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Mark O' Donnell
 · 
Research Analyst
May 18, 2020
 · 

Risk on: Oil and Stocks up

Risk on: Oil and Stocks up

Its risk on to the start of the US trading week as promising vaccine results amongst a resurrection in Chinese oil demand send equities and oil soaring.

Brent in blue, SP500 in red, Gold in orange on a daily chart

The SP500 is up near 3% on the back of Moderna, stating that their Coronavirus vaccine tests yielded signs it could make an immune response system in the body. As many countries start to ease restrictions on their citizens, hopes in a demand recovery have investors dipping their toes into risk-on assets. Amongst the 94% of winners recording gains today, JETS, an ETF that tracks US airlines and airline manufacturers, is up 11.6% in the risk-on rally. However, they are still down around 58% for the year.

Hopes in vaccine pushes risk-on rally

This risk-on rally may be short-lived; however, as market participants take any good news with regards to a vaccine as a reason to invest / trade. Jeffrey Kleintop told Bloomberg that “the market is very tied to measuring the success of these economic reopenings” and that “a successful vaccine would really make those reopenings very successful,” casting doubt about the risk on rally until a vaccine is fully developed. Furthermore, Fed Chairman Jerome Powell also casts some doubts on a recovery, stating that the US should “recovery steadily through the second half of this year” if US is able to avoid a “second wave of the coronavirus.” He has assured that the Fed has enough ammunition to help support the United States, with the Fed preparing to lend to middle-market businesses, allowing the central bank to extend up to $600 Billion in loans if required.

Demand in oil fueling risk on-rally

In the Commodities market, Crude breaks $35, and WTI contango closes. This is most likely on evidence pointing to Chinese demand reaching pre-coronavirus levels amongst ease in storage concerns and lockdown restrictions. Alongside previous Google mobility data showing tentative evidence of an increase in car usage, new evidence from TomTom’s traffic index showing rush hour traffic in Chinese cities at pre-coronavirus levels or above. With OPEC making good on supply cuts, an imbalance in demand eclipsing supply may push oil prices higher. However, it is not all positive for oil, as demand for jet fuel remains low, with many countries continuing with strict border restrictions even after lockdowns are lifted. Furthermore, it is worth noting that Jet fuel makes up around 8% of oil consumption globally, while gasoline makes up around 23%. Countries forming “mini bubbles” with other countries may slowly bring the demand for Jet fuel up.

The markets have been itching to buy the dip on any positive consensus. However, rallies in risk-on assets may be short-lived as a second wave is not out of the question given a vaccine is still months away.

Are you joining this risk-on rally?

Senior Analysts here at Blackbull Markets Phillip van den Berg and Andre Almeida have released some tremendous technical analysis on the Dow Jones rally and the USD/CAD, respectively. You can watch the videos here and here.

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