European and US equity markets underwent another disappointing session yesterday, undermined by continued weakness in oil prices, as well as concerns about sliding inflation expectations hitting banking stocks.
This continued slide for oil prices, now down 17% from the May peaks, saw US crude prices hitting their lowest levels since last August, before pulling back.
In more ordinary times an intervention by the Iranian oil minister might have had the capacity to put a floor under this slide in prices, and in this respect Brent prices are higher than their US counterparts, but on this occasion his intervention only provided a temporary respite. His comments that OPEC members were starting to discuss further cuts to the current cap were brushed aside as mere jawboning with nothing tangible to back them up.
The declines seen in the past few weeks really shouldn’t have been too much of a surprise to OPEC given the capacity of US shale producers to fill the space left open for them. That, and a significant increase in output from Libya and Nigeria, both of whom are exempt from the quota system, and it is clear that OPEC underestimated their own importance, when it came to global oil output. The decline in prices hasn’t been helped by concerns that demand might be slowing in Asia, meaning the prospect that inventory levels are likely to remain elevated for longer.
A new unknown is whether the new Saudi leadership will alter course on its current oil policy, given that it is they who are making the lion’s share of the cuts in output.
Another question now is what US shale producer’s pain threshold is as oil prices close in on the $40 level, and levels last seen in August last year.
Running rather contrary to the dovish narrative of earlier this week, articulated by Bank of England governor Mark Carney, which sent the pound sharply lower, the normally dovish Bank of England Chief economist Andrew Haldane, rather rained on his boss’s parade, by having a damascene conversion to the hawkish side when it came to monetary policy in remarks he made yesterday.
His admission that he had considered voting for a rise in interest rates at last week’s Bank of England rate meeting, puts on altogether different slant on events last week when it comes to potential splits on the committee.
The man who called for a sledgehammer in August last year appears to have realised that last year’s stimulus may well need to be reined back a touch and that the only thing that gave him pause last week was the currently weak nature of wages growth.
It would appear that departing hawk Kristin Forbes’ departure at the end of the month may not be as keenly felt after all, and we could get to hear some additional insight into some of the discussions at last week’s MPC meeting later today when she speaks at the London Business School.
Not surprisingly the pound rebounded off its lows with the end result that when compared side by side there is now almost the same 45% probability being assigned by bond markets that the UK and US will raise rates once by the end of this year.
EURUSD – the range trade remains in play with support just above 1.1100 and resistance up at 1.1300. If support near 1.1100 gives way we have the potential to open up a move lower towards the 1.0900 area, with the 1.1020 area the first port of call. This would signal a triple top reversal with resistance back up towards the 1.1300 area.
GBPUSD – the pound did fall below the 100 day MA at 1.2630 yesterday, finding support at the 1.2580 area, while also remaining above the 200 day MA. While above the 1.2580 level we do have the potential for a rebound but we need to get back through the 1.2740 area to stabilise. A slide back below the 200 day MA could well open up the 1.2380 area again.
EURGBP – the previous highs at the 0.8865/70 area remain a key resistance and the main obstacle to a move up to 0.8920. For now support comes in at the 0.8800 area, while below that the 0.8720 level.
USDJPY – the Kumo cloud resistance at 111.80 continues to hold as resistance raising the prospect of a drift back down towards 110.60 and the 200 day MA. A break through resistance opens up the potential for further gains towards the 112.40 area, and 113.00.
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