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30 Sep 2016
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29 Sep 2016
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 Thursday 29 September 2016

AM Bulletin: OPEC “deal” sends oil soaring

 

 

Indices Update

European stock indices were firmer in early trade this morning taking their lead from last night’s Wall Street rally. The major US indices pushed higher as crude prices surged. This followed the surprise news that oil producers had reached a tentative agreement to limit output in a side meeting at the International Energy Forum in Algeria. The broad-brush headline is that OPEC members have said they will reduce overall output by around 800,000 barrels per day to around 32.5 million. Few commentators had expected any deal to be reached, and there is some scepticism creeping in this morning, particularly as there is little detail behind the headline. Just one of the details missing so far is which countries will be cutting, and by how much. This could be left to be sorted at the November OPEC meeting, but if so, there’s plenty that can go wrong before then.

European equities got off to a quiet start yesterday and were initially reluctant to follow Wall Street’s rally on Tuesday evening. But it wasn’t long before they began to pick up led by the banking sector. Shares in Deutsche Bank bounced sharply and were soon up around 5%. This followed a report in German publication Die Zeit that the German government was working on a rescue plan for the banking giant. The claim was quickly rebutted by Germany’s finance ministry. Nevertheless, the bank is so large and systemically important that it seems highly unlikely that it wouldn’t be bailed out if required. At the moment it seems that Deutsche CEO John Cryan is still a step or two behind the market when he insists that the bank neither needs nor has asked for government aid.

Obviously, both Deutsche and the German government are desperate to convince investors that the bank can deal with its problems on its own. After all, a bailout would be politically disastrous for Chancellor Merkel. Not only would it be unpopular with voters, but it would also mean that Germany wouldn’t have much of an argument against Italy taking measures to rescue its own banks. One thing is for sure, Deutsche’s bondholders will have to take a hit to comply with new EU regulations on government rescues.

The FTSE 100 ended the day 41.7 points higher at 6,849.4

The German DAX rose 76.9 points or 0.7% to end the day at 10,438.3

The US30 closed 110.9 points higher to finish at 18,339.2 The S&P 500 ended up 0.5% at 2,171.4 while the Nasdaq 100 rose 0.2% to close at 4,875.3

Equities

Deutsche Bank (DBK) is once again in the news. The share price rallied close to 5% in early trade yesterday after it hit a fresh 24-year low on Tuesday. The question now is whether this is simply a short-covering bounce which will soon peter out, or the start of a more sustained rally. Yesterday there were a number of conflicting stories concerning the possibility of the German government getting involved in a rescue. Ultimately the German Finance Ministry denied it was working on an emergency plan.  Deutsche Bank pulled back from the day’s high and ended 2% higher at €10.77

Deutsche Bank scored poorly in both European and US stress tests earlier this year. On top of this the IMF identified it as the world’s riskiest systemically significant bank (Deutsche is Germany’s largest bank by total assets). Then investors found more reason to dump the stock after the US Department of Justice proposed a $14 billion penalty relating to the bank’s involvement in residential mortgage-backed securities ahead of the financial crisis. The bank’s current market capitalisation is around $16 billion. Deutsche is currently undergoing a restructuring and yesterday it managed to unload its Abbey Life insurance unit for around $1.2 billion. There is also speculation that the bank will have to raise cash with a rights issue. But a number of analysts feel this is like rearranging the deck chairs on the Titanic and that the German government will be forced to step in and rescue the bank. But such a move would be a political disaster for Chancellor Merkel.

Commodities Update

Crude oil surged higher yesterday evening. This followed the surprise news that oil producers had reached some sort of agreement to limit output in a side meeting at the International Energy Forum in Algeria. The broad-brush headline is that OPEC members have said they will reduce overall output by around 800,000 barrels per day to around 32.5 million. There is some scepticism creeping in this morning, particularly as there is little detail behind the headline, such as who is cutting, and by how much. This is of particular importance as ahead of the announcement it was understood that Iran intended to lift output to 4 million barrels per day, up from the 3.6 million it currently produces. It appears that this could be left to be sorted at the November OPEC meeting. If so, there’s plenty that can go wrong before then.

Crude shot higher in early trade yesterday after the latest update on US inventories showed a large drawdown of stockpiles. After the close on Tuesday the American Petroleum Institute (API) reported a drop in inventories of 752,000 barrels for the week ending 23rd September. The consensus expectation had been for a build of 3 million barrels. Then yesterday afternoon the Energy Information Administration (EIA) said crude inventories fell 1.9 million barrels on expectation of a 2.4 million barrel build. Crude oil rallied further in the immediate aftermath of the EIA release but then suddenly turned lower. A closer reading of the report showed that gasoline inventories rose by 2 million barrels which was the biggest build in four months. The consensus expectation had been for a modest build of between 200, 000 and 500,000 barrels.

Gold and silver both lost ground yesterday thanks mainly to an overall pick-up in the US dollar. However, their declines were disproportionate to the dollar’s rise suggesting that there were other forces at play. One of these was comments from San Francisco Fed President John Williams who said that he supports a rate hike.  However, we can expect just about every Fed member to pop up between now and December to assure investors that the US economy is strong enough to weather a 25 basis-point hike. The trouble is that they don’t believe it themselves. In the meantime, a recent report from Citigroup warned of increased market uncertainty should Donald Trump win November’s presidential election. This should help to push gold higher as investors seek out safe havens.

Forex Update

It was a fairly quiet session in FX for most of yesterday with narrow trading ranges for most major pairs. The US dollar made modest gains early in the day but began to drift lower as the US open approached. Data-wise, headline Durable Goods came in flat. This was well down on the prior month’s 4.4% gain from the month before but still better than the -1.0% expected. Core Durable Goods (which excludes volatile transportation items) fell 0.4%. Again, this was down on the prior month’s 1.3% increase but a touch better than the 0.5% decline anticipated. The dollar dipped briefly but soon recovered.

Fed chair Janet Yellen testified before a House of Representatives Financial Services Committee. She made no comments concerning the outlook for the economy or monetary policy. However, she was grilled over the possibility of politics coming into the Fed’s decision to keep rates on hold at this month’s meeting. In particular, she was quizzed over FOMC-voting member Lael Brainard’s close connection to the Clinton campaign.

Later in the day the Japanese yen weakened somewhat after crude oil surged. Crude flew higher after the International Energy Forum in Algeria ended with the surprise announcement that OPEC members had agreed to cut output. This led to rallies in commodity currencies such as the Canadian dollar. The yen weakened as the rally in oil lifted equities and sent investors into “risk-on” mode.

Upcoming events

Today’s significant economic events include the release of Spanish Flash CPI and German Unemployment. From the UK we have Net Lending, M4 Money Supply and Mortgage Approvals. From the US we have Final GDP, Weekly Jobless Claims and Pending Home Sales. US Federal Reserve Chair Janet Yellen speaks at 21:00 BST. 

Disclaimer:

Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Category: AM Bulletin


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