Oil in negative territory, and London Stock Exchange shows signs of resilience

“Mining stocks were very much out of favour on Tuesday, dragging the FTSE 100 down 2.1% to 5,691. BHP, Evraz and Anglo American all fell by more than 5%, alongside similar weakness in oil producers Royal Dutch Shell and BP as the market worried about commodities demand,” says Russ Mould, Investment Director at AJ Bell.

“Brent Crude oil dropped 10% to $22.97 amid elevated concerns over buyers for oil and storage capacity, essentially negative read-across from yesterday’s dramatic scenes involving the WTI oil contracts.

“Given that it dominated headlines around the world, the turbulence in the oil sector has naturally fuelled speculation over whether yesterday’s oil shock was a one-off or signs of bad things to come.

“Asian markets today extended last night’s losses seen on Wall Street with Hong Kong and Japan both seeing 2% declines. European markets were also in the red."

Oil prices

“Another day and the oil market is breaking new ground and not in a good way. We are in genuinely unprecedented territory after the US benchmark WTI slumped into negative territory overnight, with the double whammy of it also posting its biggest one-day drop.

“This reflects three factors, one being the huge drop in demand from the coronavirus crisis, another being the pressure on key infrastructure from a supply glut, and the third a technical issue to do with the way the futures markets works.

“Like the majority of commodities, oil is traded in futures contracts. The purchase or sale of a barrel of oil is agreed at a fixed price for delivery on a specified date. This facilitates the buying and selling of a commodity without anyone having to take physical delivery of it.

“With the May futures contract expiring today, no takers for physical delivery, a growing supply glut putting pressure on key infrastructure and traders looking to sell or roll over contracts to the next month, there was a perfect storm which drove the extreme price action yesterday.

“Unless the global economy is in a better place by mid-May then we could be looking at a very similar situation in a months’ time for WTI price action.”

London Stock Exchange / Halma / Restore

“Companies deemed to be resilient in the wake of the coronavirus crisis are like gold dust and London Stock Exchange certainly seems to be one of the select few.

“Not only has the company come out and said it had a really good first quarter of 2020, it also gave an upbeat comment about the robust state of its finances. Furthermore, it will continue to pay dividends which has become something of a luxury this year as many companies decide not to give shareholders a reward in order to preserve cash during the pandemic.

“In fact, London Stock Exchange is only the eighth FTSE 100 member to say it will keep paying dividends. That compares to 34 other companies in the FTSE 100 which have said they won’t be handing out cash, the latest of whom is Associated British Foods.

“Increased equity trading and higher clearing activity have given a boost to London Stock Exchange’s earnings. It has also benefited from having ongoing subscription revenue.

“Another example of someone with resilience is Halma, a provider of safety products. It says over two thirds of its operating companies deliver critical safety, healthcare and environmental protection solutions and are able to keep operating during lockdown.

“Interestingly, Halma says it doesn’t intend to use the UK Government’s COVID Corporate Financing Facility. One wouldn’t be surprised to see the market put a premium on companies who don’t go cap in hand to the Government as it would suggest they are in a strong financial position.

“Among smaller companies updating the market on Tuesday, document storage firm Restore ran a stress test on its business and produced positive results. It says the business should remain profitable and stay within banking covenants for 2020, even if the effects of the coronavirus are long and severe.

“Investors are looking for these signs of reassurance as it helps to remove uncertainty.”

These articles are for information purposes only and are not a personal recommendation or advice.