Oil spikes as Iran responds, Trump to speak

Morning Note

Geopolitics will dominate the session on Wednesday as traders grapple with the US-Iran fracas. Geopolitics always means uncertainty – we simply cannot know what will happen next, so look carefully at positions as markets are liable to knee-jerk moves.

Oil and gold spiked and stocks fell as Iran fired 22 surface-to-surface missiles at two US airbases in Iraq, in direct retaliation for the killing of Soleimani. So we know the Iranian response at last – this could actually reduce uncertainty unless we see escalation.

The next move lies with the US. Iran said the attacks were ’concluded’ and said it is not seeking a broader conflict. “We do not seek escalation or war,” Javad Zarif, the Iranian foreign minister tweeted in English. The implication is that they will not carry out further reprisals and wish to draw a line under the situation. Frankly they’ve barely scratched the US with this attack – it appears like nothing but a way to save face. Threats to hit Dubai and Haifi are frankly ridiculous.

However Donald Trump has said previously he would respond to any reprisals with his own. The president plans to address the media on Wednesday morning eastern time.

Following the attacks he tweeted:

“All is well! Missiles launched from Iran at two military bases located in Iraq. Assessment of casualties & damages taking place now. So far, so good! We have the most powerful and well equipped military anywhere in the world, by far! I will be making a statement tomorrow morning.”

The president has a chance to de-escalate – but does he want to? My inclination remains that a broader conflict will be averted, largely because Iran does not want to be lured into a regime-changing conflict before it has the bomb, even if that’s what the US is seeking. But increasingly there is the risk of miscalculation as neither side wants to back down.

Meanwhile, a Ukrainian passenger jet crashed shortly after take-off in Tehran with all 176 souls lost – not sure what this means or whether related. It was a Boeing. The coincidence is too much to ignore – it was surely caught in the crossfire?

Oil surged as the Iran strikes broke but has pared gains. WTI jumped to $65.60 but has since retreated to a little above $63. The May 2019 peak at $66.60 remains intact for the time being. Brent rallied north of $71 but subsequently fallen back to $69. Should this escalate quickly into a broader conflict there is a risk of supply disruption in the region that could send Brent to $80 a barrel. However, we must as ever stress that the global oil market is simply not exposed to shocks like it once was.

Gold surged to new 7-year highs at $1610 before easing back to $1590. Net longs are already stretched – is there any more this can run? As ever keep an eye on US real yields. Against this backdrop of rising geopolitical tension oil and gold are making new highs and higher lows for the time being. Gaps need to be filled quickly or they don’t get filled.

US stock market indices weaker on Tuesday handing back much of Monday’s rally, and we will see the impact of the Iranian reprisals dent European stocks on Wednesday. US futures have dipped but erased most of the initial drop following the strikes. Dow last trading around 28445 having dipped under 28150.

We need this US-Iran stuff to go away to focus again on the data. US services ISM yesterday was v good but Europe is still not swinging. German factory orders were below expectations coming in -6.5% yoy vs expected -4.7%. But the Ifo momentum points to turnaround coming.

In FX, GBPUSD has held the key support around 1.3140 to trade at 1.3150. Brexit comes back on the agenda but the exit is now a done deal. EURUSD is steady at 1.1150 but the failure to surmount 1.12 raises downside risks near-term.

US, China jawbone on trade, but markets aren’t taking the bait

Indices

In a remarkable show of restraint, markets have remained in the red despite positive noises on the prospect of reopening trade negotiations between Washington and Beijing.

US and Chinese officials are trying to sound positive on the odds their nations can reach an agreement on trade. It’s just the latest in a cycle of: sound positive > negotiate terms > back away from a deal > raise tariffs.

But this time around it seems markets are becoming wary of the rhetoric. Today, major indices are mostly in the red. Even the cautious optimism of yesterday’s early rise was quickly wiped out later in the New York session as traders thought twice about bidding up the major indices.

It could partly be exhaustion. The past month has seen the Dow gain or lose over 800 points in a single session on more than one occasion. 1,000 point swings are unusual, but not rare for the Hang Seng these days. Gold has seen movements in the region of 2%, while volatility for oil has produced swings of 5% in both directions.

The mystery phone call

On Monday, China’s top negotiator tried to calm fears ignited by Friday’s new tariff announcements. Vice Premier Liu He stated,

“We believe the trade war escalation is bad for China, bad for the United States and bad for the interest of the people in the world. We are willing to use a calm attitude to solve problems by negotiations and cooperation.”

Trump later claimed that “China called last night”, and strengthened the message by telling reporters at the G7 summit that “This is a very positive development for the world”. He later claimed “I think we’re going to make a deal”.

Asian markets trimmed losses and US and European stocks edged higher. But traders weren’t convinced.

Trump’s claim that there had been a phone conversation between officials from the US and China kept markets on the back foot. China’s Commerce Ministry declined to comment when asked by Reuters for confirmation that a call had taken place. While US Treasury Secretary Steven Mnuchin said the two sides had been in contact, editor of China’s state newspaper the Global Times, Hu Xijin, claimed that negotiators haven’t talked recently.

After being burned before, markets need something more concrete

It’s not that hard for an official to say that a trade war is bad and they don’t want one. Without confirmation of the key phone call, that’s all markets have to go on.

The major indices today are largely in the red, with the DAX heading towards a 1% loss and US futures pointing to a lower open. Traders clearly aren’t falling for the jawboning – if Trump or Beijing wants to calm market fears they’re going to have to offer up something a lot more solid.

Trump’s London calling, US-China trade war worsens, oil smoked

Forex
Morning Note

Global stocks were down by around 6% in May – can we get a better June? The runes are not looking great. 

Futures indicate European shares are lower today as trade tensions continue to mount and investors exhibit greater fear about the global economy and the risk of recession. Asian markets were generally lower after a big selloff on Wall Street on Friday that saw the S&P 500 decline 37 points, or 1.32%, to finish at 2,752.06, below its 200-day moving average. FTSE 100 held the 7150 level, but this is likely to get taken out today. 

Trade fears are heating up 

The trade war is not cooling down; in fact, it looks like the rhetoric is heating up and further escalation seems likely. China is raising tariffs on $60bn of US goods in retaliation for tariffs, coming up with its own blacklist of foreign companies, has accused the US of resorting to ‘intimidation and coercion’, and begun an investigation into FedEx. And the Chinese defence minister says if the US wants a fight, they will ‘fight to the end’. No end in sight, and the chances of a G20 détente are slim.

Futures 

US stock futures were lower along with oil amid growing fears about this trade setup. Nothing like progress has been seen re Mexico, and now the market is dealing with reports that the US has been eyeing slapping tariffs on some Australian imports, As we noted last week, the escalation last week with the attack on Mexico – especially as it represented a weaponization of trade to pursue non-economic policies – represents a major turning point and could bring others into the fray. Again, the EU could come under fire soon. 

PMI day 

Data overnight has been mixed but still indicates slowdown. China’s Caixin PMI read 50.2, unchanged from a month before but a little ahead of expectations. Japan’s PMI has gone negative, moving to 49.8, signalling contraction. Japanese manufacturing output down for 5 months in a row, while new export orders fell for the 6th straight month. Japanese equities were down sharply overnight. UK PMI at 09:30, with the ISM numbers for the US due at 15:00. 

London calling 

Trump heads to the UK today – unfortunately he’s meeting a lame duck PM so we can’t expect much of importance. There will be lots of talk of a trade deal with the US post-Brexit. Harder Brexiteers in the Tory leadership race are likely to be emboldened. Expect the no-deal talk to increase.  

Sterling is sure to be under plenty of pressure until the leadership race is clearer. GBPUSD remains anchored to 1.26 for now, having made fresh multi-month lows last week. However, Friday’s bullish hammer reversal may provide the basis for a short-term rally. Just a hint that the pound is oversold and could be ready for a wee bounce. 

Oil smoked, gold higher 

Oil has taken a beating as markets worry more about a slowdown in global demand than supply constraints. Brent has declined by 10% or so in just a couple of days and is holding on $61, while WTI is clinging to $53. Speculators are liquidating long positions wholesale, with Friday’s COT report showing net longs down by 40k contracts. Net long positioning has fallen by about a fifth (100k contracts or more) since the late April high at 547.4k. 

Stockpiles are at their highest in two years. Speculative long positions continue to be cut. Supply uncertainty is losing out to demand uncertainty. Simply put, with OPEC and co curbing output, there is ample excess capacity in the market should it be needed. 14-day RSI and 20-day CCI suggest oversold and ready for a bounce, but this is like trying to catch a falling knife. 

Gold meanwhile is picking up safe haven bid as this decline is not just about valuations but about big fears for the global economy. The easing off in the US dollar has also supported gold. Having broken $1300 gold was last around $1310, with next target $1324.

FTSE rebalancing etc

Finally, there’s a fair bit of chatter about the FTSE rebalancing – will Marks & Spencer survive in the 100? Will JD Sports be promoted? I wouldn’t get too worked up about it all, even if it’s good sport. EasyJet likely to go – shares have been hammered but the business is tightly run and it’s always been one of the smallest in the FTSE 100. MKS lucky to survive with only the rights issue saving it.

Kier – warning on profits – going from bad to worse after the rights issue flopped.  

Astra – hails Lynparza pancreatic cancer drug trials success 

William Hill – bid rumours are doing the rounds 

Dignity – says it welcomes Treasury/FCA proposals  

Morning note: Equities pressured on tough talk on China trade, RBA holds

Forex
Morning Note

US equity markets pared losses yesterday, with the S&P 500 declining by around half a percent to 2,932.47, having been close to the 2900 handle again. 

Rhetoric from the US side has shifted markedly in the last two days. Having seen progress and a good direction to productive discussions, relations have soured. 

Tweets from Donald Trump over the weekend saying he would raise tariffs on $200bn in imports from China as early as Friday did the main damage to risk sentiment, sparking a selloff in equities. Following this the Robert Lighthizer and Steve Mnuchin said China had reneged on its commitments and painted a very downbeat picture of the talks. This hit trade sensitive stocks after-market and will keep the downwards pressure on equities. 

Quite where this leaves us is hard to say. There is a sense that the US is working extremely hard to extract last-minute concessions from China ahead of a planned visit by vice-premier Liu He. That visit has been confirmed – he is to visit the US May 9th-10th. Equity futures in Europe rose on the news of the Chinese visit still being a go, but risks remain skewed to the downside today it would seem. 

Just talking tough?

Will that be enough to avert the tariffs being raised on Friday is unclear, but at least it means the two sides are continuing to talk and a deal is still possible. However, we don’t know if this is a last-ditch rescue mission to save talks or something that moves talks on in a more substantive way. The optics suggest the former, but one cannot but sense that Mr Trump is playing us a little. He may well be making a deal seem further away in order to make the achievement seem all the more impressive when it comes.

The market has been juiced by expectations the US and China would do a deal, combined with a much more dovish sounding Fed. Those two key planks are what the ATHs rest upon – remove one and we should expect more downside.

RBA holds rates before Australian elections

Elsewhere, in the FX space, the RBA chose not to cut rates, leaving the benchmark at 1.5% again. It was about 50/50 whether the central bank would cut or stick, and it seems that for now, with enough evidence that the slowdown can be blamed on transitory factors, the RBA is prepared to wait and see before easing. Also, with the election looming, the RBA probably felt it wise to wait. 

We’ve seen global central banks pivot from their tightening stance, but markets have just been a tad quick in calling the new easing cycle – the Fed last week and the RBA today confirm that it’s a done deal.  AUDUSD spiked to regain the 70 handle – it may well now keep in a range between 0.7030 and 0.7060, the narrow band it was in for the last week of April.  

GBPUSD remains supported above 1.31 but remains susceptible to Brexit news flow again. Despite all the jawboning, there is little evidence that Labour and the Tories can do a deal. Whether this gaping chasm between the major parties forces the UK towards a second referendum, General Election or a hard exit is still unknown.  

Finally, a word on Bitcoin – the crypto market remains bullish and Bitcoin futures are moving rapidly towards the $6,000 level. This could attract some technical interest as it would mark the clear move out of the bottom formation, whilst momentum traders may start to pile in on the back of it.

OPEC Preview: oil in a bear market

Week Ahead

OPEC Preview

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.

Trump factor

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.

Qatar leaves

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.

Technical picture

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.

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