It has been another volatile and undecided trading session yesterday.
OPEC did cut its oil production target by 2 million barrels per day. It was the biggest cut since 2020, it was expected, it saw a morose reaction by Joe Biden – who said it was ‘shortsighted’, but a well better enthusiasm than what I expected by the oil bulls.
The barrel of US crude ended the session 1.90% higher, yet, the 50-DMA offers haven’t been cleared just yet.
The oil bulls’ camp focus on the restricted output due to capacity contraints, the OPEC’s push to keep prices high, the Russian threat that there will be less Russian oil due to the European sanctions that include a price cap on Russian oil, the gas to oil switch due to the Ukrainian war – which increases demand for oil, the upcoming winter, the fact that we haven’t heard more about the Iran-US nuclear deal, and the expectation that China will recover and demand more oil at some point.
The skeptics, on the other hand, point that OPEC did announce a cut of 2mbpd yesterday, but many OPEC countries have been failing to meet their quotas recently due to capacity restrictions, and that in reality, the real impact of OPEC decision should be a fall of less than 2mbpd. And more importantly, the bears outweigh the fact that the world has stepped into an aggressive central bank tightening cycle, and that the recession worries, and prospect of lower demand should keep the upside in oil prices limited.
WTO warns
The World Trade Organization gave a scary forecast for the global trade next year. The WTO raised its trade growth estimate from 3 to 3.5% for this year, but they slashed their expectation for next year to 1%, from around 3-4%. They said that ‘major central banks are already raising rates in a bid to tame inflation but overshooting on tightening could trigger recessions in some countries’. They added that their forecasts have a high degree of uncertainty as they don’t know how hard the central banks would push, and how long the war in Ukraine will last. But some countries will suffer, and it’s not going to be the emerging markets only. The Eurozone and the UK economies are also on the chopping block, while the US economy is… actually doing not too bad on the trade front, despite the STRONG US dollar.
The US trade deficit continues falling thanks to a visible surge in exports, as the US is exporting plenty of energy to Europe and allies to replace their Russian supplies.
Where to?
Yesterday, the investor sentiment was rather bearish. The major indices were under a decent selling pressure, following a strong two-day rally. Therefore, it wasn’t a surprise to see them give back a part of the early-week gains. Yet one giant options transaction is apparently the reason why we saw a U-turn in the US session, and help the S&P500 erase a 1.8% decline. The index closed the session 0.20% down only, while Nasdaq finished almost flat at 11573 mark, and the Dow Jones closed above the 30’000 for the second day.
The data from the US was not very mood-friendly, but it was ok. The ISM services index showed a faster than expected expansion in the US services sector, and the ADP report printed a slightly higher number than the expectations. It showed that the US economy added some 207’000 jobs last month, versus around 200’000 expected by the market. Both figures did not match the idea that the Fed would slow its rate hikes, but the market reaction remained rather mild. Now all eyes are on Friday’s NFP number, and wages growth data.
Dollar rebounds, again
In the FX, the dollar index tested the 110 support for the second day but failure to clear it is now sending the dollar higher this morning. The US yields also rebound, as the positive impact of the Bank of England (BoE) intervention in the British sovereign markets is now fading.
As a result, the advance in EURUSD remained capped below parity, and the critical 50-DMA, and Cable is back to 1.1350 after having tested the 1.15 resistance this week.
On the political front, Liz Truss said her government remains ‘on course’ for the huge spending that they are about to throw out, and it is highly unlikely that the £2 billion concession on high earners’ tax cuts would do anything to improve the investor mood.
But the good news is, she will certainly abandon the idea of going after the BoE for now, as she well understood that shooting the BoE down would cost her big; ff the BoE wasn’t there to save the day last week, she would be in a bigger trouble today. So, Liz Truss will back the BoE’s authority to set interest rates independently, and the BoE will unlikely hesitate to hike the rates by more than she would love to. That should help keeping sterling’s head above water, for now.
