One of the major items on the calendar this week is the long anticipated OPEC meeting in Vienna, which is due to take place on Wednesday, where we were promised that we would get to see an agreement on production quotas, with a cap of 32.5m-33m barrels a day, after the meeting in Algiers at the end of September.
For most of this year oil markets have been sceptical of OPEC’s ability to freeze or even cut production, however the tone had started to change somewhat in recent weeks as OPEC and non OPEC members started to sing from the same hymn sheet so to speak, however in recent days the messages has become somewhat more muddled raising the prospect that the co-ordinated will to act simply isn’t there.
The news on Friday that Saudi Arabia wouldn’t be sending a delegate to a technical meeting on quotas to non OPEC members which was due today, just prior to Wednesday’s meeting in Vienna saw prices drop sharply on Friday virtually wiping out all of last week’s gains and, raising the prospect that we won’t see a deal at all this week.
As per usual it’s all about who will have do the business of cutting or capping output, with both Iran and Iraq reluctant to cut or cap too much, while Russia has paid lip service to a production freeze only. Without an agreement from these three any prospect of a deal is dead in the water, and while no one will want to do Saudi Arabia any favours, if there is no deal oil prices could fall further, and back below the July lows just above $40 a barrel.
All this uncertainty is likely to mean that oil markets are likely to remain choppy as OPEC and non OPEC oil ministers toy with the oil market.
While US markets completed another record breaking week, making new all-time highs on an almost daily basis, we’ve also seen the US dollar and bond yields follow in their wake, though there does appear to be some signs that the US dollar might be starting to lose a little bit of momentum, as the greenback came under some selling pressure in Asia trading overnight.
This divergence between US markets and the rest of Europe which has widened considerably in the weeks since President elect Donald Trump won the US election, currently shows no signs of slowing down, as investors start focussing more on the next set of potential problems, ahead of this coming weekend’s Italian referendum vote, where there is a good chance that Italian PM Matteo Renzi could well lose.
There remains a huge amount of nervousness surrounding Italy’s banking system despite last Friday’s news that Italian bank Monte dei Paschi saw shareholders approve the latest plans to attempt to raise €5bn worth of extra share capital.
While Italian officials are hoping that this will draw a line under the bank’s problems, the bank has already been bailed out three times previously. It is going to be increasingly difficult to generate any confidence in a rescue plan ahead of this week’s referendum vote, and while the bank continues to bear the crushing burden of its non-performing loan book.
There is the added concern, if as expected the vote does go against the Italian Prime Minister, the resulting market uncertainty will make any sort of resolution that much more difficult, at a time when investors and traders start to step back as the year comes to a close.
Also on a busy agenda this week we’ve got the latest US Q3 GDP update, the US jobs report as well as the latest results from the Bank of England’s annual stress tests of UK based banks and their ability to withstand a dramatic economic downturn, and a sharp fall in house prices. Royal Bank of Scotland is the biggest concern given it struggled in the European Banking Authority health check earlier in the summer, and it also has the prospect of a rather large fine hanging over it from US regulators, in relation to mortgage backed securities, similar to Deutsche Bank.
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EURUSD – while above the low last year at 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 – continues to find resistance just above the 1.2500 area, but the dips keep getting shallower which might suggest a break higher could be on the cards. With 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 – continues to look soft, finding some support just above the 0.8450 area and remaining on course for a move towards the 0.8380 area. A move back through the 0.8630 area retargets the 0.8780 area in the short term.
USDJPY – the US dollar continues drive higher, through 112.40 and retracing 50% of the 125.85/99.55 down move. We could well see a move back towards 115.60 which is the 61.8% retracement, if we hold above the 110.00 area.
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