Wall Street Rethinks What’s Possible in Week Oil Went Negative

The bar for shocks in financial markets these days is probably as high as it has ever been. Oil still managed to vault it.

Around markets it was another week for the history books, whose keepers must surely now be running low on ink. Oil didn’t just crash, it redefined what many people thought was possible by sinking deep into negative territory. Stocks fell, but managed to do so in their calmest sessions since the start of the crash. Treasuries and the dollar rose.

In the aftermath, everything from the role of passive investing to the ultimate legacy of the pandemic is being reassessed.

Drawn from across Bloomberg News, this is the story of another week of unprecedented drama for investors and traders.


Monday 20 April: It doesn’t start like a day to remember. Sure, oil begins on the back foot, falling early in the Asian session. But futures for West Texas crude were already at the lowest since 2002 — lopping another year off that is hardly a big deal.

The weekend was full of the usual virus headlines, although mercifully they continue to suggest the rate of new infections has peaked in many major economies. Talk continues to be about unwinding the draconian restrictions on activity that have throttled both the outbreak and growth. And thoughts are drifting to earnings, with the reporting season set to ramp up in coming days.

Futures for the S&P 500 are down, but the underlying gauge posted a big gain Friday and is now up 28% from a low last month. Asian shares also lean lower, and it’s drifty across both bond and currency markets.

A quiet day with little to note. No major news. No big shocks.

Except that oil price keeps ticking lower. It’s still the middle of the night in New York when WTI passes $16 per barrel, and still dark when contracts slip through $15. They cross $14 just after dawn.

The acceleration begins then, and WTI is through $13 before 7:30 a.m. Eastern Time, and under $12 half an hour later. To anyone watching — and everyone is — it feels like something snapped.

Certainly something new is happening. The contract the world is now focused on is for May delivery of oil, and it expires tomorrow. That means whoever is holding the note on Tuesday will take delivery of oil next month — and not only does nobody want oil right now, there aren’t many places left to put it.

The problem is demand. The expiry of a futures contract isn’t normally a big deal, but widespread lockdowns to battle the pandemic mean no one is traveling and factories aren’t running. Throw in reduced heating needs in the Northern Hemisphere’s warmer season and energy consumption has evaporated.

“Oil is the market most impacted by Covid-19 and will take longest to recover,” says James McCormick, the global head of desk strategy at NatWest Markets. “It isn’t end of world, but it is a major shake-out.”

By the U.S. afternoon, it will feel a little like Armaggedon for anyone trading crude. At about 2 p.m. in New York, the expiring May contract drops below zero. This has never happened before. At its low, it will go just beyond minus $40 per barrel.

Read more:Oil Plunges Below Zero for First Time in Unprecedented Wipeout

Those trading other assets are now on high alert for the turmoil to spread, but somehow the fallout remains fairly minimal. The relative resilience in stocks is impressive. The S&P 500 is down but the move is not extreme, especially by recent standards.

Partly this is because energy companies simply don’t make up as much of the market as they used to. But it’s also because some of the optimism that helped drive the almost 30% rebound from a March low lingers. With stimulus flowing and virus rates peaking, equity investors are still counting on a rapid rebound.

“Stocks show the market’s hope for recovery, that life will come back to normal and by the end of the year everything will be happy days,” says Karen Ward, chief EMEA market strategist at JPMorgan Asset Management. “That is a bit too optimistic. I think it’s going to be more gradual.”

The oil market would seem to agree. Whatever the technical reasons, however temporary, the rules of the financial market game just changed: The May contract for WTI has closed at minus $13.10.


Tuesday 21 April: Investors have endured another shock, and the early part of the trading day is spent coming to terms with it. Some wild things have happened in the markets in 2020, but nothing quite like this.

Negative oil prices have no precedent, but are at least logical given the contract expiry and the demand circumstances. Meanwhile, the panic didn’t spread — futures due in June settled at a much more reasonable $20.43.

In early trading the May WTI contract pops back into positive territory and the June futures rise. Asian shares show modest weakness, and U.S. futures are slightly higher. Things are calm, overall.

But they are fragile, too. It’s pretty vague, but a report about the health of North Korean dictator Kim Jong Un is enough to put investors on guard. Asian stocks extend declines, U.S. and European equity futures turn lower.

The jumpiness is understandable. Events in the oil market alone would have been enough to put traders on edge in normal times, but lately a lot of unprecedented things have been happening. The coronavirus has triggered record moves in both directions in multiple assets, unheard of policy response the world over and the greatest economic shock in a century.

“The risk of a second leg down in risk assets on recovery disappointment is rising,” reckons Luca Paolini, chief strategist at Pictet Asset Management. “The economy and a company are pretty much like nuclear power stations. You can’t just turn it on and off.”

All those nerves mean that when oil sentiment shifts late in the European morning, this time other assets respond. The expiring contract for WTI turns negative again, but more importantly futures for June suddenly plummet.

The crash is spreading beyond the front month contract, and beyond oil too. Industrial metals, linked to the global growth story in some of the same ways as crude, tank. Treasuries gain for the fifth day in six. Optionsshow bets that the Swiss franc — a noted haven — will strengthen to one per euro for the first time in five years. Trades that pay out if the dollar rises are also in high demand.

Stock resilience crumbles as investor ditch their recent winners and the S&P 500 slides the most in more than two weeks. A gauge of expected volatility for the equity benchmark climbs a second day — the first consecutive increase in almost a month.

Read more:Stocks Are Finally Feeling the Fear That’s Hitting Other Markets

Finally, after everything, after sparking turmoil across major risk assets, the May contract for oil expires — positive, at $10.01. Worryingly, the June contract is down 43% to $11.57. This just became the front month.


Wednesday 22 April: The oil madness has dominated everything so far, and that’s understandable given the historic nature of events. But there are developments elsewhere that may be less eye-catching, but more significant.

Oil moves ripple through markets because the commodity keeps the world functioning. Yet in terms of scale, the crude market is eclipsed many times over by other asset classes.

Like government bonds, which underpin the financial system, and where the premium investors demand to hold 10-year Italian debt over Germany’s has beencreeping up.

Italy has been one of the countries bearing the brunt of the pandemic, and its already fragile economy is under huge pressure. Italian stocks are underperforming German peers by about 7 percentage points this year. The yield gap has widened more than 80 basis points and the nation’s investment-grade status could be under threat.

Europe is struggling to agree how to deal with the uneven impact of the virus across its vastly different economies. A call between European Central Bank policy makers isset for tonight where they may discuss whether to accept junk-rated debt as collateral from lenders.

This would head off some concerns about a sovereign like Italy being downgraded — as things stand a cut to junk would exclude one of the euro zone’s largest economies from the ECB’s refinancing and asset-purchase programs. That could precipitate a crisis to dwarf everything seen so far this year.

Yet most eyes remain on oil, and the good news is some semblance of calm is returning to this corner of markets.

With the May contract out of the way and June rebounding, traders and investors have some time to take stock of events. Much focus falls on the role played by exchange-traded funds in the turmoil. The largest ETF tracking oil, known by its ticker USO, controls such a large part of the market it now plays an important part in stabilizing prices — though it rolled out of the May contract ahead of time.

Read more:How ETFs, New Whales of the Oil Market, Are Roiling Prices

Meanwhile the fund announced a series of measures throughout the week to help counteract the impact of the oil collapse, some of which change fundamental aspects of the product. That carries a risk of further undermining confidence in the ETF at a precarious time — already a series of highly leveraged and specialized smaller oil funds have beenshuttered this week. Should USO fail, it could have huge ramifications for crude.

A little of that pressure eases today, as oil gets an unexpected boost: President Donald Trump orders the U.S. Navy to destroy any Iranian gun boats harassing American ships, and — as usual at the first sign of tension in the Middle East — crude extends gains.

With so much going on, no one is really talking about thefunding market — and that’s a good sign. The Federal Reserve flooded the system with dollars in a bid to avoid a credit crunch, and it seems to have worked. The three-month dollar Libor fixing — the rate at which banks borrow from one another — today falls to just shy of 1%, a level not seen for a month.

Earnings show some promise, too, with quarterly results stirring speculation a recovery can come sooner rather than later. Treasury Secretary Steven Mnuchin plays into that, predicting most of the U.S. economy will restart by the end of August. The S&P 500 halts a two-day slide.

European stocks also have reason for cheer. The EU is floating a2 trillion-euro ($2.2 trillion) plan for economic recovery ahead of leaders’ talks on Thursday. Although the debate over funding this remains contentious, the assumption is they will find a way and the Stoxx 600 finishes well up.

Late in the day, the ECB bows to the inevitable and announces it will accept some junk-rated debt as collateral for loans to banks — a potentially pivotal moment for Italy and the union.

“Most policy makers these days start their speeches with ‘whatever it takes,’” notes JPMorgan Asset’s Ward. “That’s really important. It’s a good policy. It’s been preventing a vicious cycle.”


Thursday 23 April: Big moves in any of the major asset classes tend to leave a legacy of nervous investors for a while, and that’s how it feels today. U.S. equity futures are bouncing around and Asian shares show no clear direction.

Sure, oil is up again, but it’s from a low base. Yes, earnings keep arriving, but in the days of coronavirus it’s hard to say what constitutes good or bad anymore. A stream of economic indicators is on the way, but everyone knows they will be awful.

Against this backdrop it’s hard to have conviction in either direction. When the European purchasing manager readings cross the wire, they are even worse than awful, and stocks turn lower. But the reaction is brief, and the Stoxx 600 clambers back into the green. When U.S. jobless data showanother 4.4 million people without an income, futures actually gain. The median expectation was for 4.5 million new claims — evidently investors are ready to call this a win.

Read more:Bad Data Is a Given for Wall Street Gaming Out Lockdown Exit

“Markets are certainly beginning to display a level of insensitivity to incoming macro data,” says Michael Metcalfe, global head of macro strategy at State Street Global Markets. “Such data insensitivity, however, can only last for so long. Together credit markets and labor market data will provide a good gauge as to what permanent damage may be done to the economy.”

For now, the corporate bond market seems in rude health. Junk debt saleshave revived, and investors are even willing to scoop up new issues from some of the companies hit hardest by the pandemic — Gap Inc. and Delta Air Lines Inc. are among those taking advantage. Thanks to the ECB’s decision on high-yield bonds, the cost to insure euro-area debt with junk ratings falls for a second day.

Promising virus news helps lift the mood. The rate of New York fatalities is the lowest since early April, while Treasury Secretary Steven Mnuchin says he anticipates most of the economy will restart by the end of August. Italy sees recoveries from the pandemicovertake new infections for the first time.

It looks like nerves are settling, until the Financial Times reports that Gilead Sciences Inc.’s antiviral drug remdesivirflopped in its first randomized clinical trial. Last week, a report claiming the drug had helped patients in Chicago was one of the catalysts for the S&P 500’s Friday surge.

From trading as high as 1.6% earlier, the U.S. benchmark finishes ever-so-slightly down. Hardly changed at all, really. No conviction, either way.

And so all eyes turn to law makers. In the U.S., the House passes a $484 billion coronavirus aid package to replenish funding for small businesses and provide support for hospitals and virus testing. In Europe, leaders endorse a 540 billion-euro ($580 billion) short-term plan.

But despite pleas from ECB chief Christine Lagarde and a pledge from German Chancellor Angela Merkel that she’s ready to back a huge stimulus package, the group andgets nowhere in agreeing to a more substantial longer-term program.


Friday 24 April: Investors are used to the painful process of EU decisions — the bloc seems to need to be on the brink of catastrophe before reaching agreement. Except the pandemic feels pretty catastrophic, and leaders have made little progress toward the substantial action that may be needed to cushion the blow.

Futures for European stocks sink in early trading, while Italian bonds initially slump as most of their safer European peers gain. The country’s next rating decision is today — insert your own cliche about leaders fiddling while Rome burns.

Read more:Every Day EU Leaders Spend Arguing Pushes Italy Closer to Junk

But it’s another fickle session. The Stoxx Europe 600 erases most of a drop before lingering disappointment with that region’s stimulus package and data showing German virus cases climbing and business confidence collapsing drag it back down again. The S&P 500 fluctuates all day before a late jump, while Treasuries drift.

At least it’s not another Friday sell-off, which have been a feature of this pandemic as investors trim exposure before two days of headlines about rising death tolls. Total U.S. fatalities hit 50,000, but stocks take it in stride.

Stabilization in the commodity market is helping. Oil also swings between gains and losses, but compared to the moves that kicked off the week, this is orderly stuff.

The June contract ends the week with three straight up days.

Read more
Part 1:Six Days That Broke Wall Street’s Longest Bull
Part 2:Inside Wall Street’s Most Volatile Ever Week
Part 3:Five Crazy Days Drag Markets Back From Brink
Part 4:Bad News Is Grinding Down Wall Street Bulls
Part 5:Wall Street Gets Its Bull Back in Four Dramatic Days
Part 6:Bulls Triumph in a Week of Doubt and Dismal Data

— With assistance by Sophie Caronello, David Wilson, and Cecile Gutscher

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