Market Analysis - 11-JAN-2018
1) Asian Stocks Down, USD/JPY Up As Market Mulls China Bond Plans
Most Asian stocks slipped Thursday following a softer Wall Street lead. However the story which unnerved US investors- a report that China was considering reducing its purchases of US Treasury bonds- may have been wide of the mark.
The original headlines were reported by Bloomberg on Wednesday but a report from Reuters Thursday, citing a Chinese government source, said that the story could be inaccurate. The matter remains a little opaque, however, even if Thursday’s twist has given the US Dollar a modest lift.
The Nikkei225 ended down 0.3%, with Australia’s ASX 200 down 0.6%. All other bourses were in the red as they headed into the close with the damage lightest in China.
The US Dollar made gains against the Yen as investors looked again at that China story. USD/JPY remains well down on the week, hit earlier by suspicions that the Bank of Japan may be paring its own stimulus. The Australian Dollar was Thursday’s standout, gaining on an extremely strong set of retail sales data which add to an increasingly rosy domestic picture.
2) Euro May Fall as ECB Meeting Minutes Cool Bets on QE Cutback
ECB monetary policy meeting minutes headline the economic calendar in European trading hours. Markets are scouring for signs of stimulus withdrawal across the G10 space – as amply demonstrated in the Yen’s reaction to standard fluctuation in BOJ bond uptake – and any commentary suggesting Mario Draghi and company may alter the path of QE purchases faster than advertised will likely drive Euro volatility.
The ECB’s current €30 billion/month QE program is due to expire in September. Policymakers and markets probably agree that an abrupt end is not desirable. That leaves two options on the table: bond buys may be tapered into the existing end date or the entire program may be extended, allowing for a gradual roll-off into the year-end (and possibly beyond). The ever-cautious ECB would probably opt for the second path.
This assumes the ECB does not find it appropriate to provide more stimulus and extends QE without a tapering component however. In fact, President Draghi’s recent pronouncements have hinted that purchases are in fact open-ended, with September marking a time when markets will be formally updated on the program’s fate rather than an end date. The single currency may fall if today’s release echoes that sentiment.
The Bank of England Credit Conditions and Bank Liabilities surveys are also due to cross the wires. A bit of tightening has understandably taken place since last year’s rate hike but overall lending conditions remain accommodative. Meanwhile, inflation continues to accelerate. Brexit-related worries will probably dilute an overtly hawkish stance however, limiting the reports’ scope to boost the British Pound.
3) Crude Oil Price Forecast: 4% Rise To Start 2018 Seen Tempting Shale
The trend of a higher crude oil is becoming a familiar theme in global markets. With a full week of trading in the books for 2018, WTI Crude Oil has managed to trade at 3-year highs with the highest intraday level traded at since 2014.
In a world where crypto currency momentum seems to defy physics, Crude Oil’s bid does not appear to be purely speculative fervor. Instead, there has been a steady drop in U.S. crude stockpiles backed by refiner demand. The drop in stockpiles has lead to backwardation where front month futures contracts are receiving a premium over later dated future contracts. In a commodity market, backwardation is a way of using the financial market’s collective intelligence to signal market tightening, which is backed by OPEC’s production cuts and steady global demand.
The December 2018 Brent Crude Oil futures contract is currently at a $3.63/bbl premium to the December 2019 contact. The demand is aligning with price support. The irony of the current state of the Oil market is that things are looking too good to some. Iran’s Oil Minister, Bijan Namda Zanganeh recently said, “Members of [OPEC] are not keen on increased Brent crude prices above $60/bbl because of shale oil.” Prices of Brent Oil’s front month contract reached an intraday high of $69.37 on Wednesday.
The message behind the weekly inventory report out of the United States was that the overall petrol glut is continuing to shrink, and has done so for the eighth straight week. The US Crude Inventory drop registered at 4.95m barrels per the EIA.
Of course, traders are often looking for the next item to round the corner, and that is looking to individual crude products that refiners have been so aggressively turning into usable products, which are not being sold downstream as fast as an oil bull would hope.
Either way, trader should think twice or more about fighting the strength seen in Crude Oil. Wednesday saw Crude trade above $64 with Brent within an whisper of $70 and backwardation explained above continues to support the backdrop.
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