Mercury Weekly (23/10/2024)

What is Causing the Oil-Price Volatility?

Oil prices have been highly volatile recently, driven by geopolitical tensions and fluctuating market sentiment. Last week, fears of conflict between Israel and Iran sent Brent crude above $80 per barrel, but prices dropped 4.1% to $74.25 on Tuesday as these concerns eased. Algorithmic trading has amplified this volatility, with commodity trading advisors (CTAs) heavily influencing market direction by short-selling oil futures during downturns and buying when sentiment shifts.

The recent fluctuations in oil prices underscore just how much the market is being shaped by speculative trading rather than the usual supply-and-demand forces. CTAs, have been a dominant force, aggressively selling when prices decline and buying back when sentiment stabilises. This trend-driven approach has amplified market movements, causing rapid price shifts that don’t always reflect the underlying geopolitical or economic events. On top of Middle East tensions, factors like China’s stimulus moves and the Fed’s rate cuts are also in the mix. Many investors are now using oil futures to hedge against broader economic risks, which only adds to the volatility. The interplay of speculative trading and geopolitical factors suggests that oil price volatility could continue as investors react to shifting global events.

US Bank Quarterly Earnings

US bank quarterly earnings reports have largely exceeded expectations, offering optimism that the US economy might be on track for a "soft landing." Citigroup, JPMorgan and Goldman Sachs all posted stronger-than-expected profits driven by resilient consumer spending, revived deal-making, and gains in trading revenues.

Citigroup reported a third-quarter profit of $3.2 billion, beating analysts’ forecasts, thanks to gains in investment banking fees, which surged 44%. Meanwhile, BofA’s earnings fell 12% to $6.9 billion, which was better than anticipated as investment banking and trading revenue offset weaker lending figures.

Goldman Sachs reported a significant 45% jump in profits, reaching $3 billion, driven by high performance in equity trading and a 20% increase in deal-making fees. Despite facing challenges from its recent retail banking exit, Goldman’s trading and wealth management sectors posted solid returns, adding to this quarter's overall positive sentiment.

The upbeat results and recent Fed rate cuts suggest an improving outlook for the financial sector. - on Friday US bank stocks hit their highest level since before the collapse of Silicon Valley Bank.

Electric Vehicles: A Political Divide

In the U.S., the gap between political parties extends into the automotive market, particularly with electric vehicles (EVs). Republicans, who are the largest group of new car buyers, are significantly less likely to purchase EVs compared to Democrats, who are 4.5 times more inclined to go electric. This disparity is highlighted in geographic sales data, with EV purchases in Republican-dominated states like Mississippi, Arkansas, and West Virginia lingering below 3% of new vehicles, in stark contrast to Democratic strongholds such as California and Washington, where EVs comprise up to 27% of new vehicle sales.

Efforts to bridge this gap include depoliticized ad campaigns focusing on economic rather than environmental benefits, underscoring the automotive industry's challenge in navigating the complex intersection of technology, politics, and consumer preferences.

Spotlight on LVMH Amidst China's Economic Stimulus

Investors eye LVMH's upcoming earnings report with keen interest, particularly for signs of recovery sparked by China's recent economic stimulus. As Europe's luxury sector faces a downturn, all eyes are on the potential rebound in Chinese consumer spending, which could signal a pivotal shift for the industry.

Despite LVMH losing over a quarter of its market value since March, there's a glimmer of hope that Beijing's fiscal measures might stabilize the luxury goods market. Analysts anticipate this earnings call might not just reflect past performance but also provide crucial forward guidance on the impact of Chinese economic policies.

With luxury stocks accounting for a significant portion of the Euro Stoxx 50 index, LVMH's insights could influence broader market sentiment, making this update critical for investors globally.

Turbulence in the Chip Sector: ASML's Significant Miss

ASML Holding, a key player in semiconductor manufacturing, saw its shares plummet the most in 26 years after its third-quarter orders fell dramatically short of expectations, booking only €2.6 billion against an anticipated €5.39 billion. This miss led to a reduced forecast for 2025, signalling a broader slowdown in the chip industry.

The repercussions were felt industry-wide, with significant stock declines in companies like Nvidia and Applied Materials. The downturn highlights varying demand across the sector, from automotive to artificial intelligence, complicating recovery prospects.

Amidst these challenges, ASML also navigates geopolitical tensions, particularly U.S. restrictions that impact its significant market operations in China.