Thursday, December 5, 2019

Stocks rebound after hopes of a US-China trade deal before 2020 rise; do oil prices have room to soar as well?

  • China
  • Dollar
  • Yen
  • Euro
  • Pound
  • Stocks

Market recap: Aramco set to announce its final pricing for IPO shares today

Equities rebounded yesterday from three straight days of losses, thanks to renewed optimism regarding a potential trade deal between the US and China. Bloomberg reported on Wednesday that people familiar with the ongoing trade talks believe the US and China are closer to agreeing on the number of tariffs that would be rolled back in a phase one deal. They also hinted that US President Donald Trump's comments downplaying the urgency of a deal should not be taken as a signal that discussions are not progressing. Trump later supported the report by claiming that meetings with China are going very well. The DJIA gained 0.53%, the S&P 500 rose 0.63% and the Nasdaq advanced 0.54%.

Private sector payrolls in the US only grew by 67,000 in November, declining from October's 125,000 figure. November's private sector payrolls grew at its lowest rate of the past six months and fell much lower than economists' forecasts of 135,000. The Institute for Supply Management's (ISM) non-manufacturing Purchasing Managers' Index (PMI) fell more than expected to 53.9 instead of 54.5, although details of the report suggested that the US services sector might be stronger than the index suggests thanks to improvements in new orders and employment within the sector. The Dollar Index fell 0.09% as a result.

Gold dropped 0.20% and the yen weakened 0.21% against the greenback as investors shift out of safe haven assets once again thanks to the superpowers’ tug-of-war. US Treasury yields gained across the board, with benchmark 10-year yields rising 6bps to 1.77%.

Meanwhile in Asia, major indices started Thursday's trading session higher, tracking US gains. The Nikkei, Hang Seng Index and the Straits Times Index started the day 0.68%, 0.91% and 0.35% higher on Thursday.

The Canadian dollar surged on Wednesday night as the Bank of Canada’s (BoC) monetary policy statement for December was less dovish compared to October's, after deciding to keep rates unchanged at its monetary policy meeting on Wednesday. USD/CAD tumbled down by 0.71% as the Canadian dollar spiked upwards after the decision.

Saudi Aramco’s final pricing for its shares for its Initial Public Offering (IPO) is set to be announced today. The oil giant will also reveal its final allocation for retail and institutional buyers. If Aramco sets its IPO pricing at the top end of its pre-set range at 32 riyals a share, then the deal would raise US$25.6bn, overtaking Alibaba’s $25bn share sale in 2014. It would also be the largest IPO of all time.

Today’s Analysis: Oil futures gain ahead of OPEC meeting

Oil prices will likely be affected by today's Organisation of Petroleum Exporting Countries (OPEC) and tomorrow's OPEC+ (OPEC and its allies including Russia) meeting in Vienna. During the session, OPEC and OPEC+ members will be reviewing the current production agreement and also the possibility of more cuts to production numbers. The current deal stipulates supply cuts of 1.2mn barrels a day, which expires at the end of March 2020. Brent crude futures rose 3.58% to $63.00 a barrel on Wednesday, as OPEC member countries and allies signalled there may be a possible extension or further cuts to oil production, and as optimism for a trade deal between the US and China rose. 

Reuters reported that Saudi Arabia may be looking to cut production further to support the IPO of 1.5% shares of the state-owned oil giant Saudi Aramco. But rising US shale oil production (a substitute for crude oil) is likely to be an obstacle that OPEC members will take into consideration. If crude oil prices rise too much, demand may possibly shift to US shale oil, which may potentially put downward pressure on crude oil prices as well. In addition, mixed signals from OPEC+ members may hinted at a higher probability for an extension to the current deal instead of deepening production cuts. Russian Energy Minister Alexander Valentinovich Novak signalled that Russia is more likely to support an extension rather than a cut to production, citing it would be better to postpone any decisions on production numbers until April 2020, as the global economic outlook may change in the coming months. Iraq, OPEC's second largest producer after Saudi Arabia, signalled that it would support deeper cuts, despite historically over-producing. 

But the US-China trade war has also negatively impacted the prices of crude oil. If the two countries are unable to come to a consensus for a partial trade deal, then the US is likely to apply the planned tariffs on December 15th on Chinese imports. This will likely lead to an escalation in the trade dispute, which will weigh on global economies. The negative impact can already be seen in the US and China economies and as China shows signs of a slowdown, global demand is likely to drop as well. The outlook of demand for oil in 2020 could be dampened as a result.

The most likely outcome of the OPEC meetings today and tomorrow is for the cartel to extend the existing deal for three months to June 2020, with better compliance by members, and signalling that more cuts are possible in the future. A Bloomberg survey indicated that 94% of the 176 respondents agree that OPEC will extend cuts into 2020 and the majority of them expect production cuts to maintain at 1.2mn barrels/day. In this case, Brent crude futures will likely only slightly rise, towards $63.35’s level, or an upside potential of roughly 0.55%. The next likely outcome will be for a deeper cut by the cartel, which would likely send Brent oil futures rising towards $64.16. 

Effect on brent crude futures