- Most markets look “tame” and will continue to do so despite recent volatility in the oil industry, JPMorgan said in a Wednesday note.
- Energy equities — those hit hardest by the oil slump — account for only 3% of the S&P 500, making earnings adjustments throughout the sector less relevant to the broader equity market.
- The Federal Reserve’s salvo of monetary easing will form a “backstop” for credit markets as the coronavirus threat rages, JPMorgan said.
- Anticipated production cuts can provide strong support for oil prices, the bank added.
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Markets look “tame” after WTI oil contracts reached negative prices for the first time ever on Monday, John Normand, head of cross-asset strategy at the bank, wrote. The commodity market’s volatility skyrocketed to 1,400% this week as a storage squeeze and historically weak demand left traders with nowhere to keep oil scheduled for May delivery.
Energy investments and currencies suffered from the unusual price swings, but three new developments leave investors mostly insulated from the commodity market chaos, JPMorgan said.
“For all the headlines around crude, the cross-asset impacts have been contained,” Normand wrote.
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Energy equities account for only 3% of the S&P 500, the bank highlighted, making any earnings downgrades in the battered sector less relevant to the broader market. Credit market participants should be slightly more cautious, as energy holds a 9% weighting in the bank’s US High Grade and High Yield indexes.
The Federal Reserve’s arsenal of easing policies also gives investors reason to rest easy, Normand said. The latest oil-price volatility would’ve spilled further into other markets had the central bank not unveiled a slew of lending programs to pad against the coronavirus’ economic impact. Though it would be “misleading” to claim the Fed’s purchases can provide a solid floor for struggling energy firms, the massive policy effort will likely calm volatility across markets, the analyst said.
The central bank’s efforts can protect markets only until the oil sector can alleviate its supply and demand stressors. The commodity bear market “was always likely to end the way previous ones did,” Normand wrote, with a combination of production cuts and a bounce-back in demand. The coronavirus’ hit to travel activity will keep the need for oil suppressed until the pandemic fades, placing the onus on producers to slow pumping and ease storage concerns.
An oil price recovery might resemble a slower U-shaped trend, but “the trajectory should be good enough to avoid systemic stress as long as central bank backstops are in place,” Normand wrote.
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