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Old 15-04-2020, 16:57
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Default Re: Tickmill UK Fundamental Analysis

IEA April Energy Outlook Pressures Oil Producing Nations to cut Bigger and Faster

The People’s Bank of China cut its medium-term lending rate for financial institutions on Wednesday to the lowest level on record. This is far from “fine-tuning” of monetary policy, but rather a powerful stimulus of the banking sector, which raises concerns about smoothness of economic recovery. The government tries to deal with the fallout of coronavirus mainly by taking the gloves off of the banking sector.

The cut of the lending rate for commercial banks should bring similar relief in financing for firms and households that were dragged under the mills of epidemic.

Commercial banks in China can now borrow at a record low rate of 2.95%. This credit facility was launched in 2014 and the latest rate cut amounted to 20 basis points which is relatively big cut. By lowering the rate, PBOC tries to spur the competition of commercial banks in making loans, which in theory should lead to a further decrease in the prime loan rate – benchmark loan rate offered to first-class borrowers:

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Trade data from China released on Tuesday beat expectations. Exports decreased by 6.6% against expectations of -13.9%, imports fell by only 0.9% compared with the forecast of -9.8%. A smaller than anticipated decline in China foreign trade contains pessimism about the virus impact on world trade which supported short-term positive market sentiment on Tuesday. The data on export and import prices in the US and Indonesia’s foreign trade in March laying the groundwork for better estimates of world trade recovery.

The risk-off wave as a next big test for the Fed

China will release March GDP, retail, and industrial production data on April 17. Weak figures will probably force markets to revise the pace of economic recovery and energy consumption outlook to the downside, restraining upturn in oil. The price resumed decline despite the pledge of many oil producers to reduce output during which the countries agreed to reduce production by 10 million bpd from May 2020. The IEA’s April outlook included dire predictions of demand recovery: the agency estimates that demand in April will fall by 29 mn b/d, which is almost a third of world consumption. Even if lockdowns are weakened in the second quarter, underconsumption for 2020 will amount to 9 mn b/d which is just 1 mn b/d less that max output cuts expecting to last only a couple of months:

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EIA valuation exceeded market expectations negatively

Countries that set lockdowns earlier, such as Italy, announced on the weekend that quarantine would be extended until May. Recall that Wuhan was unblocked only 63 days after the introduction of the measures, so one-month social restrictions imposed in other countries are likely to be too short to be effective. They will probably also need to be extended.

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