 84, spent 10 days in hospital after testing positive. And an obese British Prime Minister Boris Johnson spent time in intensive care after contracting the virus late April. What makes the Trump diagnosis different is his health status is in serious question with 31 days before the November election. With the pandemic weighing on social-distance concerns, many registered voters have already cast their ballots.

Early-morning reactions to the news suggested most analysts were writing off the market plummet as a knee-jerk reaction. Julian Wee at Credit Suisse in Singapore told Reuters the market move probably won’t last. Chris Weston at Pepperstone in Australia told the news service the positive test has profound ramifications on the race for the White House.

“… it really depends on what we are talking about. Are we talking about a situation where he gets it and doesn’t turn up to debates? Or he gets it and uses it to say: ‘I’ve survived this, I’m a fighter,’ – or he passes away…we’ve got a lot of questions and not a lot of answers immediately available.”

That uncertainty helps explain the jump in VIX and the slump in crude oil prices as investors look for safe-haven assets. That said, trading on Thursday showed the market was not keen on a bull run for the price of oil. Traders had bet on a $40 floor in the previous session, but the test failed, suggesting fundamentals were not supportive of tailwinds. A wave of layoffs in the US airline sector, redundancies from the world’s leading oil companies and fading prospects for extra unemployment insurance in the United States left the market on its back heel in Thursday trading. US employment rates for September disappointed on Friday, with the 661,000 in new hires coming in way below the expected 859,000. With parts of the United States in the grips of a second-wave of infections, the labor market is shrinking and tacitly bringing demand with it. We must view the market through market factors and write-off the early-morning bloodletting to the Pavlovian response to bad news for the US president.

There were 18 days between when UK’s Johnson tested positive and when he was released from hospital April 12. Brent crude oil rallied, though, some 14% during that time, largely on word that the United States helped broker a truce between Russia and Saudi Arabia, which at the time were in a battle for market share. Further supporting the notion that market factors drive market factors, Ole Hanson, the head of commodity strategy at Danish firm Saxo Bank, said the headwinds were already blowing.

“Crude oil extended its decline due to continued worries about the pace of the recovery in global fuel demand together with increased focus on OPEC and its ability to keep production down,” his note on Friday read. “This comes after Libya’s oil industry, all but shut down since January because of civil war, began to recover, potentially leading to rapid output growth over the coming months.”

Libya last month lifted force majeure declarations on crude oil exports in place since January. Production has since gone from a trickle to around 270,000 barrels per day. That pace will be certain to upset OPEC efforts to keep the market in check, though compliance is already a chronic issue for the production group. The weak demand has prompted mass layoffs in parts of the economy’s largest sectors. Citing the demand destruction during the pandemic (and not painting it as a green decision) Norwegian major Equinor announced plans to cut its global staff by around 30% by 2023. Europe, meanwhile, saw its inflation rate dip deeper into negative territory.

One possible risk premium that’s effectively buried beneath the rubble of the US news on the president’s health is the lingering conflict in Nagorno-Karabakh. Just as interests collided in the Middle East with the Arab pivot toward Israel, the clashes over the disputed territory between Azerbaijan and Armenia has global ramifications. Given the confusing borders in the area, conflict is almost a certainty, though the recent violence has been the worst its been in years. A dense network of oil and gas pipelines, as well as lines for electricity, run through the region and could be exposed to the fighting. Armenia on Friday warmed to a cease-fire agreement, but later accused the Azeri military of hitting its air defense capabilities.


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