Crude Oil Crushed Again

Originally published by AxiTrader

Key Takeaway

Oil's collapse continued but it bounced of important support. The moves this week come after the market adjusts to the reality shale is back and OPEC’s plan to drive prices higher by tightening the market is not as effective as many hoped.

On central bank front, Mario Draghi made the smallest possible change last night and made a point of signalling he’s still “whatever it takes Mario”. But the shift that he, and his colleagues on the ECB’s governing council, made was an important one in highlighting how different the global economic backdrop is now compared to the middle of last year.

Upgraded inflation forecasts and changed language from the ECB are signs the conversation is changing in Europe as it has at the Fed. That helped the euro which is up around half a percent against the US doll and substantially more on some crosses. Germany 10s rose 6 points in the wake of the ECB’s decision while US 10s are back at this important 2.6% level.

Elsewhere on forex markets sterling is a little stronger, the Yen is finally making sense with USD/JPY back near 115, and the Australian, kiwi, and Canadian dollars are all under a little pressure again. The Aussie is clinging to 75 cents after an overnight low of 0.7492.

Gold and copper also remain pressured and US stocks are dipping back into the red as I write.

What You Need To Know (with a little more detail and a few charts)

• S&P 500 +.22 (0..00%) 2859 (7.31 am Sydney)
• Dow Jones Industrial Average +6 (0.03%) 20861
• Nasdaq 100 -3 (0.05%) 5,834
• SPI 200 +2 (0.1%) 5,754
• AUD/USD 0.7507 -0.27%
• Gold $1202 -0.45%
• WTI Oil $49.66 -1.23%

International

• All in all it was an important signal that the conversation is changing at the ECB and that will have implications for the Euro over the medium term.

• Draghi is still worried about the lack of trend in underlying inflation and the ECB expects headline inflation to print 1.7% this year up from an earlier estimate of 1.3 percent, and 1.6 percent next year – up from 1.5% previously. The ECB sees prices rising an unchanged 1.7 percent in 2019. But Draghi said he stands ready to act if necessary, “If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the programme in terms of size and/or duration”.

• The ECB took out the phrase which referenced their readiness to act further and aggressively if necessary Draghi said “basically to signal that there is no longer that sense of urgency in taking further actions ... that was prompted by the risks of deflation. That was the assessment of the Governing Council”. Crisis averted.

• Draghi. It was a subtle shift but an important one because even though the ECB president and his governing council keep their guidance on interest rates and QE relatively unchanged their upgraded economic forecasts for the EU show that the worst of the Euro crisis looks to be behind the 27 nation bloc

• Bill Gross says traders need to be careful with this Trump rally. In his latest newsletter Gross said “Don’t be allured by the Trump mirage of 3-4 percent growth and the magical benefits of tax cuts and deregulation”. And he gave a dire warning about the state of the global economy saying “The US and indeed the global economy is walking a fine line due to increasing leverage and the potential for too high (or too low) interest rates to wreak havoc on an increasingly stressed financial system. Be more concerned about the return of your money than the return on your money in 2017 and beyond”.

• That last comment is the classic bond investor – which Gross is – speak for what investors need to focus on. In my experience the worst times in markets come after bond investors forget this and start chasing return on their money. Are we there at the moment? I’m not sure but Gross is clearly worried about global indebtedness. He said “In the U.S., credit of $65 trillion is roughly 350 percent of annual GDP and the ratio is rising. In China, the ratio has more than doubled in the past decade to nearly 300 percent. Since 2007, China has added $24 trillion worth of debt to its collective balance sheet. Over the same period, the US and Europe only added $12 trillion each.” His point? “our highly levered financial system is like a truckload of nitro glycerin on a bumpy road. One mistake can set off a credit implosion where holders of stocks, high yield bonds, and yes, subprime mortgages all rush to the bank to claim its one and only dollar in the vault”. I guess we’ve all been warned – AGAIN.

• And speaking of bonds, and Gross, US 10years are on the cusp of a massive event. At the moment the rate on the 10-year is sitting at 2.596% as we wait for non-farm payrolls tonight. What's important about this is that the rate hasn't closed above 2.6% - on my read of the charts - since September 2014. Gross said a month or two back that 2.6% was the key level to watch and I agree with him - especially if we see a weekly close tonight above 2.60% after non-farm payrolls.

• Chinese consumer inflation undershot expectations by a mile yesterday with a print of just 0.8% yoy. The PPI recovery continued with a print of 7.8% yoy but it’s the dip in CPI that is the one to watch. Food prices were a big part of this – which is good – but CPI has been a pretty good indicator of the underlying economic activity in China. So as I say…something to watch.

• Elsewhere it’s worth noting that an additional 400 US Marines are joining the fight with US-backed rebels to take Raqqa

Australia

• If Australian traders want to have a day off today is a good day for it. US markets are slipping again, but only marginally, and the real action is going to happen after 12.30am tomorrow morning when US non-farm payrolls are released.

• As it stands after yesterday’s 18 point fall SPI traders have moved from -8 to +2 in the past 30 minutes as the US market recovered a little.

• That’s probably reasonable but in SPI terms the market is sitting just above a nice little uptrend which could open the way for a big fall if it breaks. That level 5734 is the trendline of a wedge which stretches back to the low around 5650 earlier this month.

Forex

• Chatter about next week’s G20 communique is in the market once again. Specifically that’s because the draft seems to have watered down commitments to avoid competitive devaluations, and allow flexible but stable exchange rates in favour of language which shifts the focus onto “excessive global imbalances”. That’s important in the context of Peter Navarro as a trade negotiator and it’s also important for the overall Trump administration’s attitude toward the US dollar.

• Listening to Bloomberg surveillance yesterday I heard an interview with commerce secretary Wilbur Ross who said, words to the effect of, “it’s not our lot in life to run a trade deficit which is roughly equivalent to all the worlds net exports”. That is the administration really believes the US has lost in global trade. Indeed when asked if there was a risk of a trade war Ross said (again paraphrasing) “we are already in a trade war” it’s been going on for decades.

• How far can the US dollar really strengthen in this environment, even with the Fed raising rates. Something to ponder.

• Anyway back to overnight moves and the Euro is higher as noted after the ECB made it clear it too is shifting position because the bad things it feared simply haven’t materialised and don’t look like they will. So the Euro is up 0.5% at 1.0591 – I have a medium term target of 1.09/10 for the euro.

• USD/JPY on the other hand is rallying because the BoJ is not the ECB and saw this move coming. That’s why it has this sensational policy to keep bonds bid and a commitment to let the money supply grow as much as needed in order to keep rates low and upward pressure on the USD/JPY rate. IT’s at 114.81 this morning.

• The USD is also gaining ground on the commodity bloc and EM commodity currencies. The AUD is at 0.7504 this morning, the kiwi is at 0.6892 – governor Wheeler will be smiling – and the USD/CAD rate is up at 1.3511. The ruble has lost 1%, the rand has given up 1.7%, the real has lost 0.95% while the Mexican peso has lost a similar amount as it runs away from a test of the 200 day moving average for the fifth time in a couple of years.

Commodities

• Oil continued its fall overnight as a long market tries to clear the decks a little. But befre I get to the price action – which neatly tested the uptrend line stretching back to the lows of 2016 overnight – I want to talk about the behavioural stuff. Is anyone really surprised that oil broke wide open this week during CERAWeek the big industry conference in Houston? I’m saying this ex-poste as a way to try to help readers understand why oil might have collapsed so much so fast.

• Now it’s worth noting I was already warning about oil on the basis of price action, Saudi comments, speculative positioning and my own feeling of the efficacy of OPEC’s cuts before CERA. But I sense that when the industry got together they all looked at each other saw that US shale is really charging back and went – SHOOT!.

• Indeed Bloomberg reported yesterday that shale oil billionaire Harold Hamm said the industry’s binge can “kill” the oil market. Hamm said US oil production “could go pretty high…But it’s going to have to be done in a measured way, or else we kill the market”.

• That’s an interesting quote given news that the EIA has upgraded its expectations for US production to 9.53 million bpd in Decmber this year. That’s an increase of around 1.25 million bpd from forecasts made a year ago. Likewise plans for US shale producers to expand beyond the Permian Basin have been unveiled at this week’s CERA conference.

• Anyway, earlier this morning around 5am, oil had lost another 2.5% in Brent terms to $51.80 and 2.7% in WTI terms which is sitting at $48.90. That was just above the trendline I highlighted in yesterday’s crude note.

• But since then crude has recovered off that trendline which has helped the overall US stock market do likewise. As I write at 7.30am WTI is at $49.62 down just 1.3%.

• Gold is still under a little pressure but has managed to hold above $1200 overnight. IT’s all down to non-farms now and where that drives the US dollar, stocks, and bonds. Gold is just a residual of this move right now.

• Copper has dipped a little once more losing 0.9% to $2.56 a pound. The focus remains on the growth in inventories on the LME and whether BHP Billiton Ltd (AX:BHP) will restart Escondida with contract workers now.

Today's key data and events (all times AEDT)

• Australia - Home Loans (Jan), Investment Lending for Homes (Jan) (11.30am)
• New Zealand - Electronic Card Retail Sales (YoY) (Feb), Electronic Card Retail Sales (MoM) (Feb) (8.45am)
• China - Retail Sales (YoY) (Jan), Industrial Production (YoY) (Jan) (1pm)
• Japan - BSI Large Manufacturing (QoQ) (Q1) (10.50am)
• Germany - Current Account n.s.a. (Jan), Imports (MoM) (Jan), Exports (MoM) (Jan), Trade Balance s.a. (Jan) (6pm)
• EU - Nil
• UK - Consumer Inflation Expectations, Manufacturing Production (MoM) (Jan), Industrial Production (MoM) (Jan), Industrial Production (YoY) (Jan), Manufacturing Production (YoY) (Jan), Trade Balance; non-EU (Jan), Total Trade Balance (Jan), Goods Trade Balance (Jan) (8.30pm)
• Canada - Unemployment Rate (Feb), Participation rate (Feb), Net Change in Employment (Feb) (12.30am)
• US - Average Hourly Earnings (MoM) (Feb), Unemployment Rate (Feb), Labor Force Participation Rate (Feb), Nonfarm Payrolls (Feb), Average Weekly Hours (Feb), Average Hourly Earnings (YoY) (Feb) (12.30am); Baker Hughes US Oil Rig Count (5am); Monthly Budget Statement (Feb) (6am)

Have a great day's trading.