Brexit, oil and quarantine

Financial and commodity markets analytics

Market Watch review. 19.10.2020

In today's release, we’ll cover the following topics:

  • Brexit talks may resume. 
  • The risk of a collapse in oil prices is still high. 
  • US national debt exceeds 100% of GDP. 

Back in the first half of the European trading session, we saw a surge in the activity of GBP buyers. The reason is obvious – the appearance of information that Britain is still waiting for the EU to show flexibility. Therefore, even despite the rather tough position of Boris Johnson, Brexit negotiations may continue as early as this week. And if London and Brussels resume negotiations, the probability of reaching an agreement increases.

Even a slight increase in the probability of a deal between the UK and the EU significantly reduces the pressure on the GBP. As a result, we see a general strengthening of the GBP/USD pair quotes. Even before the opening of the US trading session, the pair added more than 90 points and came close to the resistance level of 1.3000. But only fixing the pair above this level will allow us to talk about the readiness of buyers to continue growth.

Now let's move on to the oil market. Demand remains weak, but it is still too early to talk about panic and the readiness of oil prices to resume the decline. Moreover, we are seeing a stabilization of the situation after a rather strong increase in volatility last week. Although any tightening of quarantine measures in Europe, and then in the United States, can still provoke a wave of sales in the black gold market.

Before the opening of the US trading session, trading volatility remains moderate. At the same time, the US WTI oil is trading at $41 per barrel – very close to the maximum level in the last 7 weeks. That is why the introduction of additional quarantine restrictions can put significant pressure on oil, dropping WTI quotes below $40 per barrel, and then to the lows of the past week.

I will conclude today's review with an analysis of the overall economic situation in the United States. On Friday, the data on changes in the US national debt was published, which stated it reached a record high since World War II, when the national debt reached 106% of GDP, and at the end of fiscal 2020, this figure is at 102%. It is too early to say that the world's largest economy is in a critical situation, but it will not survive another total quarantine.

Given all this, the scenario in which the United States will again announce a total quarantine seems unlikely. But even a slight restriction in movement will contribute to a fairly strong decline in stock indices and, as a result, another increase in the USD. I consider this scenario unrealistic until the US presidential election, so the situation on the financial markets may remain relatively stable for the next two weeks. 

Closely monitor the news background and be prepared for all the surprises of the market.