Oil And Stocks Rally As Saudis And Russians Vow To Do Whatever It Takes

Originally published by AxiTrader h2 Market Summary/h2

It's been a big start to the week for oil and stocks after the Saudi and Russian oil minister said in Beijing yesterday they would extend the production cut for a further nine months and do whatever it takes to rebalance the oil market.

That saw oil rally more that 4% at one stage which in turn ignited a rally in stocks driving the FTSE 100, and S&P 500 - amongst others - to new record highs in overnight trade. As I write the S&P has closed at a new record high of 2401 up 0.45%. The Dow Jones Industrial Average is up a similar amount and the Nasdaq 100 has risen 0.34%.

That oil has given up half its gains – WTI now $48.88 up 2.17% - and that such a large output cut extension is a tacit admission of failure is for another day and discussion it seems for stock traders who continue to also ignore weak US economic data.

The washup is that after a small gain yesterday on the ASX 200 SPI traders have marked prices up 17 points, 0.3%, to kick off trade today.

On forex markets oil's rally and weak NY manufacturing data again undermined the US dollar's recovery which has knocked the US dollar down 0.34% in US Dollar Index terms with the commodity bloc – Aussie (0.7417), kiwi (0.6874), and CAD (USDCAD, 1.3641) – the big winners in the G10 along with the euro which rallied 0.43% to 1.0975. The yen is a little weaker and the pound hardly moved.

It’s worth noting the US dollar has lost ground against every single EM currency I watch.

A weaker US dollar is also good for gold which is at $1,230 this morning up 0.2% while copper has bounced 0.6% to $2.53 a pound.

On the day today we await the release of the minutes to the RBA’s meeting earlier this month. Most RBA Watchers would expect that given the upbeat messages from the bank these will be pretty positive. Motor vehicles is also out in Australia and tonight we see the ZEW survey in Germany, EU GDP, and inflation data in the UK.

Of most import perhaps will be tomorrow morning’s release of US API stockpile data.

h2 Here's What I Picked Up (with a little more detail and a few charts)/h2

• S&P 500 +11 (0.48%) 2402 (7.37 Sydney - change since previous day)
• Dow +85 (0.41%) 20981
• Nasdaq +28 (0.46%) 6,149
• SPI 200 +17 (0.29%) 5,835
• AUDUSD 0.7413 (+0.37%)
• Gold $1230 (+0.15%)
• WTI Oil $48.82 (+2.05%)

h2 International (oil in the commodity section below)/h2

• New record highs for stocks again overnight and there is just nothing that seems to sap the will of the bulls to prevail at the market. More correctly I’d say is something I noted on my regular 7am SkyBusiness interview yesterday. That is why would you sell? Yes the data has been weak but the Fed says it will bounce back. Rather more important has been the stellar lift in US corporate earnings.

• Factset says expectations were for a 9% yoy rate back at the end of March but the blended expectation is for a stellar 13.6% rise when the final results are tallied. In a world of still relatively slow growth that is remarkably strong growth. Factset says it’s the best since Q3 2011.

• Chinese data yesterday showed a slowdown from the previous month feeding the current concerns about the economic outlook. Retail sales actually beat expectations with a 10.7% yoy rise but that’s down 0.2% from the previous month’s print. Industrial production, however, dropped from 7.6% yoy in March to 6.5% in April and Urban investment dipped from 9.1% to 8.9%. Not terrible – and certainly no scary enough to belt the Australian dollar – but worth watching. Interestingly Chinese stocks climbed on hopes of more stimulus.

• Bond giant PIMCO has downgraded its forecast for US inflation after a “noticeable softening” in US inflation over the past two months. They say April’s data showed broad based weakness “reflecting softness in a range of core goods and services. As a result, we’ve reduced our 2017 year-end core U.S. inflation forecast to 2.0% from 2.3%”. They say seasonal factors in H2 2017 could mean even that outlook is too high. As a result PIMCO says this “noticeable softening in inflation increases the pressure on Federal Reserve policymakers to explain their presumed plan to hike interest rates in June”.

• And also putting pressure on the Fed is the continued dip in US economic data. Don’t tell stock traders because they don’t care but the Citibank Economic Surprise Index – the one that everyone is else is now suddenly talking about – fell again and is at -32 this morning after the NY Fed’s Empire manufacturing index fell to -1 against expectations of +7. Ouch!

• Markets shrugged of North Korea but that doesn’t mean this is a non-event. Japanese prime minister Shinzo Abe said what I’m sure the West’s policy makers and the military are thinking. That is said “it is indeed very clear that the threat posed by North Korea's missile and nuclear program is now entering into a new stage. That is our recognition,”. He also praised president Trump’s approach which includes “all options on the table”. Interestingly folks, Russian president Vladimir Putin looks like he might deal himself in saying the world should stop pushing North Korea so hard.

h2 Australia (more on the blog a little later) /h2

• A bit of a wild ride for the ASX yesterday as weakness became strength became well a pretty flat close with the 200 index closing up just 1.5 points at 5,838.

• In a price action sense the rally is as positive as the Thursday’s close was negative. It highlights the battle between the bulls and the bears right now over the outlook for the indexs and in particular for the banks.

• On the latter – which remember make up about 25% of the ASX200’s market cap – Deutsche released a not yesterday saying that the banks are still a little richly valued. The lead from overnight however is likely to see the banks and the market higher today. Perhaps more than the 17 points SPI traders are betting on.

• What's really interesting about the recent - volatile - price action on teh ASX200 is that there is a tentative sign the relationship I've been using as a guide between the local market and the S&P 500 might be breaking down. That makes sense given the moves we are seeing in forex, and the asset allocation driving them, speaks to investors and traders making active bets on specific countries and markets. But it is intriguing nonetheless. Has the market formed a view the banks can't go any further at a time that views on the commodity cycle have turned? I'm not sure - but the lack of snap back in the relationship you can see in this chart is interesting and worth watching.

• Yesterday's release of housing finance was largely in line with expectations but possibly still a little conocerning for APRA and the RBA. Investor loans were up 0.8% in teh month for a 14.2% growth rate over the year which is hard to square when the regulator has a 10% cap. But teh reality is the latest round of macropru was done during March so this data shows why the regulators moved not the effects of same. We'll really have to wait a few months to see what the May data looks like to see the bit of new rules.

• Looking forward today we get the release of the RBA's latest meeting minutes. I'm expectinig a pretty upbeat economic commentary with a nod to concerns about housing and finance. On balance they should be net positive for the Aussie dollar but will need to be perused for impact on financials - if any

h2 Forex/h2

• A weaker US dollar across the board as forex traders do what stock traders won’t and focus on the divergence in data flow. Naturally the lift in the price of oil helped producers but the overnight move – and the breadth of it – is indicative of an emerging negative sentiment manifesting in fund flows away from the US dollar and into other currencies.

• Already last week we saw actual data favouring European stocks over their US counterparts and that sentiment is unlikely to have been dented by Angela Merkel’s party’s election success in the German state election over the weekend. European data di dip a little last night with the Citibank Eco surprise index at 67.5 this morning. But that’s still a wide gap to current US prints.

• So we see Euro up near 110 again this morning after consolidating above the Macron gap again last week. It’s looking pretty solid at the moment but the 1.1020ish high is the level to watch. If it can break then euro might surge.

• USDJPY broke it’s downtrend from the 108 region yesterday but prices are already retesting the break this morning. It’s at 113.75 and a break of 114 could kick things up another level.

• And of course there is the commodity bloc and EM currencies. The US dollar is on the retreat in varying degress across this group. The Russian ruble surged on the back of the oil move, but so too did the Mexican peso, Korean won, Singapore and Taiwan dollars all of which gained about half a percent on the USD.

• The Aussie is up a similar amount at 0.7414 but off its highs. The CAD benefitted from from US dollar weakness and oil’s rise while the kiwi is struggling a little toward the back of the pack with a 0.25% rise. The conditions are ripe for a further AUD/USD rally today if the RBA delivers an upbeat set of minutes as I expect they will.

h2 Commodities/h2

• Doing their best Mario Draghi impression the Saudi and Russian oil ministers promised to do “whatever it takes” at a joint press conference in Beijing yesterday. Using what has become OPEC’s most potent weapon over the past year when prices were at risk of weakness – the Jawbone – the pair announced that they had agreed the production cut would be extended by 9 months when OPEC meets on May 25.

• That saw oil prices rocket higher in Asia with European traders hitting the turbo button when they entered the fray. WTI traded up to a high around $49.63 (my slow ma) while Brent soared to $51.27 (also my slow ma as well as trendline resistance). They are back at $48.86 and $51.80 respectively.

• Here’s the Brent chart;

• Part of that pullback could be that Kazakhstan has already said while it supports the extension it will need to renegotiate its part of the deal because it expects its productive capacity to grow. Another part of it could be that the 9 month extension is a tacit admission OPEC has got it wrong. That is the market hasn’t rebalanced the way it thought because demand has been a little weaker in the US at the same time production in North America has ramped up. That’s the risk. The Baker Hughes rig count was up again last week and while OPEC continues to subsidise its competitors that won’t change in a hurry.

• But while solidarity holds in the group and if it is serious about the extension then eventually stockpiles may fall back to the 5 year average the group is targeting. That means API and EIA inventory data is the key going forward.

• Gold is up mildly catching a bid on the back of the the weaker US dollar. It’s at $1230 but off the $1237 high.

• Copper is up again nearing $2.54 a pound. Technically it looks a little better but overall it’s in a downtrend.

Have a great day's trading.

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Written By: Axi