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Early moves

Crude soars over 5% on production cut sign-off

European indices surrender early gains

Crude prices surged overnight as traders reacted to the news that a deal between OPEC/non-OPEC producers to cut output had been officially finalised. The move has seen both Brent and WTI contracts gap higher and, in the case of WTI, finally bust through resistance which has held since the summer. Both contracts hit levels last seen in July 2015. Compliance is the next obvious hurdle as far as production cuts are concerned. But we’re unlikely to know if anyone is breaking the agreement until shipping data and other related measures are studied over the next few months.

The bounce in crude helped to lift European stock index futures in early trade. However, soon after the open all the majors had pulled back from their best levels. Investors are now looking ahead to Wednesday’s Federal Reserve rate decision which is by far the main event ahead of the year-end. A 25 basis point rate hike from the Fed is priced in. But what is uncertain is the outlook for future monetary tightening.  If the FOMC’s “dot plot” is as hawkish as it was this time last year when it indicated four rate hikes in 2016, then we can expect a jump in bond yields and sharp downward correction in equities.

Stock Index Update

Equity rally continues

NASDAQ100 lags Dow and S&P

The US-led equity market rally which began in earnest after the US presidential election continues for now. Chart-wise, the upper areas of resistance which held throughout the summer on the Dow and S&P500 have been completely smashed and both indices have made a succession of record closing highs. However, the NASDAQ 100 is still struggling to break out to the upside and this divergence demonstrates how certain stock market sectors have outperformed others since Donald Trump’s victory. Stocks in financials have done particularly well over the last month, thanks to a great extent to a pick-up in bond yields. This has led to a steepening of the yield curve which has boosted banks’ margins. There are also hopes of reduced regulation. Construction, energy and basic materials have also done well thanks to Trump’s campaign promise to spend around $1 trillion on infrastructure spending. On the flip side, many dividend-paying stocks such as utilities have lost ground as have a number of drug and biotech stocks as Trump looks to unwind the Affordable Care Act. Many tech stocks are also out of favour as many companies in Silicon Valley look set to lose their access to government.

Commodities Update

Crude trading near 18 month highs

Precious metals fall again

Crude prices surged overnight as traders reacted to the news that a deal between OPEC/non-OPEC producers to cut output had been officially finalised. Compliance is the next obvious hurdle, but we’re unlikely to know if anyone is breaking the agreement until shipping data and other related measures are studied over the next few months.

On Friday crude oil ended little-changed on the week. Last Monday both WTI and Brent spiked higher to trade at their highest levels since July 2015. However, traders quickly rushed in to book profits as analysts continued to express doubts over OPEC and non-OPEC producers’ commitment to cut output. The trigger for the sell-off was news that Russian output hit a post-Soviet record of 11.12 million barrels per day (bpd) in November. Then it was reported that OPEC production hit a fresh record high in November of 34.19 million barrels per day (bpd), up from around 33.6 million bpd in October. This increased production suggests that OPEC’s commitment to reduce output by 1.2 million bpd in an attempt to hit a target of 32.5 million bpd, and a proposal for a non-OPEC cut of 600,000 bpd won’t be enough to help lift prices much beyond $55 or so.

It seems that neither gold nor silver can catch a break at the moment. Both precious metals fell further at the end of last week thanks once again to the stronger dollar. On top of this investors are increasingly unwinding their “safe haven” trades as they continue to pile into equities. The overriding feeling is that president-elect Trump will fulfil his campaign promises to cut corporate and personal taxes, tear up regulations inhibiting business and unleash a $1 trillion infrastructure spending programme. All this should boost growth and spur inflation. What could possibly go wrong? Well, it will certainly boost the US’s national debt and that’s assuming any of these measures actually make it through Congress. In the meantime gold and silver continue to give back their gains made in the early part of this year. Chart-wise, if gold can’t hold support around $1,160 then a return to the lows seen this time last year can’t be ruled out.

Forex Update

US dollar holds on to gains

Euro slips on ECB stimulus

There was very little activity in FX on Friday morning. In fact, there was relatively little activity all day. But a look at some of the charts for currencies showed that it had been a volatile week. For instance, the Dollar Index was trading just shy of 102.00 on Monday, went on to break below 99.50 on Thursday morning before rallying sharply thereafter. The dollar strength at the beginning of last week was really down to a sharp, but brief, sell-off in the euro following the Italian referendum. Voters rejected calls for constitutional reform and the result led Prime Minister Matteo Renzi to tender his resignation. However, the euro quickly recovered as investors viewed the result as increasing the likelihood (and therefore the chances of a successful outcome) of a state rescue of Italian banks. Then on Thursday the ECB announced an extension to its bond buying programme, although at a reduced rate. Overall this was slightly more stimulus than expected. In addition the ECB’s Governing Council made it clear they would increase the programme in terms of size and/or duration should the outlook for growth or inflation “become less favourable.” This led to a sharp sell-off in the euro which was exacerbated when ECB President Mario Draghi emphasised downside risks to the central banks Euro zone growth forecasts.

Meanwhile, investors have been factoring in the prospect of a pick-up in US growth and inflation expectations. This comes on the back of Trump’s election victory and his campaign promises to cut taxes, boost infrastructure spending and slash business regulations. In addition the US Federal Reserve is expected to hike rates later this week which increases the dollar’s attraction for investors.

Upcoming events

It’s a quiet day in terms of economic events and data releases with just the CB Leading Index from the UK and US Federal Budget Balance due out.

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

Tagged: AM Bulletin

Category: AM Bulletin


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