Friday, September 18, 2020

Asia Times: Oil futures jump on OPEC+’s resolve to keep compliance at high levels

Tags
  • Dollar
  • Gold
  • Yen
  • Pound
  • Stocks
  • Oil

09182020a

Market Recap: Oil futures jump on OPEC+’s resolve to keep compliance at high levels

Stocks in the US suffered yet another pullback on Thursday as investors' confidence of the economy starts to fade amid weaker-than-expected employment figures. Initial jobless claims fell less-than-expected in the week ending September 11th to 860,000 (E: 850,000), from a revised 893,000. While continuing claims had a bigger than anticipated drop in the week ended September 4th, the predictive powers of this particular dataset is starting to fade as a result of the 26-week eligibility period for state unemployment claims across a number of states in the US. Pessimism from the Fed's monetary policy decision also likely persisted into Thursday’s trading session, with investors starting to better price in the Fed’s weaker outlook for the US economy.

Indexes Daily Change (%) Net Change Closing Price
Dow -0.47% -130.40 27,901.98
S&P500 -0.84% -28.48 3,357.01
Nasdaq -1.27% -140.19 10,910.28
*Source: Bloomberg

Tech weighed the most on major indices thanks to heavyweights Apple and Microsoft each losing upwards of 1%. The communications and consumer discretionary sectors were at the bottom of the table on the S&P500 as well, mostly due to shares of Facebook and Amazon losing 3.30% and 2.25% respectively. Real estate was the worst performing sector, likely after weak housing starts and building permits for August. Housing starts dived more-than-expected to 1.416 million (or -5.1% MoM), while building permits dipped 0.9% MoM. More rebalancing of portfolios away from the tech sector may have taken place as well, although to a smaller extent than yesterday, as smaller cap indices outperform the more tech heavy S&P500 and Nasdaq Composite but fell short to the Dow.

Airlines came into focus on Thursday, after US Chief of Staff Mark Meadows commented that the White House will be looking into additional support for the sector following his meeting with industry executives. Meadows said that the industry needs US$25billion in aid to protect up to 50,000 jobs. With the current financial aid scheme for airlines from the White House expiring on September 30th, it is becoming increasingly urgent for the government to seek additional funding for aid for the sector. However, House Speaker Nancy Pelosi has been vocal of her opposition against a stripped-down bill, likely as part of a strategy in stimulus negotiations talks. Pelosi did contradict this statement when she called the House back into session during the August recess to vote on a US$25 billion Postal Service bill, but it appears to be unlikely for her to do the same for airlines.

09182020b

The dollar fell against all G10 currencies on Thursday with the exception of the Norwegian krone. The greenback continues to inch closer back downwards towards its September open as the currency struggles to hold on to its gains amid higher levels of uncertainty in the US. Delayed stimulus along with volatility from the upcoming presidential elections are likely to continue to weigh on the currency.

The Bank of Japan (BoJ) aligns itself with new Japanese Prime Minister Yoshihide Suga. The BoJ kept rates and asset purchases at current levels, as market participants mostly expected. Governor Kuroda also reassured the market that the central bank will continue to maintain its close relationship with the government even after the recent leadership change. The Japanese yen gained after the decision as a result, possibly due to reduced uncertainty in Japan. The central bank also revised its economic outlook, reflecting the bank’s view that the worse of the economic contraction has passed. The upgraded outlook likely put some upward pressure on the Japanese yen as well.

Sterling dipped on signals from the Bank of England (BoE) that it would place more emphasis on discussion for negative interest rates. The central bank voted 9-0 in favour of keeping interest rates and its asset purchase target on hold at 0.1% and 745 billion pounds respectively. It also reiterated that it still plans on completing the remainder of its planned asset purchases by the end of the year. More importantly, the driver for the currency was from news that the BoE and the Prudential Regulation Authority will begin exploring technical considerations for below zero interest rates starting Q4 2020. The news comes as a surprise as investors likely placed negative interest rates as a possibility only after an additional expansion to asset purchases. In our view, this doesn't change that as quantitative easing is likely to still be favoured over negative rates by the central bank. More likely is that the BoE is acting on the possibility of negative rates in the wake of high levels of uncertainty surrounding the British economy in 2021. Sterling dipped post-decision by as much as 0.73%, before recovering later in the trading session as the greenback continued to weaken.

09182020c

Safe haven assets remained largely mixed on Thursday. Gold retreated and continued to hover between 1,930 and 1,960. The Japanese yen gained against the dollar but fell against the euro. US Treasuries continued to be affected by the Fed's new interest rate targeting mandate with the yield curve continuing to steepen. Benchmark 10-year yields inched lower by 0.8bps to 0.69%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -0.76% -14.82 1,944.44
Silver -0.45% -0.12 27.04
USD/JPY -0.20% -0.21 104.74
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -0.2bps 0.14%
10-Year -0.8bps 0.69%
30-Year -2.0bps 1.44%
*Source: Bloomberg

Oil futures gained another 2% on Thursday, pushing both crude oil benchmarks to trade at its highest weekly gains since early June. Prices were likely boosted by OPEC+'s resolve to keep supply from the bloc at bay with signals from both Saudi and Russian OPEC+ ministers for member countries to improve their compliance to the output limit agreement. However, the outlook from the bloc continued to be less-than-rosy as it sees additional downside risk to oil demand as a result of a potential second wave of the Covid-19 pandemic. A stronger resolve from the bloc also contributed to the jump in oil prices after the cartel urged member countries to be ready to take further action if needed, providing investors with additional confidence for crude oil supply. Fundamentals still stay mostly the same in both outlooks for demand and supply of crude oil, meaning that upside for crude oil in the short-to-medium-term remains limited despite increased volatility this week.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +2.56% +1.08 43.30
WTI +2.02% +0.81 40.97
*Source: Bloomberg

Stocks in Asia were mixed on Friday morning as investors in the region continue to weigh on concerns from Fed Chair Jerome Powell on the US' economic recovery at his post-FOMC meeting press conference yesterday. Currencies continuing to strengthen against the dollar is also likely to weigh on stock performance as well. The Nikkei gained, while the KOSPI and ASX200 were trading at lower levels in the earlier trading hours on Friday. Futures tracking major indices in the US were down as of 9.18am (GMT +8) as well, this time with a larger downside skew in non-tech companies.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +0.11% +26.13 23,345.50 9:08:25 AM
KOSPI -0.34% -8.08 2,398.09 9:28:20 AM
ASX200 -0.23% -13.62 5,869.60 9:28:14 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.52% -144.00 27,675.00 9:18:26 AM
US Futures -0.47% -15.75 3,335.25 9:18:27 AM
Nasdaq 100 Futures -0.30% -33.25 11,042.00 9:18:26 AM
*Source: Bloomberg

Economic releases for the day ahead include (all timings in GMT +8):

  • UK Aug Retail Sales (2pm)
  • US Sep Consumer Sentiment Index (U. of Mich) (P) (10pm)