Oil Slipping As Traders Question The OPEC Deal

Originally published by AxiTrader

Quick Recap

An interesting night with the US dollar pressing higher but reversing, stocks slipping, commodities and gold rallying, and more signs that the German and even French economies may be lifting.

What You Need To Know

International

• US stocks are dipping back from two week highs overnight as earnings are a little disappointing in some sectors. But the important thing to note is that most sectors in the S&P 500 are actually higher and as I write only 3 sectors are down with the S&P off 8 points or 0.4% to 2143. The Dow Jones Industrial Average is off 0.3% and the Nasdaq 100 has dropped 0.5%.

• Yesterday the Fed’s Charles Evans said a hike this year is on the cards and three hikes by the end of 2017 – he votes next year and he’s a dove so rates are going to move higher but that’s hardly a scary scenario.

• A Reuters survey showed that traders believe the Bank of England will hold rates steady at its November meeting. Last night speaking to the Lords BoE governor Carney said he’d assess his future by the year’s end and whatever he decided wasn’t related to the government or any comments Teresa May made recently about the bank.

• Mario Draghi hinted that maybe no more accommodation is coming from the ECB when he said he understood the pain that low rates can cause. But he also said that the current policy settings were necessary to get the economy going again and at the end of the day returns on assets were the result of overall growth in the economy. That’s a good point savers! But Germany’s finance minister Wolfgang Schaeble weighed in saying that monetary policy has reached the limits of its effectiveness.

• On EU data German business confidence hit a two and a half year high of 110.5 (exp 109.5) Ifo said overnight. Across the border in France the number of jobless had their steepest fall ever in September.

• One word - REFLATION

Australian

• The Australian stock market is certainly in the thrall of short term traders at the moment. The price action over the past few days, where the SPI futures moves overnight have been essentially useless guides to the day’s trade. Yesterday’s 34 move fed from positive AGM commentary according to my pal Henry Jennings but the big bounce in Dalian iron ore noted by Henry and my Business Insider colleague David Scutt yesterday certainly helped the resource stocks. That rally continued overnight with copper up more than 2% amid a broad based industrial metals rally.

• So the question for traders today is whether the SPI futures loss of 10 points overnight is a true indication of where the S&P/ASX 200 will be today or not.

• I’m doing a lot of work with some of the traders I’m mentoring at the moment on what the candle charts reveal and the one thing that jumps out of the chart below when it comes to the SPI is that traders remain relatively uncertain with multiple days with long tails – both on the top and bottom side. It also suggests the short term, day trade, nature of the market. On the day 5350 in the SPI and 5375/80 on the physical ASX remain key supports.

• Today is CPI day here in Australia and the market is expecting a rise of 0.4% and 1.1% for the headline CPI release. Economists will be focussing on the trimmed mean measure of inflation which is expected to print 0.4% and 1.7% respectively for the qoq and yoy outcomes. But headline is the more important focus for me because of the feedback loop into consumer inflation expectations, wage outcomes, and so on. Because of that linkage it is also the headline number I think the RBA will be watching a little more closely this quarter as well. 1% or below in headline yoy opens the door for another RBA cut.

Forex

• The US dollar strengthened initially hitting multi month highs against a number of currencies but for the most part besides the pound it is either back near where it was or losing ground against the Aussie dollar and the Kiwi. So with the blackout period for the Fed meeting upon us and with CME futures pricing in close to an 80% chance of a Fed hike in December the question of whether all the good news is priced into the US dollar needs to be asked.

• It’s something I highlighted yesterday morning and it’s important given I hold the view this US dollar move is the accumulation of specific weakness for the other side of many US dollar pairs rather than simply US dollar strength per se. So when I look at the chart of the DXY and take the unexpected pickup in EU and German economic outlook into account my thoughts turn to a retracement of recent strength.

• Looking specifically at the EUR/USD (1.0894) and JPY/USD (104.21) we see that the Euro fell to 1.0848 before recovering while USDJPY climbed through resistance making a high at 104.87 before reversing lower again. Both charts now suggest a reversal is now a high probability trade for me. I’m a day or two earlier than my actual system so only small positions though. Here’s the Euro chart:

• Looking at the Aussie and it’s still well supported and as I suggested yesterday in my AUD daily note the outlook is brightening as I watch USD/SGD look like it is rolling over. If CPI comes in around expectations, perhaps a little higher at 0.6% the Aussie can run back toward 77 cents. A weak result will of course knock the Aussie back to 0.7580, perhaps lower, as traders bet that a November rate cut is a real chance in a too low for comfort inflation environment.

• On the Sing I like it a little lower on the charts and after comments from the PBOC yesterday that the Yuan is basically stable across the basket and shouldn’t lose too much more ground I’m looking at USD/CNH as making a top around these levels for the moment as well.

Commodities

• What does OPEC stand for? Apparently it’s the Organisation of Producers Exempt from Cuts according to one wag on Twitter as it becomes obvious that with the Iranians and the Iraqis claiming exemption from the OPEC production deal that 1/3 of the nations in the group don’t want to take part in the deal. Certainly they support as we heard from the Iranians a day ago but they claim special reasons to be let out of the deal.

• That means the Saudis, and perhaps the Russians and Qataris, are going to have to where most of the burden for the freeze and any cuts. But overnight we heard via interfax that maybe even the Russians aren't so keen on a deal afterall. Now of course if it is a production freeze that is pretty straight forward and an easier deal to do. But, if as Venezuela suggested overnight there are cuts needed then it will fall more heavily on the nations not claiming exemption to get the deal done.

• It all means oil is drifting again with Crude Oil down 1.5% at $49.78 and Brent Oil off 1.7% at $50.59. As I noted on my video yesterday if it falls through the $49.35/55 region (WTI) oil could be in for another $1/1.50 dip. Inventory data this morning could be important. Here’s the chart:

• I still believe some sort of deal will be stitched together by OPEC and non-OPEC countries. But that doesn't mean i'm going to ignore the charts for the next month until OPEC meets.

• Gold is back up as the US dollar loses a bit of its lustre but also because of physical demand out of India I’m reading on the screens this morning. IT’s made a new post-collapse high and is at $1275 this morning. This yellow stuff looks like it could run another 15/25 dollars before it runs out of steam.

• Copper is up in a broad commodity rally overnight as data from around the globe starts to surprise a little on the upside.

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

• Australia - RBA trimmed mean CPI (QoQ) (Q3), Consumer Price Index (QoQ) (Q3), RBA trimmed mean CPI (YoY) (Q3), Consumer Price Index (YoY) (Q3) (11.30am)
• New Zealand - Nil
• China - Nil
• Japan - Corporate Service Price (YoY) (Aug) (10.50am)
• Germany - Import Price Index (MoM) (Sep), Import Price Index (YoY) (Sep), Gfk Consumer Confidence Survey (Nov) (5pm)
• EU - Nil
• UK - Gfk Consumer Confidence (Oct) (10.05am); BBA Mortgage Approvals (Sep) (7.30pm)
• Canada - Nil
• US - MBA Mortgage Applications (Oct 28) (10pm); Goods Trade Balance (Sep) (11.30pm); Markit Services PMI (Oct), Markit PMI Composite (Oct) (12.54am); New Home Sales (MoM) (Sep), New Home Sales Change (MoM) (Sep) (1am); EIA Crude Oil Stocks change (Oct 21) (1.30am); 5-Year Note Auction (4am)

Have a great day's trading