A sharp move lower in the price of oil is setting European stocks up for a lower open on Monday ahead of trading updates from Reckitt Benckiser, L’Oreal and Centrica.
The price of crude oil has dropped sharply since opening in typically quieter Asian trading after Sunday’s oil producer meeting in Doha failed to produce an agreement on freezing output. Tit-for-tat sabre rattling between the Saudis and Iranians scuppered a freeze that apparently all other participants, including non-OPEC countries Russia and Mexico were in favour of.
An agreement always seemed highly doubtful when Iran had said it would not freeze out, having just come out of sanctions and Saudi Arabia said it wouldn’t if Iran didn’t. Still, the fact that the meeting went ahead appeared to leave the door open to at least some sort of face-saving, unbinding agreement. As soon as Iran shunned the meeting by not sending its oil minister it was an un-done deal. Perhaps Saudi Arabia thought Iran would soften its tone at the meeting with agreement on a future date or output level to freeze.
The oil price decline has likely only just begun since the possibility of an output freeze was price into oil at over $40 per barrel. In the short-term, oil workers in Kuwait on strike protesting over pay appears to be limiting more dramatic declines. If no pact could be reached on Sunday, it seems doubtful the next OPEC meeting on June 2nd will be any different.
Miners and banks had been some of the biggest gainers, in part over hopes that an output freeze by some of the largest producers would put upward pressure on oil prices and spread to other commodity markets. With its heavy-weighting in both mining and banking sectors, the FTSE 100 could come under particular pressure.
In US markets last week the financial sector leaped after banks reported smaller than expected profit declines. Goldman Sachs and Morgan Stanley as well as nearly 100 of the S&P 500 companies report this week so investors will have a much better outlook on the likelihood of the -8% drop in year-over-year earnings that has been forecast.
After last week’s economic focus on China, the dial swings back to the UK and Europe this week with UK unemployment and retail sales leading up to the ECB meeting on Thursday and then rounded off by Eurozone PMIs on Friday.
Any positive economic surprises for the UK are unlikely to offer much relief for the pound which should find its fair share of sellers in the context of an already dovish-leaning Bank of England Monetary Policy Committee terrified of Brexit. Warnings over the costs of Brexit from a report by the treasury as well as US president Obama this week could improve the chance of Britain staying in the EU, and support the pound.
The dollar showed some obvious signs of strength in the face of mixed economic data last week, this week there could be opportunities to fade the bounce. The Fed’s Bill Dudley talks at conference this afternoon.
EURUSD – The euro finished the week with two low-range days that closed below 1.13 after Wednesday’s sharp decline. The weekly bearish engulfing candlestick would suggest there is a good chance the price moves back to the middle off the long term range at 1.09.
GBPUSD – Cable is in a down-sloping trading range with a mid-point around 1.42. Long term, there is scope for a down-sloping inverted head and shoulders pattern but price needs to hold 1.39 to keep that pattern alive.
EURGBP – The euro-pound pair has formed two inside days above aforementioned support from the Feb 24 and March 24 peaks at 0.7930. Bias is for a downward break after hitting a confluence of long term resistance at 0.81.
USDJPY – The dollar-yen has gapped down to 108.20. Psychological resistance from 110 and former support at 11 suggest chances remain high for an eventual sell-off towards 1.07 then 1.06.
Equity market calls
FTSE100: to open 64 points lower at 6,279
DAX: to open 85 points lower at 9,966
CAC40: to open 42 points lower at 4,453
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