Pressure continues on oil and shares

This article was submitted by Michael Stark, an analyst at Exness.

The start of new American tariffs on many countries on Wednesday 9 April boosted havens in general while most cyclical instruments and other currencies declined. Traders are concentrating on the higher likelihood of recession in various countries, primarily the USA, and political instability from reciprocal tariffs. This article summarises recent news affecting major markets then looks briefly at the charts of oil (USOIL) and the S&P 500 (US500).

The total levy on Chinese goods coming into the USA now stands at 104%, which is very likely to be inflationary in the medium to longer term. Meanwhile various countries, especially those more heavily affected by the latest round of tariffs, have been attempting to negotiate with the American government. Retaliatory Chinese tariffs on American goods are due to take effect on Thursday 10 April and the EU will vote on Wednesday whether to impose their own tariffs on the USA.

Traditional havens like the yen and franc would seem to be the main potential gainers in this situation, but traders might also look at euro-dollar. Equally, the S&P 500 is now down nearly 20% from February’s highs, so some investors in shares might try to buy or buy more ‘at a discount’. It’s potentially very challenging to catch the point where the price starts a sustained bounce, though, because this depends on sentiment as well as the actual news.

The critical data for most markets this week is American inflation on Thursday. That’s likely to have a strong effect on the dollar and gold. Shares and oil might also move around the release, especially if it’s surprising. Friday 11 April is an important day for American companies’ earnings reports with a focus on banks.

Oil holds below $60: demand likely down, supply up

Since the announcement of higher than expected new American tariffs, especially on China, oil’s decline has been dramatic. The very high tariffs on China are important because China is the largest importer of oil, so economic headwinds there usually have a significant effect on demand. OPEC+ decided last week to increase supply next month.

4 April was American light oil’s lowest weekly close since August 2021, so it’s difficult to estimate the next potential support. The 78.6% monthly Fibonacci retracement is around $40, but even in the circumstances that’s a very long way from where the price is now. The unusual strength of the oversold signal and the size of recent candlesticks call into question whether the price might continue immediately lower unless significant fresh trade news reaches markets.

Equally, buying oil now looks like trying to ‘catch the knife’. Fundamentals are quite strongly negative and 7 April’s failed bounce suggests that demand is likely to remain low for some time unless there’s another round of strong losses or the tone of the news changes. Short-term trading of retracements seems to be the least bad option now.

Some participants in stock markets had hoped for negotiations to make some progress in the first week of April and at least some countries to be exempted quickly from the latest round of tariffs. However, now it’s a full-scale trade war: China in particular, under 104% tariffs, is very unlikely to back down. The main uncertainty for markets now is less how major countries such as China will continue to react and more whether the American government has discipline of policy to stick to what was announced.

So far there hasn’t been a full-day close below 5,000, which suggests that this area is still a support and it’d be possible to see another attempt at a bounce soon. However, it’s important to consider the bigger picture: the current retracement has barely touched the highs from late 2021 and early 2022 plus the losses in the last two months haven’t so far been bigger than in early 2022, just faster.

A very obvious bullish interpretation of the chart would be inverted head and shoulders, suggesting a return to 6,000 around this time next month. Perhaps obviously, that’s very questionable given how quickly the trade situation can change. Traders also need to monitor the upcoming earnings season in the USA, particularly banks’ reports on Friday 11 April, and sentiment on the Fed’s upcoming meetings.

The opinions in this article are personal to the writer; they do not represent those of Exness. This is not a recommendation to trade.

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