Crude Oil Torn Between Earnings, Fiscal Stimulus Updates & Brexit Woes

Oil Fundamental Outlook: Bullish

• Crude oil prices could rise on Q3 earnings data and fiscal stimulus hopes
• But Brent may pull back if spike in Covid-19 cases means more lockdowns
• Volatility from Brexit may echo across markets and undermine risk appetite

Corporate Earnings Cascade

Third-quarter earnings will be sweeping markets this week, with big-name banks like JPMorgan, Citigroup, Wells Fargo, Bank of America, Goldman Sachs, and BlackRock reporting. Other major non-financial firms include Johnson & Johnson, Alcoa, UnitedHealth and United Airlines. Stronger-than-expected figures could offset growing pessimism around growing coronavirus cases (more on that below).

If these firms generally beat market expectations, we could see investor sentiment get a lift and help push growth-anchored assets like crude oil higher. Having said that, virus-sensitive industries like travel and hospitality may disappoint when it comes to earnings considering the cycle-sensitive nature of their sector. Having said that, overwhelmingly positive earnings from other firms may offset the losses in this industry.

Source: Bloomberg

The airline industry has not yet recovered and continues to remain vulnerable to lockdown policies by governments in response to the rise of Covid-19 cases. The index above is a capitalization-weighted benchmark of the leading airlines stocks which shows that on balance it remains far below its pre-March plunge. Their distress is so evident that executive and legislative branches of the US are now fighting over it.

Fiscal Stimulus Talks Remain Up in the Air

After a confusing round of tweets, President Donald Trump has asked policymakers to sign individual, targeted stimulus package bills. One includes another round of $1,200 stimulus checks with another targeting the airline industry. House Speaker Nancy Pelosi has come out against the idea of standalone bills, advocating instead for a single, all-encompassing aid package.

Markets have been held hostage to these ongoing and sporadic developments as effects from the provisions of the last stimulus bill fizzle out. Monetary authorities and lawmakers have stressed the necessity of government stepping in to create more demand since the central bank alone cannot create demand. This greater emphasis on fiscal stimulus has made markets pay more attention to these erratic developments.

Brexit: Almost…There

UK Prime Minister Boris Johnson has set a self-imposed deadline for October 15 to be the final day for Brussels and London to hammer out a final agreement. Tension over fisheries continues to be the main sticking point in negotiations, though the British Pound rose last week on the back of progress. Having said that, the risks remain high, and so too the potential for volatility.

The Prime Minister has threatened to walk away if adequate progress has not been made. The PM has warned businesses that the new regulator landscape in a no-deal scenario could disrupt supply chains and weaken already-precarious growth prospects. As I wrote about in my guideline on how to trade politics: “[with] eroding fundamentals, markets become increasingly sensitive to political risks as their capacity for inducing market-wide volatility is amplified”.

--- Written by Dimitri Zabelin, Currency Analyst for DailyFX.com

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