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Stocks, shopping and borrowing all rise
Stocks are firmer on Friday though major indices continue to show indecision as they rotate around the 50-60% retracement of the recent pullback through the second week of June. Economic data remains challenging and in the US at least there are fears about rising case numbers.
US jobless claims were disappointingly high, missing expectations for both initial and continuing claims. Following the surprisingly good nonfarm payrolls report, the weekly numbers didn’t follow through with conviction – initial claims were down just 58k to 1.5m, whilst continuing claims only fell by 62k to 20.5m.
The slowing in the rate of change is a concern – hiring is not really outpacing firing at a fast-enough pace to be confident of a decent recovery. You would prefer to see a greater improvement given the reopening of businesses, and it suggests more permanent scarring to the labour market.
US Covid-19 cases climb, UK retail sales jump in May
Worries about the spread of the disease persist, though second wave fears are not exerting too much pressure as investors start to get used to rising case numbers – remember it’s not cases that count, it’s the lockdown and people’s fear of going out that hurts the economy and corporate earnings. California and Florida both registered their biggest one-day rise in cases. As previously stated, I don’t believe there is the will to enforce blanket lockdowns again.
UK retail sales rose 12% in May, bouncing back from the 18% decline in April as we rushed to DIY stores but are still 13% down on February levels before the pandemic struck these shores. Australia also posted a strong bounce in retail sales of more than 16%.
Will US quadruple witching boost volatility for range bound stocks?
Stocks were broadly weaker yesterday in Europe and the US. Shares across Europe have opened higher on Friday and remain set to end the week up. As per yesterday’s note, the major indices remain in consolidation mode around the middle of the range from the Jun 8/9th peaks to the Jun 15th lows. The S&P 500 finished at 3115, on the 61.8% retracement of the move.
Trading around the 6240 level this morning the FTSE 100 is similarly placed but also flirting with the 50% retracement of the Jan-Mar drawdown. Remember it’s quadruple witching in US when options and futures on indices and equities expire, so there can be a lot more volume and volatility.
UK public debt is now higher than GDP, official data this morning shows. That’s not happened since the 1960s as the nation recovered from the second world war and highlights the damage being wrought on the public finances by the pandemic response. Picking up from the Bank of England yesterday, which increased QE by £100bn, the amount of issuance may require additional asset purchases from the central bank.
Sterling bears eye 1.22 in the wake of BoE decision
Sterling broke to almost three-week lows yesterday, with GBPUSD testing the 1.24 round number support in the wake of the BoE decision. This morning the 50-day simple moving average at 1.2430 is acting as support but having already broken down through the key support levels the path to 1.22 is open again. The euro was also making fresh lows for June, with the 1.12 round number holding for the time being after a breach of the 1.1230 area at the 23.6% of the 2014-2017 top-to-bottom move.
OPEC compliance promises lift oil
Oil is higher, with WTI (Aug) progressing back towards the top of the recent consolidation range close to the $40 level, which may act as an important psychological level. Iraq and Kazakhstan have set out how they will not only comply with OPEC cuts but also compensate for overproduction in May. Other ‘underperforming participants’ have until Jun 22nd to outline how they will compensate for overproduction following Thursday’s Joint Ministerial Monitoring Committee (JMMC). OPEC conformity stood at 87% in May and the JMMC did not recommend extending the maximum level of cuts into August.
Hopes that non-compliant nations will make up for cuts helped raise sentiment around crude and sent Brent into backwardation for the first time since the beginning of March, with August now trading a few cents above September and October contracts.
Stocks come off highs but optimism reigns, OPEC agrees cut
German and Chinese data is taking the gloss a little off Friday’s US jobs report, but the overriding sense in stock markets remains one of remarkable optimism. Speaking of which, pubs in England could reopen by Jun 22nd.
Stock markets surged last week and completed Friday by breaking through more important levels after a very strong jobs report from the US. The nonfarm payrolls report showed the US economy added 2.5m jobs in May, after more than 20m were lost the previous.
This was taken as a reason to buy stocks as it handsomely beat forecasts of 8m jobs being lost. The S&P 500 is now down just 1% for the year and trades with a forward price-to-earnings ratio of more than 23.
The report was of course hailed as a signal of American greatness – the biggest comeback in history, according to Donald Trump – and the White House even suggested it meant less support may be needed for the economy: ‘There’s no reason to have a major spending bill. The sense of urgent crisis is very greatly dissipated by the report,’ said the president’s economic advisor Stephen Moore.
Cue the Federal Reserve this week which needs to keep up the ‘whatever it takes’ mantra – does it see concern in the recent rise in Treasury yields that it needs to lean on, or will it take their recovery as a sign of optimism?
NFP boosts stocks, but recovery will still take a long time
I would like to make three points on this jobs report.
One, an unemployment rate of 13.3% is still very, very bad – 18m jobs lost over two months and a continuing weekly claims count on the rise.
Two, this was the easy bit as furloughed workers came back to their jobs as soon as they could – this seemed to happen a little quicker than had been expected but was, in itself, not the surprise. The tough part is not the immediate snap back in activity once restrictions lift, but recovery to 2019 levels of employment and productivity, which will take much, much longer.
Three, the data itself is flawed. There have been classification errors, so the real rate of unemployment may be much higher, whilst the response rate to the survey was a lot lower than usual.
China trade data, German industry output weigh on European stock markets
European stock markets opened lower on Monday, pulling back marginally from Friday’s peaks as Chinese trade data and German industrial production numbers weighed. China’s exports fell 3.3% year-on-year in May, whilst imports declined 16.7%.
German industrial plunged 18% last month, the biggest-ever decline. But there is little sign risk appetite has really slackened. The FTSE 100 looks well supported now above 6400, having closed the all-important March 6th-9th gap. The DAX looks well supported at 12,700.
Crude oil gaps higher after OPEC meeting
Crude prices gapped higher at the open after OPEC+ agreed to extend the deepest level of production cuts by another month and Saudi Arabia followed this by hiking its July official selling prices by around $6, more than had been expected.
A deal among OPEC and allies, confirmed on Saturday, had already been all but announced last week. WTI (Aug) pushed up above $40 but gains have been capped with this agreement being all but fully priced.
The question will be whether there is appetite among members to extend cuts again. Those countries that have not complied with quotas in May and June will need to make up the difference in July, August and September.
Higher oil prices will encourage US shale producers to reopen taps, whilst it is unclear how well demand is coming back despite lockdown restrictions being lifted around the world.
La settimana che ci aspetta: Aspettative alte per gli incontri del FOMC
Come già avvenuto nell’ultimo periodo, la settimana prossima sarà legittimo aspettarsi una serie disastrosa di dati economici. Analizzeremo le cifre per avere indizi su quanto tempo potrebbe richiedere la ripresa economica, e anche se le proiezioni che prevedono il crollo del secondo trimestre sono terribili come sembrano.
I mercati delle materie prime seguiranno da vicino l’incontro dell’OPEC, anche se le ultime indiscrezioni suggeriscono che gli operatori potrebbero rimanere delusi. Il FOMC potrebbe rivedere le sue proiezioni economiche e fornire qualche ulteriore chiarimento sulle prospettive relative alla policy con uno spostamento verso la forward guidance implicita.
Cosa potranno dirci i dati sulla fiducia in merito al recupero post-Covid?
I trader, gli economisti, le imprese e i policy maker di tutto il mondo sono ancora incerti su quale forma prenderà la ripresa nel post-lockdown. Molti sperano ancora in un rimbalzo deciso, anche se la cosa sembra improbabile.
Tra tutte queste incertezze, il sentiment delle imprese e dei consumatori è un indicatore utile sulle sensazioni che ha chi è sul campo relativamente al percorso da intraprendere. Non sorprende che finora i sondaggi siano stati profondamente pessimistici.
Tuttavia le economie stanno riaprendo, le misure di blocco sono in fase di allentamento e la vita sta tornando ad essere simile alla normalità in molti paesi. Ciò si è tradotto in una prospettiva più positiva, oppure il primo passo ha semplicemente mostrato quanto ci resta da percorrere sulla strada della ripresa?
L’OPEC estenderà i tagli record alla produzione?
La settimana scorsa i mercati petroliferi sono rimasti delusi quando i membri dell’OPEC hanno deciso di non anticipare il vertice previsto per il 9 giugno. Le notizie all’inizio della settimana avevano rivelato che l’organizzazione stava cercando di estendere i suoi tagli record alla produzione per diversi mesi, se non fino alla fine dell’anno.
Queste speranze avevano sostenuto il prezzo del petrolio, ma il greggio e il Brent hanno perso slancio verso la fine della settimana quando le prospettive sono diventate meno positive. Alla fine, sembra più probabile che l’Arabia Saudita e la Russia si accorderanno per prolungare i tagli per un solo mese, anziché ridurre la produzione da luglio. Tuttavia, le tensioni sul mancato accordo tra alcuni membri dell’organizzazione stanno sollevando dubbi sulla probabilità che si riesca a concludere un accordo.
Dati sull’inflazione negli Stati Uniti: è in corso una deflazione sostenuta?
I dati sull’inflazione negli Stati Uniti saranno resi pubblici questa settimana. Di recente l’andamento dell’inflazione è stato impressionante: in aprile è stato registrato il calo più importante della crescita dei prezzi da dicembre 2008, e l’inflazione di base ha subito il calo maggiore dall’inizio delle serie storica nel 1957.
Non sarà un solo mese di forti ribassi dei prezzi a preoccupare i policy maker, ma la più grande inquietudine è che stiamo entrando in un lungo periodo di deflazione. I tassi di interesse sono già al minimo, ma un nuovo rapporto che indichi che la crescita dei prezzi è sotto quota zero potrebbe far sì che i mercati si domandino per quanto ancora il FOMC potrà lasciare le cose come stanno prima di portare i tassi in negativo.
Il vertice del FOMC: i mercati alla ricerca di proiezioni economiche e di un orientamento futuro
Il Federal Open Market Committee annuncerà giovedì le sue ultime decisioni relative alla policy.
Questa volta i mercati spereranno che il FOMC dia maggiori indicazioni. Il vertice di aprile e i successivi verbali non sono stati in grado di fornire alcun quadro concreto sulla possibile evoluzione della politica monetaria futura per rispondere al peggioramento delle condizioni economiche. I membri hanno discusso sulla definizione di obiettivi per la disoccupazione e l’inflazione, e anche per stabilire una data limite prima della quale non aumentare i tassi di interesse.
È probabile che vedremo ritornare il SEP (sintesi delle proiezioni economiche), che era stato abbandonato a marzo perché all’epoca le prospettive sull’economia erano troppo incerte per essere analizzate. Tutto questo, e un passo verso la forward guidance implicita, servirà per fornire ai mercati un quadro più accurato della politica futura della Fed.
La crescita del Regno Unito e i dati sulla produzione daranno forma alle aspettative del secondo trimestre
Una serie di dati relativi al Regno Unito nel mese di aprile ci offre uno scorcio sulle temute prestazioni del secondo trimestre. Viene già dato per scontato che questo trimestre sarà terribile, ma il PIL mensile e le cifre sulla produzione del settore riveleranno se anche gli scenari peggiori sono stati abbastanza realistici.
La media del PIL sul trimestre che termina ad aprile dovrebbe attestarsi attorno ad un -12%, in calo del 2% in aprile. Su base mensile, è previsto un calo della crescita pari al -24%, mentre il calo su base annua si aggirerà intorno al -29%. È verosimile attendersi che la produzione manifatturiera sia calata di quasi il 30%. Siamo nel bel mezzo di quello che dovrebbe essere il momento peggiore, ma ci sono ancora dubbi su quanto gravemente sia stata colpita l’economia.
Cieli sereni per l’offerta basata sul cloud di Adobe?
Con il termine della stagione degli utili, il calendario delle aziende appare decisamente ridotto, anche se il caso di Adobe potrà rivelarsi interessante.
Il software dell’azienda è basato sul cloud, con grande sollievo di molte aziende che si affidano ad esso ma hanno i propri dipendenti bloccati a casa lontano dai loro computer in ufficio. Il fatto che i loro prodotti siano venduti con un modello basato sull’iscrizione potrebbe aiutare l’azienda a mantenere entrate relativamente stabili, anche se come la maggior parte delle aziende è verosimile che Adobe registrerà un duro colpo alle proprie attività nel corso di questo trimestre.
In evidenza su XRay questa settimana
Leggi il programma completo dell’analisi e formazione del mercato finanziario.
|07.15 UTC||Daily||European Morning Call|
|17.00 UTC||08-June||Blonde Markets|
|From 15.30 UTC||09-June||Gold, Silver, and Oil Weekly Forecasts|
|17.00 UTC||10-June||FOMC Preview with chief market analyst Neil Wilson|
|14.45 UTC||11-June||Master the Markets with Andrew Barnett|
Eventi economici principali
Presta attenzione agli eventi più importanti sul calendario economico di questa settimana:
|06.00 UTC||08-Jun||German Industrial Production|
|08.30 UTC||08-Jun||Eurozone Sentix Investor Confidence|
|01.30 UTC||09-Jun||AU NAB Business Confidence|
|09.00 UTC||09-Jun||Eurozone Final Employment Change / Revised GDP (Q/Q)|
|00.30 UTC||10-Jun||Westpac Consumer Sentiment|
|01.30 UTC||10-Jun||China CPI|
|12.30 UTC||10-Jun||US CPI|
|14.30 UTC||10-Jun||US EIA Crude Oil Inventories|
|18.00 UTC||10-Jun||FOMC Rate Decision|
|18.30 UTC||10-Jun||FOMC Press Conference|
|Pre-Market||10-Jun||Dollarama – Q1 2021|
|12.30 UTC||11-Jun||US Unemployment Claims|
|14.30 UTC||11-Jun||US EIA Natural Gas Storage|
|After-Market||11-Jun||Adobe – Q2 2020|
|06.00 UTC||12-Jun||UK GDP (M/M), Manufacturing/Industrial Production (M/M), Construction Output (M/M)|
|14.00 UTC||12-Jun||Preliminary University of Michigan Sentiment Index|
Equities head for strong finish, all eyes on the bond market, NFP jobs report
No V? The lack of a V-shaped recovery may not be worrying stock markets too much, but it is a source concern for consumers who lost confidence over the course of May. Perhaps this was due to the glacial pace of easing of lockdown restrictions and annoyance at the government; or perhaps it was economic – worries about job losses and a big drop in house prices finally sinking in and offsetting the novelty of being furloughed.
Whatever the cause, GfK’s UK consumer confidence index slipped to –36 in the second half of May, down from –34 in the first half and near the –39 printed in July 2008. Meanwhile, Japanese household spending fell even further in April, declining more than 11%. This was the fastest drop in spending since 2001 and built on a 6% drop in March.
Stock markets fell yesterday, pausing what’s been a robust risk-on rally in June, whilst bond yields snapped out of their funk. European stock markets suffered a broad decline. The Nasdaq hit a record intra-day high but ended down 0.7% on the day. The Dow eked a small gain, but the broad S&P 500 index declined 0.34%, though held the 3100 handle after dropping as low as 3090.
European stock markets rebound, eyes on bonds after ECB QE hike
Today, European stock markets rallied back to their highs of the week in the first half hour of trading, with the FTSE rising above 6400 and the DAX at 12,700. Both set to complete a very strong week of gains, with a German stimulus package and ECB bond buying helping to lift sentiment. The DAX’s breach of the 61.8% retracement was a very good bullish signal – since then, in the last week it has cleared the 200-day line and advanced through the 78.6% level, up close to 10% since last Friday’s close. The FTSE is over 5% higher this week.
Eyes on the bond market again: after being somewhat subdued by central bank actions for many weeks US 10yr yields broke out to 0.85% even as stocks slipped up, whilst 2s couldn’t move beyond 0.2%. I think you have to look deeper into what the central banks are doing here as well as the amount of issuance. The Fed is reducing the pace of asset purchases, but investors think it will need to keep a lid on the front end of the curve for a long time by keeping its target rate at zero.
The move in US yields seemed to be a result of the ECB move to increase QE by a further €600bn. I’m not sure we can draw any immediate conclusions from this sharp move in US rates, but it will be very interesting to watch how the Fed responds to this development. Does it seek to influence the yield curve – yield curve control like the Bank of Japan, or does it let bond markets function?
If investors are dumping longer-dated bonds, and driving up yields, it may be that the inflation trade is on – given the tsunami of issuance and central bank intervention, it is logical enough to expect a bout of inflation coming round the bend, even if the immediate pressures from the pandemic are deflationary. Or it may just be a signal that the bond market thinks the worst of the crisis is over and we can chill out a bit – the move up in yields and drop in the Vix under 25, combined with the rally in equities should all be telling us that things are hunky dory.
When you look at the economic data, however, it’s hard to be to very optimistic. One to watch.
US nonfarm payrolls report on tap
The US nonfarm payrolls print is the last big risk event of the week, and seen at –8m, albeit Wednesday’s ADP number was just –2.76m vs –9m expected. Last month showed a massive –20m drop, but it only really told us what we already knew after several weeks of dreadful weekly initial claims numbers. Yesterday, US initial jobless claims fell to 1.9m but the continuing claims number rose 650k from last week to 21.5, ahead of expectations.
The fact that this number is rising is a worry that either businesses are not rehiring very fast, or worse, workers laid off simply don’t want to go back to work because they earn more now being unemployed thanks to the expanded benefit package. One report indicated about 40% of US workers are better off not working.
WTI oil, Brent oil near highs as OPEC again suggests moving meeting
Oil was near the highs with WTI (Aug) above $38 and Brent (Aug) above $40.50 as OPEC brings its off-again, on-again meeting forward from June 9th to June 6th (tomorrow) – at least that is the current understanding.
At various stages this week it’s been taking place yesterday, next week and not at all. Russia and Saudi Arabia want to get this extension over the line before the start of the new trading week. The meeting taking place on a Saturday does raise the prospect of a gap open on Sunday night.
Dollar unwind continues, euro higher on ECB stimulus
In FX, the dollar continues to get hit in an unwind of the pandemic trade that pushed it aggressively higher. EURUSD has advanced with the ECB stimulus which is going to give the politicians a better chance of agreeing to fiscal stimulus as per the EC’s budget proposals.
EURUSD broke above 1.1350 to trade around 1.1370 – eyes on the 1.1450 target still. GBPUSD is up around 1.2640, near to breaching the 200-day moving average, despite worries about Brexit talks going nowhere and the British parliament rejecting any extension of the transition period. The break by the pound above the twin peaks of the April highs opens up the path back to 1.28 and then 1.31, but the 200-day line offers a big test first.
Equities pause after strong gains, FTSE reshuffle confirmed, ECB meeting ahead
Corporate PR is not something that worries traders regularly. Sometimes bad press is bad for the stock – look at Facebook and Cambridge Analytica. Sometimes the optics are just a bit galling for some of us. Take HSBC, which saw fit to promote overtly anti-Brexit propaganda with its ‘We Are Not an Island’ ad campaign.
Now, along with Standard Chartered, it is backing controversial national security in Hong Kong that will destroy freedom in the territory supposedly enshrined by the 1984 Sino-British joint declaration. It’s in tough spot of course – most of its revenues come from Greater China. It needs Beijing on side, but equally it should probably take a moment to put its political views in context next time. Shares are down a third YTD and have halved in the last two years.
Stimulus supports global stock markets – more PEPP from the ECB today?
Meanwhile stimulus everywhere is supporting equity market gains. Germany has agreed a €130bn stimulus package to reinvigorate its economy, while Australia has unveiled its fourth, A$680m programme, aimed at boosting the construction sector. The European Central Bank (ECB) will today likely stretch its pandemic asset purchase programme by another €500bn.
Stocks roared higher on Wednesday, with all the major indices marking another day of progress, but the rally has paused and stocks are off slight ahead of the ECB meeting and US jobless numbers today. The FTSE 100 closed above 6380 as bulls drive it back to the Marc 6th close at 6462. The DAX moved aggressively off its 200-day moving average and has support at 12,400 despite a slight pullback today.
The S&P 500 rose 1.4% to clear 3100 and moved close to the 78.6% retracement level. It now trades with a forward PE of 22.60. The Dow rallied another 500 points, or 2%, before running into resistance on the 200-day moving average around 23,365 on the futures after the cash close. The Nasdaq is only a few points from its all-time high.
Although we are seeing a mild pullback at the European open this morning, the dislocation between markets and the real economy is frankly unsustainable. On that front we have the weekly US jobs number today – we’re looking at continuing claims as the more important number as a gauge of how swiftly the US economy is getting going again. Continuing claims are seen at 20m, down from 21m last week. Hiring should be exceeding firing now, but it will be a long slog back to where things were. Riots and curfews in big metropolitan areas don’t help.
ECB economic projections to detail the Covid-19 hit in Europe
The ECB meeting today will also help guide our view of how bad things are in Europe as we focus on the new staff projections. The ECB has detailed three scenarios for GDP in 2020 relating to the damage wrought by the pandemic: mild -5%, medium –8% and severe –12%.
Christine Lagarde said last week that the “economic contraction likely between medium and severe scenarios”, adding: “It is very hard to forecast how badly the economy has been affected.” Indeed there is actually no way of really know how badly Q2 went. We have various sources estimating pretty seismic falls; INSEE says French GDP will contract by 20% in the second quarter. Estimates for Germany suggest a roughly 10% decline.
The inflation projections will also be closely watched after HICP inflation in May slipped to its weakest in 4 years and outright deflation was recorded in 12 of the 19 members of the euro. Markets will also be keen to see what the ECB Governing Council makes of this development three years after Draghi declared the war on deflation won. Aside from the economy and inflation, the market is happily expecting an increase to PEPP of €500bn.
FTSE quarterly rebalancing confirmed
The FTSE quarterly rebalancing has been confirmed with Avast, GVC Holdings, Homeserve and Kingfisher entering the FTSE 100, and Carnival, Centrica, EasyJet and Meggitt dropping into the FTSE 250. EasyJet and Carnival have really taken a beating since the pandemic hit and longer term their business models are a problem if people don’t go on cruises, or if you enforce social distancing on planes.
Centrica has had a rough old time of things as its UK customer base has shrunk drastically, whilst earlier this year the company booked a number of one-off impairment charges relating to its oil & gas assets and nuclear power plant stake – a process it has since put on hold. Its main appeal of course was a steady income from a traditionally iron-cast dividend, which it has suspended.
Entering the FTSE 250
BB Healthcare Trust
Civitas Social Housing
JLEN Environmental Assets Group
Liontrust Asset Management
Scottish American Investment
Exiting the FTSE 250
GVC Holdings (promoted)
JPMorgan Indian Inv Trust
Mccarthy & Stone
In FX, the dollar has regained a little ground against major peers. GBPUSD failed to make the move stick above 1.26 to take out the Apr double top level and is now looking to test support around the 1.25 round number and the 23.6% retracement at 1.2510. EURUSD has eased off the 3-month highs struck yesterday but looks well supported for the time being at 1.12 – the ECB meeting today will deliver the usual volatility so watch out.
Oil has pulled back amid uncertainty over the OPEC+ meeting. Price dropped sharply yesterday before paring losses as it looked like the meeting would not take place today because of a dispute over compliance. Now we understand Russia and Saudi Arabia have agreed between themselves to extend the deepest level of cuts by another month, meaning the tapering from 9.7m bpd to 7.7m bpd will take place in August.
But they want non-compliant countries to play ball this time and over-comply going forward to make up for it. Whilst I think OPEC and Russia can just about keep the cuts on track, there are clear signs that this deal is a huge ask for many within OPEC and may unravel over the summer if prices hold up. Russian energy minister Novak was on the wires this morning saying oversupply was down to 7m bpd in May and could move to deficit of 3-5m bpd in July.
Chart: Dow runs into 200-day simple moving average
OPEC meeting preview: record production cut to be extended?
Officials from major oil producers were originally scheduled to hold their next (online) meeting on June 9th, but current OPEC president Algeria has proposed moving the meeting forward to June 4th – this Thursday.
Oil traders have taken this as a sign that the cartel and its allies, a grouping known as OPEC+, are eager to act as quickly as possible to keep oil markets stable.
Crude oil firms ahead of OPEC meeting
Crude oil has gained over $0.80, or 2.3%, while Brent oil is $0.90, or 2.4%, higher today.
OPEC’s current output cut is for nearly 10 million barrels per day. It’s the highest level of production cuts in the cartel’s history and equates to around 10% of global demand.
The cut was agreed in the wake of the collapse in oil prices during March. Saudi Arabia, frustrated that OPEC ally Russia was refusing to commit to further cuts to help counteract the shock to demand caused by the coronavirus pandemic, abandoned existing curbs and slashed prices on its own oil exports.
The Kingdom and Russia soon returned to the negotiating table and agreed to the 9.7 million barrels per day cut in May and June, with the production cut reducing to 7.7 million barrels per day from July until December.
But OPEC officials are now in talks to continue with the elevated level of cuts, potentially until the start of September. While some reports suggest that the cuts could remain in place until the end of the year, such a proposal would likely meet with strong resistance from Russia.
Are crude oil and Brent oil heading higher after OPEC meeting?
While oil has edged higher this week on tentative hopes for an agreement on extending the cut, OPEC meetings always carry a risk of disappointment. Markets are showing restraint ahead of the gathering, which is still yet to be confirmed for this week.
While it seems that OPEC producers want to keep the current level of cuts in place, Russian participation remains a key sticking point. It seems the Russians are onboard with something, but there is a risk the final agreement falls short of market expectations.
Get more insight ahead of the cartel gathering with our exclusive OPEC meeting special on XRay – set a reminder now.
Oil prices spike on surprise draw
WTI futures and Brent futures spiked to highs of the day after a surprise draw on US oil stocks. EIA figures showed a 745k barrel drawdown vs an expected build of more than 4m barrels. Stocks at the key Cushing, Oklahoma hub feel by 3m barrels, the first such draw since February. Gasoline inventories fell 3.5m barrels vs 2.2m expected. Distillates continued to build at 3.5m. Refinery inputs averaged 12.4m bpd, which was 0.6m bpd less than the previous week’s average.
WTI (Aug) rallied above $27.80 before paring gains to trade roughly in the middle of today’s range around $27.30. Front month (Jun) oil was up at $26.30. The draw on inventories, particularly at Cushing, will spur hopes demand is coming back as economies reopen and that we are not approaching ‘tank tops’ as swiftly as feared. However there are still risks that at least for the Jun and Jul contracts we see high levels of volatility as we approach expiry.
OPEC updates demand forecast, sources suggest further production cuts
Earlier, OPEC said crude oil demand in 2020 would fall even further than previously thought. In 2020, world oil demand growth is forecast to drop by 9.07m bpd, an adjustment lower of more than 2m bpd from the prior report.
In its monthly report it said the contraction is concentrated in the second quarter and mostly in OECD Americas and Europe, with transportation and industrial fuels affected the most. As such, OECD oil demand is now revised lower by 1.20m bpd while non-OECD oil demand growth was adjusted down by 1.03m bpd.
“Demand contraction in 2020 can be mitigated with sooner than expected easing of government COVID-19 related measures, and faster response of economic growth to the implemented extraordinary stimulus packages,” OPEC said.
In terms of supply, a raft of announcements from OPEC members has pointed to greater cuts than previously estimated. In addition, sources have talked about extending the 9.7m bpd cuts beyond June. I think this mainly reflects huge demand destruction and nowhere to put the crude more than increased willingness to ‘take one for the team’. Meanwhile the cartel believes the collapse in prices will further affect non-OPEC supply. Non-OPEC oil supply in 2020 is revised down further by almost 2m bpd from the previous projection, and is now forecast to decline by 3.5m bpd.
The main revisions of the month are based on production shut-ins or curtailment plans announced by oil companies – including the majors – particularly in North America. Globally, excluding the OPEC++ 9.7m bpd cut, around 3.6m bpd of production cuts have been announced, so far, in response to the lack of demand, low oil prices, excess supply and limited storage capacity. And yet in April, OPEC crude oil production increased by 1.8m bpd from March.
European markets cautiously higher, oil weak despite OPEC deal
After rallying into the Easter weekend, European markets were bit lacklustre on Tuesday but still trading marginally higher thanks to some decent numbers out of China and the continued hope that governments are getting a grip of the crisis. US shares closed softer on Monday, with the S&P 500 down 1%, but this was after the best weekly rally for Wall Street since 1974.
Asian shares rallied overnight after better-than-expected Chinese trade data. Exports fell 6.6% in March, against –14% expected. Imports slipped 0.9% vs –9.5% forecast. With the usual caveats around Chinese government data, these numbers are much better than feared and underpinned broad strength in Asian trade. The Nikkei 225 closed 3% higher, finishing at a one-month high, while shares across China were also up around the 1% mark for the day. US futures are trading higher.
Lockdowns are being extended: The bitterer the pill, the stronger the medicine. At least that is what many governments are hoping for as they extend lockdowns and seek a path out of the mess. France will only gradually begin reopening the country from May 11th, while India’s lockdown is being extended through to May 3rd. The UK seems set to extend the lockdown by another 3 weeks to May 7th. The hope is that the more pain now, the quicker you can reopen the economy. We’ll need it – France’s finance minister Le Maire says GDP will decline 8% in 2020.
Meanwhile in the US, Donald Trump is as belligerent as ever, saying he is working on plans to reopen the economy, despite being the global epicentre of the outbreak and deaths exceeding 22,000. Several state governors are taking steps on their own to do this. The risk lies, as everyone knows, in reopening too soon and needing to close down again. But if the US economy does get moving sooner than elsewhere, we could see stocks outperform too.
Earnings season kicks off today in the US with the big banks. JPMorgan and Wells Fargo get the show on the road. Bank of America, Goldman Sachs and Morgan Stanley report on Wednesday. Investors seem to be expecting heightened volatility around this quarter’s earnings releases, reflecting the deep uncertainty about how bad the numbers will be. Heightened volatility will undoubtedly support trading top line, but we will need to see what effect government support has had on things like impairment charges. And as ever, the real focus will be on the earnings outlook for Q2.
Despite the historic OPEC++ deal to cut output by 9.7m bpd over the next two months and commit to ongoing curbs for two years, WTI has slipped lower since reopening on Monday and is forming a support zone around $22.30/40. Brent is struggling to hold $32.
There is still a lot uncertainty over whether the reduction in output will be enough. Saudi energy minister Abdulaziz Bin Salman said it will be more than the 9.7m headline cut, indicating as much as 19.5m bpd will come out of the market initially. But the commitment still lacks what some think could be a demand crash worth 30m bpd. Whilst there is bound to be a rebalancing in oil markets due to supply coming off, either by design or by default, most think OPEC and allies haven’t done enough to prop up prices in the near term, albeit they do seem to have shown a willingness to prevent a complete collapse as inventory builds threatened to overwhelm the market.
Output in North America is already collapsing. The EIA sees output down 366k bpd in April to 8.71m bpd and a further drop in May to 8.53m bpd. It wasn’t’ long ago US output was around 13m bpd. In Canada the number of active rigs has declined to just 35 from as many as 240 in February. Bank of America says the deal by OPEC will stem the decline in the US – just 1.8m bpd being lost vs a 3.5m without the deal. It predicts demand for 2020 will be down 9.2m bpd, vs a prior estimate of 4.4m. Texas oil regulators could decide today to mandate 20% production cuts.
The biggest uncertainty for oil is how quickly does demand recover in the medium term? Indeed, this is the central question for risk assets in general.
In FX, the pound pushed up to its strongest in a month versus the US dollar. GBPUSD broke clear of the month range yesterday and continues to find near term support above 1.2530. Looking to hold the rally above the 61.8 retracement at 1.25150.The mid-March swing highs around 1.2650 offer near-term resistance to the bulls, as well as the 200-day moving average at 1.2657 . Daily MACD still positive. The UK and EU are trying to keep the Brexit show on the road and are due to set out how they plan to progress trade talks on Wednesday.
Chart: FTSE 100, 1hr, MACD signalling weakness, look for support around Thursday’s lows at 5,677.
UK 100 Cash, 1-Hour Chart, Marketsx – 08.50 UTC+1, April 14th, 2020
Oil leads global market tumble on ‘Black Monday’
The collapse of OPEC+ talks over the weekend tipped markets into chaos on Monday. Traders, already on edge due to the unfolding coronavirus epidemic, were sent fleeing to safety after Saudi Arabia slashed its crude oil prices.
Crude and Brent tumbled over 30%, their worst daily performance since the Gulf War, hitting lows below $27.50 and $31.50 respectively. The Kingdom cut prices for April crude by 30% and stated that it intends to raise its output above 10 million barrels per day. Talks at the weekend saw OPEC and its allies fail to agree new terms for an oil production cut; OPEC+ couldn’t even agree to extend the current level of cuts, let alone deepen the cuts to battle the hit to demand from the coronavirus outbreak.
Saudi Arabia is well-positioned to weather weak prices and Russia claims it can withstand the pressure for up to a decade. US shale oil producers, who have flooded the global market with oil to take advantage of supported prices and are heavily debt-laden, could be in dire trouble.
Global equity markets have been sent tumbling. The collapse in the oil markets, combined with news that the Italian government has imposed travel bans on 16 million people, sent investors running from stocks.
US futures went limit down after triggering circuit breakers during the Asian session. After a 5% drop the Dow was indicated to open down over 1,300 points, but based upon the ETF market – which is not suspended – the Dow was looking at a drop of 1,500. Asian stocks took a hammering, with the Hang Seng and the Nikkei both closing over 1,100 points lower.
European equities sank as well, with the DAX, and Euro Stoxx 50, all off around 7%. The FTSE 100, also down 7% to test 6,000, was trading at levels not seen since the immediate aftermath of the Brexit referendum.
Stocks most at risk
While stocks across the board tanked, several industries were hit harder than others.
Oil majors slumped. BP (LSE) tumbled 20%, ExxonMobil dropped 17%, Chevron tumbled 16%, and Occidental cratered 38% – all in pre-market trading on the NYSE – while Royal Dutch Shell fell 14%.
Airlines were hit hard as well after the price slump left them sitting on big losses after hedging oil at higher prices. American Airlines, Delta Airlines, Southwest Airlines and United Airlines were all down 5-6% in the pre-market.
Coronavirus fears weighed on tech stocks. The FAANGS all recorded losses in the range of 6-7%, but cruise ship operators were hit harder. The US government warned American citizens not to go on cruises. Carnival – the company that owns many of the ships currently stranded due to on-board quarantines – dropped 10%, Norwegian Cruise Lines tumbled 11%, and Royal Caribbean Cruises slumped 12% – all before the markets opened.
New record lows for US bonds
The flight to safety drove the yield on US government debt down to record lows. Yields move inversely to prices. The yield on the US 10-year treasury bond fell to 0.32% while the yield on the 30-year treasury note fell towards 0.7%, breaching 1% for the first time in a year.
Gold traded around $1,673 after hitting $1,700 over the weekend.
Cryptos join in with global market chaos
The cryptocurrency market is no stranger to volatility. The world’s largest cryptocurrencies were down around 10-15%, with Bitcoin falling below $8,000.
OPEC Preview: oil in a bear market
December 5th, 2018
Production cut expected
OPEC and its allies convene in Vienna this week with expectations firmly favouring a supply cut in order to rebalance the market after the ramp in production seen ahead of the Iran sanctions. A cut in excess of 1m bpd seems assured, although it could be significantly higher than that. Anything up to 1.4m bpd seems anticipated, and therefore it may take more to significantly rally the market. A commitment to a longer and deeper cut will be required. Wire reports on Tuesday suggested a cut of at least 1.3m bpd is being worked on.
The meeting of the 26 OPEC and non-OPEC nations comes at a key moment for the market, with crude prices having slumped by around 20% or so over the course of October and November. The pace of that decline was startling and has undoubtedly forced a rethink of the increase in production we saw over the summer, particularly on the part of Saudi Arabia.
It’s not been alone: Saudi Arabia, Russia and the US have all been opening the taps this year. OPEC production in October hit the highest since December 2016 and was broadly flat in November. OPEC pumped 33.31m barrels in October, up 390k barrels from the month before. Saudi Arabian output is booming, climbing to a record 11m bpd. Undoubtedly this ramp cannot continue if the market is to rebalance given the declining expectations for demand growth.
Russian oil output hit a post-Soviet record high of 11.41 million bpd in October. However, this had dipped to 11.37 bpd in November. US production has surged to a record 11.475m bpd in September and is seen reaching 12.1m bpd next year (EIA). US production is now up 21% in the last year and the latest rise could mean more upward revisions to forecasts.
Donald Trump has repeatedly berated OPEC and others for trying to force up prices. Whilst there is pressure on the US-backed Saudi regime to acquiesce to demands to do nothing that would help lift prices, OPEC and its allies are set to push ahead. Although there are competing factions and priorities, no member wants a repeat of the collapse in prices four years ago.
US shale casts a long shadow. In particular, we must look at OPEC needing to act now to prevent a further squeeze on prices as more pipeline capacity comes on stream next year that would mean more US crude on the world’s markets. OPEC members are well aware that supporting prices is good for US shale producers, but they seem unwilling to go head to head again.
The question it leaves us with is to what extent OPEC is losing its relevance. Qatar may be a small player (approximately 2% of OPEC production), but it could suggest smaller suppliers are starting to lose faith in the Saudi-led cartel. Could it be the first domino? We must look at it in context of the regional powerplays. Whilst it may indicate a lack of consensus among members about cuts, it would be more likely to reflect the political tension between Qatar and its neighbours, in particular Saudi Arabia, which along with Egypt, the UAE and Bahrain is maintaining a trade embargo on the country. It would seem sensible for Qatar to distance its energy policy as much as possible from Saudi influence, particularly given its focus on natural gas over oil. It seems unlikely that Qatar’s decision will cast much of a shadow over the meeting or prevent an agreement.
Speculative positioning has turned south. CFTC figures show net longs down to their lowest in a year, down to 348k contracts by the beginning of November from 739k in February.
On the Brent daily chart, we see a firm bounce at the start of the week, with Brent breaking the downtrend resistance level and looking to push up to the 23.6% retracement of the recent down move at around $64.65. However yesterday’s failure to maintain any bullish momentum suggests there is little appetite at present for a pre-OPEC rally.