Oil drags stocks lower again

The sharp sell-off in the energy market this morning has dragged stocks lower in its wake.

Oil processing plant
Source: Bloomberg

Equities are in the red this morning as the correlation between oil and stocks is high. The same old concerns about oversupply in the oil market are driving energy prices lower and in turn dragging stocks with it. The inability and unwillingness of oil producing nations of having a coordinated production cut will ensure the oil glut is here to stay in the near-term.

Iran has plans to ramp up its oil output to pre-sanction levels which will entail triple its production from current levels. While the oil market remains in turmoil we can expect equities to be hit by selling. If the FTSE 100 stays sub 5945, its outlook will be bearish and sellers will be focusing on 5812. The DAX has a similar outlook and the next big support level in sight is 9225, with 9317 acting as a barrier to rallies. 

GBP/USD dropped below $1.40 overnight – its lowest level since 2009 – as the ‘Brexit’ fears keep pressure on the currency pair. The decline has been rapid recently and a snap back may provide an opportunity for bears to sell into strength – which has been a popular strategy lately. Rallies will run into resistance at $1.4057 and $1.4080 and sellers will be keeping an eye on $1.3843.

EUR/USD is dancing around the $1.10 mark and even though there was little movement overnight, the pair’s downward trend since 11 February is still in place. Mario Draghi has dropped big hints that he will reveal more easing at the next month’s European Central Bank meeting (10 March), which will keep pressure on the euro. Mr Draghi doesn’t always deliver on his promises, so traders need to be cautious. Bounce backs in EUR/USD will encounter resistance at $1.1066 and $1.1160 and the next big support levels in sight are $1.0976 and $1.0926.

Gold is gaining ground as jitters in the equity markets keep demand for the asset high. The metal has been in an upward trend since the turn of the year, and while it holds above $1217 additional gains are a possibility. The next big resistance level in sight is $1234 and any pullbacks may entice more buying.

Oil is still suffering from the sell-off yesterday as Saudi Arabia ruled out a production cut and Iran described the idea of a production freeze as laughable. Iran is focused on getting its output level to pre-sanction levels, which would mean tripling production from the current output level. If Brent remains under $34 and WTI is sub-$32, their outlooks will be poor. 

 FTSE risers and fallers (as of 9.30am)

Company % change Index points
[Shire +0.66 +0.57
Compass Group +0.57 +0.45
Persimmon +1.43 +0.34
ITV +0.80 +0.29
London Stock Exchange Group +0.53 +0.17

 

Company % change Index points
Royal Dutch Shell - B -2.99 -7.23
Royal Dutch Shell - A -2.66 -6.46
BP -2.49 -6.12
HSBC Holdings -1.52 -5.1
BHP Billiton -7.4 -4.55

The Day Ahead

Economic data:

2.45pm – US flash services PMI (February): expected 52.8, prior 53.2.
3pm – US new home sales (January): expected 500,000, prior 544,000.
3.30pm – US crude inventories: expected 900,000 barrels, prior 2,147,000 barrels.

Corporate reporting:

US
Cheasapeake Energy Corp  

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