OPEC risks disappointment, US jobs report on tap

Forex
Morning Note

OPEC and allies are poised to formally agree to a policy of deeper production cuts, but there’s not a lot for bulls to be glad about. The 500k bpd increase to 1.7m bpd sounds good but only reflects existing over-compliance, led by Saudi Arabia, which has been pumping less than it is allowed, and it’s going to be short-lived. The deal looks at the moment to only extend through the first quarter of 2020. If OPEC doesn’t extend the curbs through to the end of next year it could act as a de facto loosening of supply that markets would punish with lower prices. There’s a real risk that even with deeper cuts OPEC fails to live up to expectations. We could of course see another meeting soon after this one to agree an extension – critical to today’s formal announcement therefore is whether there is any extension beyond March 2020. And we’ll wait to see if any arm-twisting by the Saudis forces Iraq and Nigeria into complying – but why would they bother now when they’ve not complied thus far?

Oil prices are reflecting a tinge of disappointment with WTI softening to $58.40 after hitting a high above $59 yesterday. Brent meanwhile has eased back off the $64 level to trade around $64.30 – importantly on Brent we failed to beat the November high, a sign that the market isn’t buying into this deal. The 200-day moving average remains a hurdle a little above $64. Prices for WTI and Brent are simply back to where they were before the attacks on the Aramco facilities in September. It’s all got a buy the rumour sell the fact look about it. But we must stress that if OPEC accompanies the deepening of cuts with an extension, at least to the next scheduled meeting in June, but perhaps until Dec 2020, prices could enjoy more upside.

There was good news for Saudi Arabia as Aramco priced well at the top of the range and raised $25.6bn in its IPO. A record listing values the company at $1.7tn, but we shall see where the shares head on day one. Regional and domestic investors have come good but the worry is that the big foreign institutional demand has not been there – if you’re just recirculating oil money among Arab states and Saudi households (levered) then what good has this float actually done?

In equities, Asia has been broadly higher amid more upbeat sentiment around trade talks.

Equities stumbled in Europe yesterday but the good old cocktail of trade optimism and a Friday mean they are pointing higher. However some very nasty German industrial numbers have taken the shine of European stocks ahead of the open.

Wall Street was steady with the Dow and S&P 500 trading mildly higher yesterday. Futures indicate more gains today. Trade will be the deciding factor.

After the usual pump and dump comments from Trump saying that trade talks are ‘moving right along’, we got more concrete news on trade as China agreed to cut tariffs on some pork and soybeans from the US, although it did not mention the quantities involved. This could be due to necessity from a shortage of pork because of African swine fever, more than desire to get a trade deal done, but nevertheless it’s pointing in the right direction. Nevertheless, the toing and froing of trade talks continues – we’ll be waiting for any fresh signal and will only believe a deal once it’s been served up on the table, not when the chefs say it’s in the oven.

In FX, the US jobs report is the big set piece event. A very weak ADP reading this week has forced some to revise forecasts for the NFP, although as always stressed, the ADP number is not always a reliable predictor for the NFP. Consensus is 180k but this is affected by GM workers returning. The three bears likely won’t be happy – expect more low unemployment, which is seen at 3.6%, and decent wage growth (3%). But markets are in a reasonable nervous frame of mind right now – a big miss could signal weakness in the US economy  – bears are sniffing around for anything that points to recession.

Last month’s reading showed US labour market strength remains intact: we saw a strong beat for the US labour market report with nonfarm payrolls up 128k in October, well ahead of the 85k expected, whilst there were upward revisions to the prior two months. The August print was revised up 51k to 219k and the September number was hiked by 44k to 180k. The 3-month average at 176k against the 223k average in 2018

Momentum behind sterling remains solid. GBPUSD has continued to drive higher and has consolidated around 1.3160 – perhaps resting for the assault on the May high at 1.31750. Looking at the charts it’s just one bull flag after the other, but possible 14-day RSI divergence should be watched. A debate tonight between Boris Johnson and Jeremy Corbyn may produce some moves – the election is Johnson’s to lose so he simply needs to avoid any booby traps. Polls as ever need to be heeded – latest from BritainElects shows the Tory lead down to just under 10pts. At present it does not look like the gap is narrowing quickly enough for Labour to mount a serious challenge, but upon such complacency have many best laid plans gang aft agley.

The euro remains steady with EURUSD holding onto 1.110, despite some very nasty looking German industrial numbers – down 1.7% vs +0.1% expected. The collapse in German manufacturing is staggering. Whilst PMIs are indicating recovery, these numbers suggest the very opposite. USDJPY has steadied above 108.60 having found decent support on the 50-day moving average.

Elsewhere, gold was down at $1473 having encountered firm resistance on the 50-day line at $1482. At send time gold was trading at $1473, with November lows sitting at $1445.