Originally published by Rivkin Securities
Crude Oil prices tumbled on Friday as data showed that OPEC production reached a new record of 33.64 million barrels per day in October, up 240,000 barrels per day from September. This is prompting fresh supply concerns ahead of an official meeting in Vienna at the end of this month where member countries have agreed to cut production to between 32.5 – 33.0 million barrels per day. This is on top of comments in recent weeks from a number of key members stating that they should be exempt from production cuts as a result of various reasons including internal fighting and sanctions.
Members are pumping as much oil as possible in an attempt to raise their baseline production figures, which will then be used in determining their allocation of production cuts. The higher the baselines the better off they will be post production cuts. While this is a logical strategy ahead of any agreement for allocating production cuts, it will make the eventual rebalancing of the market more difficult.
In response both Crude Oil & Brent crude oil fell -2.80% & -2.38% respectively shown on the first chart below. Prices are now approaching the key $40 level which has seen officials step up their production cut rhetoric to support prices previously and is likely to prompt them to do so once again. Declines in oil weighed on commodity prices in general along with a modestly stronger U.S. dollar. Copper prices took a breather after surging as much as 30% since October 24th closing -1.69% weaker, natural gas fell -0.49% and the Thomson Reuters CRB index was -1.41% lower given its heavy weighting towards oil.
The second chart below shows precious metals spot gold and Silver which were decisively lower on Friday night as rising bond yields reduce the demand for the precious metals which benefit from lower interest rates. Spot gold fell -2.71% while spot silver declined -6.74%, while both metals are seen as safe havens by the markets silver tends to be more volatile given its role as an industrial metal.
Looking to the bond markets we continue to see a sell-off in sovereign debt yields which has only been exacerbated by Trump’s victory as the market prices in the prospect for higher inflation. The yield on two-year treasuries rose +1 basis point to +0.9070% while the ten-year yield which is more sensitive to inflation expectations jumped +4.6 basis points to +2.1180%. To put that in perspective that’s a +25 basis point increase since the election and +80 basis points from the July 2015 low of 1.321%.
Equity markets were mixed on Friday, the S&P 500 was -0.14% lower while the Nasdaq 100 gained +0.10%. Perhaps unsurprisingly consumer cyclicals outperformed (+0.65%) as did financials (+0.36%) which are benefiting from higher yields and expectations of reduction regulations. Energy stocks were weaker by -1.66% as commodity prices fell as healthcare led declines, down -1.47%. The U.S. Dollar index was modestly higher, up +0.21% following comments by Fed Vice Chair Stanley Fischer on Friday that the Fed was reasonably close” to achieving its dual mandate for inflation and unemployment. The notable data release for the U.S. was the University of Michigan consumer confidence survey (preliminary MoM Nov) which was higher than forecast, up to 91.6 from 87.2 previously and estimates of 87.9.
In Europe the Euro was -0.35% weaker and equity markets were generally lower. The Euro Stoxx 600 finished -0.41% weaker, as did the Euro Stoxx 50 -0.54% and CAC40 -0.92% while the DAX managed a small gain of +0.36%. German bond yields which are the benchmark for the region were modestly higher, the two-year yield up +1 basis point to -0.603% and the ten-year yield up +2.4 basis points to +0.306%. Data from Germany showed that consumer prices rose +0.2% month-on-month in October as expected and +0.7% year-on-year to October in line with forecasts.
In the U.K. the pound continued its recent outperformance gaining +0.45% against the dollar. The currency is benefiting from declining expectations of a “hard Brexit” and that stronger than expected growth & inflation will keep the Bank of England on hold over the coming months. As a result the FTSE100 which has a large exposure to overseas earnings was -1.43% weaker as was the more domestic focused FTSE 250 which finished -1.41% lower.
The yield on two-year debt was unchanged around +0.233% while the ten-year yield rose +2.5 basis points to +1.365%, up +83 basis points from the August 15th low of +0.534%. Data from the U.K. showed that construction output (MoM Sep) increased +0.3% surpassing forecasts of 0% and year-on-year increased +0.2% against estimates of a -0.4% decline.
The yen is modestly weaker early this morning after strengthening +0.16% on Friday ahead of this morning’s preliminary GDP figures (QoQ Q3) at 10:50am AEDT where it is expected to show the Japanese economy expanded at a +0.8% annualised rate, up from +0.7% in the second quarter.
The offshore Yuan was -0.15% stronger on Friday ahead of today’s key data for industrial production, retail sales and fixed asset investment excluding rural. The data will be closely monitored for further signs to show that the economy is stabilising.
Locally the S&P/ASX 200 was higher on Friday, up 41.9 points (+0.79%) as the Australian dollar fell -0.78%. Meanwhile we expect a softer start to trading today with ASX SPI200 futures down -15 points.
Data releases:
- Japanese GDP (QoQ Q3) 10:50am AEDT
- Chinese Industrial Production, Retail Sales, Fixed Asset Investment Ex. Rural (YoY Oct) 1:00pm AEDT
- Japanese Industrial production (MoM & YoY Oct) 2:30pm AEDT
- Euro-zone Industrial Production (MoM & YoY Sep) 9:00pm AEDT