After months of prevarication yesterday’s OPEC deal did manage to generate a fairly decent rebound in oil prices, as they announced their first production cut since 2008. It must be noted though that the deal agreed will only return output back to levels last seen in the first half of this year at 32.5m barrels a day, a cut of 1.2m barrels, effective from 1st January 2017, for six months.
Even accounting for the cuts announced yesterday these new levels will still be at the high end for daily output for OPEC production over the last ten year period, at a time when Russia is still pumping at record levels of 11m barrels a day and US shale producers are waiting on the sidelines to further increase their own output.
While Russia has said it will cut its own output by 300k barrels a day the OPEC agreement doesn’t appear to include Indonesia’s output of 720k barrels a day which they refused to cut back on and as a result suspended themselves from OPEC. There will be a subsequent meeting on December 9th with non-OPEC members in Doha to try and coalesce around a further 300k reduction in output.
Ultimately the devil will be in the implementation and yesterday’s rebound, while large only returned prices to the levels they were a month ago, and still below the October peaks.
That being said yesterday’s oil rally does appear to have put a short term floor under the oil price and as such has helped to push bond yields up across the board. The biggest jumps came in US and UK yields as they pushed back towards their November peaks, as markets started to price in firmer inflation expectations, which in turn has helped the pound put in its best monthly performance in eight years against the euro, and on a trade weighted basis.
Even though yesterday’s OPEC deal was good news for the energy sector the response of equity markets was slightly more nuanced, with US markets closing lower on the day, albeit having posted their best monthly performance since July, while European markets only managed to post modest daily gains, while closing lower on the month, as the divergence between Europe and US markets continued.
Today’s price action, as we start the final month of what has been a turbulent year, will return to the mundane matters of economic fundamentals with the latest manufacturing PMI numbers for November from Japan, China, Europe, the UK and the US, as well as unemployment numbers from Italy and the EU.
Earlier today there was some inspiration from the Japanese and Chinese numbers, which were slightly better than expected, and there has also been evidence of an improvement in the recent numbers out of Europe, the UK and the US.
The latest UK manufacturing PMI for November is expected to show a continued improvement in headline activity to 54.4 from 54.3 in October, though as in previous months input prices will be keenly monitored for inflation pass through effects.
Italian Prime Minister Matteo Renzi could do with some good news ahead of this weekend’s constitutional referendum, however the latest unemployment numbers aren’t likely to provide it, expected to come in at 11.6%, where it’s been for around 12 months now, with youth unemployment in the high 30’s percentile. The Q3 GDP number is expected to be confirmed at 0.3%.
Yesterday we saw a sharp improvement in Chicago manufacturing PMI from the US for November, which if translated into the broader ISM manufacturing numbers today could well see similarly sharp improvement from the 51.9 in October, with a number of 52.1 expected, though this could come in higher if yesterday’s Chicago number is any sort of benchmark.
EURUSD – while still above the 1.0460 level we remain susceptible to a return to the 1.0730 area. A move below 1.0460 could well be the catalyst for a move towards parity and a retest of levels seen at the beginning of the century.
GBPUSD – currently range trading between 1.2520 and the 1.2380 area, however with the dips getting shallower we could see a break higher. With stronger support down near the 1.2330 area the prospect of further gains towards 1.2880 remains a possibility, while above these lows. Only a move through 1.2300 opens up the potential to revisit the recent lows near the 1.2100 area.
EURGBP – currently finding resistance just below the 0.8600 level with support just above the 0.8450 area, we need to see a move through this support to argue for a move towards the 0.8380 area. To signal a base is in we need to see a move through the 0.8630 area.
USDJPY – having moved through the previous highs at 113.80 the US dollar looks set to close in on the 115.60 area which is the 61.8% retracement of the 125.85/98.95 down move.
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