We have seen a meltdown in the oil market in recent weeks, which joined equities in contributing to continued high market volatility. Some oil price benchmarks went into negative territory. There is some logic to this – demand for oil has fallen dramatically due to lockdowns and this is causing oversupply. There was an agreement between OPEC and OPEC+ countries on April 12th to cut production by 9.7 million barrels per day but this clearly turned out to be nowhere near enough of a production cut. The big question is whether this indicates further instability in World GDP growth, or whether it is simply an oil-specific case of supply outpacing demand. The latter seems more likely, so it does not look like a systemic risk factor for world markets – although, of course, it has ramifications for market volatility, which remains high.

Quite understandably, investors are wondering where they go from here. A good place to start looking for clues is economic forecasts. Two weeks ago, the IMF predicted a 3% decline in World GDP for 2020, then a bounce-back to +5.8% growth in 2021. Last week’s forecast from Oxford Economics agrees (mostly) – but it is worth remembering that there is still a huge amount of uncertainty around predictions at the moment. These could be optimistic projections.

The VIX volatility index has fallen significantly from its March 16th high of 82.7 to about half that level now. However, this is still significantly higher than its usual reading of 20 to 25. In light of this, we want to reiterate our message of the last few weeks: Dominion’s market view remains cautious until volatility approaches a more normal level. It still looks way too early to call a recovery in markets.

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