Oil And Stocks Up On Russia's Readiness To Join OPEC's Production Cuts

Originally published by AxiTrader

Quick Recap

It’s all about oil this morning after Russian President Vladimir Putin threw his lot in with OPEC and said Russia could join an Crude Oil production freeze. That’s propelled oil up 3% to the highest level since June.

That, along with a sort of relief rally from traders expectation the Trump Presidential campaign has imploded, has driven stocks in the US higher. The US dollar is also higher but the risk on fell of the equity rally and the move higher in commodity prices has allowed the AUD/USD to lift higher and it’s back above 76 cents. Only the CAD/USD is stronger amongst the major currencies.

What You Need To Know

Here's what I picked up.

International

• I’ll discuss the specifics of oil in the commodity section in more detail. But it is worth reiterating what I have been saying for some time now. This move to cap, and cut production, is driven by an internal political imperative to rebuild the fiscal balances and improve growth and deficit positions that many of the oil producing nations are suffering from. That’s important because it suggests the kind of discipline around production caps and cuts that would otherwise be unlikely given internecine issues within, and without, OPEC.

• Polls suggest Hillary Clinton is moving into a big lead in the US presidential election. That’s important for traders because many were worried that a Trump presidency could be bad for markets, especially stocks. So the corollary of that is that there is a reduction in the reticence to invest by many who held that fear. That’s taken some downside pressure off stocks and helped oil in give them a lift in US trade overnight.

• So, at the close the S&P 500 is up 0.46% to 216, the Dow Jones Industrial Average is up 0.49% and the Nasdaq 100 is 0.69% higher.

• Deutsche Bank AG (DE:DBKGn) NA O.N. (NYSE:DB) had a good night with its shares up more than 3% overnight. But the focus turned to Royal Bank of Scotland Group PLC (LON:RBS) with Reuters reporting that the bank could face a bill of up to $27 billion, roughly the stock market value of the bank, in fines from global authorities.

• Goldman Sachs (NYSE:GS) is warning that capital flows out of China might actually be bigger than they look Bloomberg says. That’s despite the apparent stabilisation of reserves in recent months. “There have been $265 billion in net yuan outflows since last October through August, primarily due to trade settlement in yuan… This flow has helped lessen the overall outflow pressure faced by China because it means that importers did not have to buy as much foreign exchange to pay for imports” Goldman said. That’s interesting. At some point those Yuan get converted so it helps explain upward pressure on USD/CNH feeding into USD/CNY. More on that below.

Australia

• The Australian market eked out a small 8 point gain to close at 5475 yesterday which was in keeping with Saturday’s close on futures. But it could have been much better with the high around 5495 again reinforcing this 5500 level has been a bridge too far for the local market recently as the S&P/ASX 200 was unable to break through for the best part of two weeks.

• That should all change this morning with the rally in oil, commodities, and US stocks pointing to a strong open when the ASX kicks off at 10am this morning. SPI 200 futures are currently up 20 points to 5480.

• Naturally the oil sector is going to be the star attraction today as companies and shareholders react to the break higher in crude overnight. Financials should do well again today after a reasonable performance from the big 4 yesterday and of course the big miners should replicate their solid rises in London trade overnight.

• In SPI 200 terms the 5487 level looks like the one to watch for a break out to the top side. You can see the level in the 4 hour chart below.

• NAB business confidence is out at 11.30am this morning – that will give us an updated read on the health of the economy via business conditions, confidence, profitability, trading conditions, and employment intentions.

Forex

• The US dollar is stronger again this morning up 0.77% to 103.77 against the Yen, up 0.56% against the Euro which is at 1.1135 and it’s 0.69% stronger against the Pound with GBP/USD back down 1.2346. In no small part that is a result of the Presidential debate. But the falling German trade surplus can’t have hurt either.

• Against the commodity bloc, save for the NZD/USD, the US dollar is weaker. The Canadian dollar is up 1% on the back of oil’s surge. Maybe it’s time for a little catch up because the CAD has been lagging. The Australian dollar gets the gong as the contrary to everything else price move because it has bucked US dollar strength and Kiwi weakness as it rises on commodity price moves and risk appetite. It’s still mired in this 0.75/77 cent range however.

• Two other notable moves in the past 24 hours. The Mexican Peso is at its strongest level in a month with USD/MXN at 18.92 while the official Chinese Yuan fix of 6.70 was the highest in 6 years and validated the move in the offshore market. It tells us that the Chinese are happy to let USDCNY rise as the US dollar strengthens – especially if it is materially stronger against the basket if it held USDCNY firm.

Commodities

• Russian president Vladimir Putin set the cat amongst the Oil trading pigeons at the energy conference in Istanbul overnight said “Russia is ready to join the joint measures to cap production and is calling for other oil exporters to join.” He said depressed prices had lead to underinvestment which at some point would lead to deficit at some point and trigger “unpredictable jumps” in prices.

• “That's why in the current situation we think that (an oil output) freeze or even an oil production cut is likely to be the only right decision to maintain the stability of the global energy sector,” Putin said.

• Putins got everyone excited about the stickiness of the OPEC deal and a new OPEC non-OPEC pact. OPEC Secretary-General Mohammed Barkindo said such a deal is close adding that “All the atmosphere has changed positively (with non-OPEC)”.

• But perhaps the final word on the latest news should go to Saudi Oil Minister Khalid al-Falih who said at the same meeting everyone else is speaking at that “OPEC needs to make sure we don't crimp too tightly and create a shock to the market. We are going to be very responsible.” So, he not trying to drive prices back to the $80s. He agreed with Putin but also added the warning again “Prices have dropped too low and that has impacted investment. Many companies and countries are hurting ... we don't want to give the market the wrong signal and shock the market's prices.”

• Naturally OPEC can only do what it and non-OPEC producers can do in terms of output while traders and the market will move prices to where they need to go as a result.

• So it’s important that WTI has still not yet taken out the June high. If it does the mid $50’s come pretty quickly. If not a period of consolidation will ensue.

• Gold hit a high at $1264 last night but it’s back at $1259 this morning up $3. It’s consolidating but still under pressure.

• Copper is up 1.48% to $2.1885 benefitting from the risk on tone which also helped iron ore futures in Dalian and then in the US overnight.

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

• Australia - Mid-Year Economic and Fiscal Outlook (11.30am); Investment Lending for Homes (Aug), Home Loans (Aug) (11.30am); National Australia Bank's Business Confidence (Sep), National Australia Bank's Business Conditions (Sep) (12.30pm)
• New Zealand - Electronic Card Retail Sales (MoM) (Sep), Electronic Card Retail Sales (YoY) (Sep) (8.45am); NZIER Business Confidence (QoQ) (Q3) (9am)
• China - M2 Money Supply (YoY) (Sep), New Loans (Sep) (n/a)
• Japan - Trade Balance - BOP Basis (Aug), Current Account n.s.a. (Aug) (10.50am); Eco Watchers Survey: Outlook (Sep), Eco Watchers Survey: Current (Sep) (4pm); Machine Tool Orders (YoY) (Sep) (5pm)
• Germany - ZEW Survey - Current Situation (Oct), ZEW Survey - Economic Sentiment (Oct) (8pm)
• EU - ZEW Survey - Economic Sentiment (Oct) (8pm)
• UK - BRC Like-For-Like Retail Sales (YoY) (Aug) 910.01am)
• Canada - Housing Starts s.a (YoY) (Sep) (11.15pm)
• US - Fed's Evans Speech (12.30pm); NFIB Business Optimism Index (Sep) (9pm); Redbook index (YoY) (Oct 7), Redbook index (MoM) (Oct 7) 911.55pm); Labor Market Conditions Index (Sep) (1am); 52-Week Bill auction, 4-Week Bill Auction, 3-Month Bill Auction, 6-Month Bill Auction (2.30am)

Have a great day's trading