- German IFO data painted more optimistic picture
- US shale oil producers are facing problems and that could support the oil price
- Gold traders are looking towards the FOMC minutes
US Futures are trading higher as investors are picking up momentum from Europe. The German IFO business confidence is one of the most closely watched data in the Eurozone and the number shows that the confidence among companies is more positive than ever. There has been some concerns especially if you look at yesterday’s data (manufacturing and services PMI data) that there may be another wave of economic slowdown activity hitting the country but the soft data released today has defied those predictions. This has provided fresh fuel for the euro currency which is already trading in a strong uptrend but we are still below the 2015 resistance which is 1.1714.
While the ECB’s president hawkish comments are still very much behind the euro rally, but some ECB policy committee members tried to calm the markets that tapering is not imminent. Not that Draghi said anything substantial last week which can justify the move in the euro, but the market is determined to keep their own version which is that the days of loose monetary policy are over.
The dollar index has been caught between a rock and a hard place in light of the recent Trump-Russia scandal. Jared Kushner who claims that his actions did not cross the line, left a lot to be desired with traders preparing for further losses in the dollar as the investigation continues.
On the healthcare front, no news is no good news in this case. Trump’s fiscal agenda has a mountain to climb and with no progress on the horizon for the healthcare reform, we expect big question marks to arise in regard to Trump’s ability to deliver.
What is most worrisome though is the President’s unpredictable nature. It is no surprise that the IMF downgraded the estimates for the U.S. economic growth over the next two years to 2.1% each. The same scenario is playing out in the UK, with growth expectations reduced to 1.7% on the back of Brexit uncertainty
Oil
Something which you can cheer about when it comes to the oil price is not what they OPEC and non OPEC players said in their conference yesterday in St Petersburg. It is the increase in the declining rate of major US shale basins which should not go unnoticed. The reason for that is very simple, the rates are rising and the crude price is strong enough to encourage investors to throw their money at them. The cost simply exceeds benefits and currently some players are producing oil which is well below their breakeven cost but they have to pump that in order to pay their overheads and financing cost.
During the big oil price crash, a vast majority of investors were apprehensive about their capital return and guess what, those concerns are still here and it is only a matter of time before they will become more prominent given the gradual rate of interest rate hike which the Fed is trigging.
If you need the evidence of this, just look at Anadarko which brought these issues under the spotlight when they missed the earning forecast badly. The expected number was a loss of 33 cent when the number reported came in at 77 cent for the Q2. In order to survive in this tough environment, the only way out of this is to cut your expenses and new investments.
Gold
The precious metal is hitting highs on the back of political uncertainty over in the US. But the event which matters the most is the upcoming FOMC meeting. Given that there is no press conference after the event, we do not believe that there will be something major out of this. However, we are expecting more details on the Fed scaling down the size of their balance sheet and that would move the gold price. Overly hawkish stance would create uncertainty because everyone is worried about one thing which is what if the Fed is wrong. One wrong decision is going to change the game.
