OPEC risks disappointment, US jobs report on tap
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.