There has been no major moves economically speaking in the market, but there is plenty on the horizon and markets will shortly be focused on data out of Japan with household spending likely to be the main focus. Japan's ability to spend has been sharply in the microscope under Abenomics as he tries to break the culture of saving and push Japanese to be more consumer friendly with their cash to boost GDP but also to help increase tax revenue. It's likely that the market will be looking for weaker numbers here and expecting the market to rally further against the Yen, which has recently clawed back some ground against the USD.
Technically speaking the USDJPY ran out of steam at resistance at 114, as the market started to unwind some of its positions to take profit. Since then we have also seen it push down to support at 111.843 before failing to find any further legs for the bears, this is a bullish signal for the most part and the market may look to restart further moves higher as a result. If we did see further drops I would expect the 20 day moving average to finally play catch up and act as dynamic support for the USDJPY. Expectations around the bulls breaking higher will find the next level of resistance at 116.591.
On Thursday I spoke about the Canadian dollar and it continues to struggle to find any ground other than through the current OPEC meetings. There is however a number of Canadian economic events on the horizon which will have some impact, and I am expecting this to flow onto the market. It will be hard to beat the current USD strength though without some sort of major data boost or an OPEC deal (a struggle at this time). Certainly with the Trump dollar in full force and markets looking forward not backwards the USDCAD could certainly still remain in the territory of the bulls for the time being.
The obvious correlation between oil and the CAD has so far helped it not further erode anymore ground to the USD and support at 1.3402 continues to be a major level which has prevented further drops on the charts. One thing that is worth noticing is the 50 day moving average which is creeping up the charts and looking very imposing as a possible catalyst for dynamic support, after future touches on the daily chart were met with strong buying. In the even the bulls do manage to regain control the market is likely to jump back up to 1.3542, but with the USDCAD long term horizons always need to be careful as the pair is known to range.
OPEC has dominated headlines today and with good cause, as the once former oil monopoly continues to struggle with internal politics in an effort to alter the current price of oil by cutting production and supply all together. There is only one problem... the rest of the world continues to pump oil outside of OPEC, and the various OPEC members are suffering from low prices so much that cutting production may not actually support them at all. It has so far got to the point where some pundits are calling the odds of an OPEC deal even happening at 50/50, my guess would be to put this figure much lower given the politics at play and how unlikely Iran is to enable any production freeze at all. So where to for oil markets from here? It's likely that markets will shift their focus back on US oil inventories data again as the main catalyst for movement and also focusing on global growth as a sign of a pick-up in the market.
So where to now if the OPEC talks break down on the charts. My focus would likely be on the key support level of $42.00 at this stage, given that the market has rushed down to that level before and will look for some sort of land in the sand, failing that the next support level down could be found just below this around the $40.00 psychological level. While it's easy to play levels it's important to realise this is politically driven so the patterns will only support movements that depend on the OPEC deal and right now the market is predicting the talks might indeed fail, and cause Saudi Arabia to flood the market in any case.
The US markets however continue to find strength from the economic data with recent figures out today on consumer confidence lifting to 107.1 (exp 101.2), this was a strong result when you compare the previous months reading of 98.6 and shows that consumers are looking to spend in the build up to Christmas. Preliminary GDP q/q also lifted to 3.2% (3.0% exp), and this is in-line with the expectations around Trump and the infrastructure building that is expected to take place over the next 4 years of his term to boost the American economy.
The S&P 500 has benefited the most from the recent movements and its lift up the charts should come as no surprise as the hawks are back in play, but also there is a look for government to spend. At present the S&P 500 has pushed through the 2200 market and at present using this level as support before looking to push higher. Market expectations are that 2250 is likely to be on the cards in the short term given the optimism from a business standpoint in the US economy, but also based on the fact the USD continues to strengthen making it cheaper for US businesses to operate. Any further drops on the chart are likely to find support though on the 20 day moving average and I would expect this to play a big part if we do find any bears still present.
A strong feeling of anxiety has gripped the financial markets this week with investor jitters rising as uncertainty over OPEC securing a meaningful freeze deal in today’s Vienna meeting weighs heavily on global sentiment. The many anomalies revolving around the deal continues to send ominous warnings while repeatedly conflicting reports of major oil producers cooperating and debating have left most market participants on edge. With the cartels credibility hanging on a thin line and the oversupply concerns intensifying by the day, OPEC has more to lose than gain from failing to secure a deal but can major producers decipher this logic? While there still remains a thick layer of uncertainty over today’s OPEC outcome, it may be certain that Oil is exposed to explosive levels of volatility as investors systematically offload and reload positions to be in the winning trade.
WTI Crude is heavily pressured on the daily time frame and a breakdown below $45 could open a path lower towards $43. A failure to secure an effective deal today could ensure oil remains depressed for prolonged periods with price levels below $35 becoming a reality in the medium to longer term.
US ADP report in focus
The Greenback edged slightly lower on Tuesday with the Dollar Index hovering above 101.00 as investors took profit ahead of Wednesday’s heavily anticipated OPEC meeting. With expectations cemented over the Federal Reserve raising US rates in December, bullish investors still remain in control with the Dollar expected to remain buoyed. Some attention may be directed towards the ADP Non-Farm Employment Change which should act as an appetizer ahead of Friday’s NFP report. A strong ADP may encourage bulls to propel the Greenback higher during trading today.
Currency spotlight – EURUSD
The Euro continues to be battered by the painful combination of Eurozone growth concerns and fears of political instability in Italy. Tuesday’s positive stance from the ECB pledging to buy more Italian bonds post Italian referendum did little to quell the downside pressures on the EURUSD with bears exploiting this opportunity to send prices lower. Mario Draghi is due to speak about the future of the European economy in Madrid today with any dovish hints of extending QE in December enticing bears to attack. A resurgent Dollar amid the heightened US rate hike expectations could ensure the EURUSD concludes the year in losses.
From a technical standpoint, prices are bearish on the daily timeframe as there have been consistently lower lows and lower highs. A breakdown back below 1.060 could open a path lower towards 1.050.
In recent days the NZD has managed to find itself in a bit of resurgence up the charts against the USD as positioned were unwound and people were looking for some positives out of the NZ economy. The bulls today have suffered a minor set-back as they look to climb they charts with the NZ trade index coming in much weaker than anticipated at -1.8% q/q (0.0% exp). This drop in the trade index has been lead by lower commodity prices at the farm gate and continues the trend in the last five quarters of a drop. The flow on effects to the economy at this stage are estimated to be substantial especially with the fixed income traders who have instead turned their attention back at the USD as it looks likely the NZ economy will have to sustain low interest rates for some time.
The NZDUSD managed to fight back today but stalled briefly at the 100 day moving average, however it managed to quickly jump higher before the bears took a big swipe and have since pushed it back down aggressively on the chart. It has so far stopped just short of the 0.7061 support level as the market is once again frets with the idea of looking to push lower and take on the 70 cent psychological barrier. The hard level of support and floor that seems to be appearing is likely to be found flat on 0.6994, with multiple tests coming at this level. At present the 200 day moving average is also acting as dynamic resistance and I would expect it to continue to hold out against movements higher in the marketplace.
Lastly oil has certainly made its mark today as OPEC stunned the vast majority of investors by actually coming to some sort of agreement. In the process though it did kick out Indonesia and then redistribute its supply amongst the members, which in turn has lead to this large rush, but not as big as one might expect. The next thing many are looking for is if the non OPEC countries like Russia look to actually play ball and cut back production as well in an effort to bolster prices further. Certainly there is still a glut of oil in the world, and something does need to happen for it disappear.
Chart wise WTI oil has so far been looking strong with the bulls and rushed up to the $50 dollar a barrel mark before retreating slightly. Resistance for going higher is likely to be found at 49.80 and I would expect the market to struggle past this point unless the non OPEC countries come into line with the agreement. Any falls for oil are likely to be found at 47.88 which is acting as a hard level of support in the marketplace and with the 50 day moving average hovering around this area it will be tough for traders to push past with the current situation.
On Wednesday OPEC defied sceptics by telling the world we’re still united. When many thought that OPEC had no more influence on oil prices, yesterday proved them wrong with Brent prices surging by 9% to trade above $50. For the first time since 2008 the cartel members managed to put their political conflicts aside and strike a deal that benefits their economic agenda by reducing output 1.2 million barrels a day starting January 2017 for six months.
Russia also said it will come on board and cut output by up to 300,000 barrels per day in H1 2017, and still to be seen whether other countries will join when OPEC and non-OPEC producers meet on December 9 in Doha.
Energy stocks around the world are enjoying one of their best days in many years with S&P/ASX and Topix energy indices up by more than 7% and U.S. S&P500 energy index closing 5% higher yesterday.
Will prices continue to move higher?
If you were long oil early Wednesday, then you’ve received your Christmas gift already, but whether prices will continue to surge higher depends on multiple factors.
• Which countries other than non-OPEC Russia will commit to a cut?
• Will the process be monitored effectively, or chances of prisoner’s dilemma that encourages some members to exceed their production quota come into play?
• Will U.S. drillers return fast if prices held above $50 and how many rigs will be reactivated?
• On the demand side, are we going to see higher revisions due to Trump’s infrastructure policies?
If oil prices traded in the range of $50-$60, shale isn’t likely to return in massive levels, however if prices spiked above $60 then the shale industry will return as a major player to rebalance prices. The bottom line is OPEC’s deal will put floor on the downside, but on the upside multiple factors should be taken into consideration.
Italy continues to dominate headlines as Euro hits 20-month low
Political risk is showing no signs of escaping the headlines after the European Union was plagued into fresh political turmoil overnight following confirmation that Italian Prime Minister Matteo Renzi suffered a humiliating defeat in the referendum over constitutional reforms, which will lead to the handing of his official resignation to the President of Italy later today.
While political change in Italy is not something that the world is immune towards, there is anxiety that this round of political instability will rock economic confidence and negatively impact the Italian banking industry that is considered to be a danger spot for the Eurozone. It is no hidden secret that the Italian banking industry is plagued with bad debt and it is widely conceived that the Italian Government does not have the money to support the troubled banks, which could run the risk of eventually leading to an EU bailout similarly to what we have seen happen elsewhere in the past.
The market reaction to the events in Italy have not been disastrous, but it has attributed to the negative trading environment to commence the week in Asia and there are concerns over how financial stocks could react when the markets in Europe open in a couple of hours. The Euro has as expected been the major loser to the events in Italy, with the Eurodollar sinking to a fresh 20-month low marginally above 1.05 early on Monday morning.
There is no hiding away from the fact that this represents another victory for the anti-establishment with this also wrapping up events in 2016 that have included unpredictable upsets in both the United Kingdom and the United States. The concern is that the constitutional referendum in Italy was originally seen as a measure to speed up reforms in Italy for the greater good, but it was later turned towards an opportunity for voters to display their unrest with the current economic situation in the country and dissatisfaction towards the Italian government.
When you consider that there are major elections in both France and Germany in 2017, investors will be unable to ignore that there will be further political risks to come next year and that the surprises seen in 2016 could be viewed as a warning shot as we head into the new trading year. The elections scheduled for 2017 represent major event risks and following the political upsets that have caught investors by surprise throughout 2016, the upcoming elections in both France and later Germany provide a reason why many believe that the Euro could head for additional declines over the medium and longer-term.
Pound awaits Supreme Court hearing
While the British Pound is still enjoying a bounce following the comments that it might be possible to purchase access into the single-EU market once the United Kingdom finally leaves the European Union, there is a risk that the currency could begin retracing its gains once the Supreme Court begins a landmark hearing later on Monday on whether Parliaments consent is required before official negotiations can begin on the United Kingdom leaving the EU.
The hearing of 11 different justices is supposed to last four days and while the official outcome is not expected to be announced until 2017, any hint that Prime Minister Theresa May might be able to invoke Article 50 as previously planned for around March 2017 will encourage selling opportunities in the Cable.
Markets become increasingly acclimatized to negative news - adjustments never faster
Investors are getting used to bad news, and the lessons learnt in the past couple of months were implemented on Monday after the Italian referendum results. It’s true that a “No” vote was priced in to some extent, but the heavy defeat with 60% lead for those who rejected the reform of the constitution suggests that anti-establishment populists in Italy are on the rise. Although the Five Star Movement may be pushed away until the spring of 2018, there are many uncertainties ahead especially for Italy’s financial system.
The Brexit vote took a couple of days to be shrugged off, and Trump's electoral victory shock lasted only a few hours before bulls took control of the market, so why not respond in a similar way to Italy’s referendum? The EURUSD fell more than 150 pips in the immediate aftermath of the vote result testing 1.0503, and in less than 24 hours the pair surged by 290 pips. We can have a list of reasons to justify the price action, such as buy the rumours sell the news, Italy’s referendum vote doesn’t mean Brexit, or short squeeze occurred, but the most obvious fact is that markets are acting in such a weird way, where bad news is received with open arms, and this trend may not last too long.
Reserve bank of Australia held its final meeting for the year, and as expected kept rates at a record low of 1.5% after reducing them by 50 basis points in 2016. Very little changes were seen in the statement too, indicating that the central bank is in watch and see mode, and the Australian dollar reaction was mild, moving in a 40-pip range against the U.S. dollar. Traders should keep an eye on tomorrow’s GDP release where the Australian economy is expected to contract for the first time in 5 years.
The key central bank meeting for the week is Thursday’s ECB meeting. The €80 billion asset purchase program will end in March 2017 and the key question is going to be whether the Central Bank will continue buying bonds at the same pace or reduce the amount in a similar tactic to the U.S. Fed, which started reducing its monthly purchases by $10 billion in December 2013. Italy’s no vote will undoubtedly be discussed; however, any sort of bailout will create political chaos, but it remains to be seen whether it will indirectly impact the ECB’s decision.
The Canadian dollar has finally managed to gain some ground against the strong USD after weeks of the market waiting for it to react to oil prices beginning to show some turn after the recent OPEC agreements. However, Ivey PMI data out today showed weakness in the Canadian economy was still apparent as it came in at 56.8 (60.0 exp) showing that despite the optimism in Canada there is still weakness in the economy and the fact it was slightly down on last month will be concerning. For the most part the Canadian economy will benefit greatly if oil prices continue to remain high in the wake of the recent OPEC meeting. What will be key for the Canadian Dollar will be how non-OPEC members such as Russia react to the agreement. There is still a degree of hesitation around dealing with Russian and its needs to pump as much as possible to sustain the deficits it currently runs.
On the charts the USDCAD has broken through a number of key support levels as it slips down the charts in a bearish motion. The largest being the 1.3402 level which managed to hold out for a few days before the market pushed through on the back of oil prices. Currently though the 1.3267 support level is holding up further drops on the charts and the 50 day moving average is acting as dynamic resistance on the chart. This is likely to cause the bulls a little hesitation and they may look to play of key levels rather than focus on turning the trend at this stage. When looking further ahead I would expect the bears to look to play to lower levels at 1.3149 before pausing and looking for further oil movements which may indicate direction for the USDCAD.
Silver has been an enigma as of late as it has bucked the trends and dived lower in a tough market for commodities. For the most part it has looked to follow the market and indeed climb higher as commodity prices have improved in the long term, relatively speaking though silver is very much a precious metal and traders have been pushing it around as a hedge for market sentiment. Despite all of this silver has so far struggled as well with a higher USD which has pushed the metal lower and into the $16 dollar range where it has not been since June.
Silver on the charts has been a technical traders dream as of late as it plays of psychological levels and moving averages very clearly. So far it has held up on support at 16.708 but this looks unlikely to hold in the short term as the market continues to look bearish with the incoming Trump presidency. The 20 day moving average has acted also as a level of dynamic resistance in the market place, and is likely to hold back further movements unless we see drastic change. The next level of support down is at 15.933 and I expect this will be a tough one for the market to crack.
WTI Crude was vulnerable to sharp losses on Tuesday following reports of OPEC’s output rising to a worrying record high of 34.19 million barrels per day in November which revived the oversupply concerns. It is becoming quite clear that the effects of last week’s expectation-defying production cut deal in Vienna is warring off as investors come to terms with the painful OPEC reality. For the cartel to bring production back down to the optimistic 32.5 mbpd in January after November’s high, a mammoth 1.7 million barrels will have to be trimmed which could be challenging. When keeping in mind countries such as Libya and Nigeria that are exempted from the limits of the latest agreement amid the record high outputs, concerns may mount over OPEC failing to fulfil the agreed production cut next year. There are still many unanswered questions and patches of uncertainty over how the cartel may solve this complicated production cut jigsaw consequently pressuring oil further.
Much attention may be directed towards the OPEC and Non-OPEC meeting on the 10th of December which could spark a selloff in oil if non-OPEC refuses to cut production by 600,000 barrels per day. Russia’s oil production continues to hit fresh post-Soviet highs while Russian officials have repeatedly stated that output cuts will be implemented moderately which could impact the pending deal. If pessimism persists over the production cuts and oversupply fears intensify then WTI bears could install another heavy round of selling. From a technical standpoint, bearish investors could exploit the breakdown below $50 to encourage a decline lower towards $48.50.
Sterling bears make a comeback
Sterling relinquished short term gains on Tuesday with the GBPUSD sinking towards 1.265 after reports of the British government requesting parliament to honour its plan to divorce the European Union renewed the Brexit fears. The main theme driving the Sterling this year has been the ongoing Brexit saga with uncertainty and fears over the longer term impacts of Brexit to the UK economy diminishing investor attraction towards the currency. While bulls may be applauded on their ability to exploit the noise and optimism over Brexit being delayed to propel Sterling higher, the technical bounce should act as a firm foundation for sellers to drag prices lower. Investors may direct their attention towards the UK Manufacturing Production report which if exceeds expectations could provide bulls a slight lifeline. Although data from the UK continues to repeatedly display signs of economic stability, it has become clear that Brexit remains the main theme that has made Sterling sellers’ dream in the medium to longer term.
US markets saw a massive rise today as the Dow was up 300 points and the S&P 500 was up 29 points showcasing that investors believe the advent of Trump will have a positive effect on the US economy. This result while being based around the politics was further backed by the strong results the US market has been seeing with JOTLS job openings up to 5.53M - a reversal on a drop in the last 2 months. However this may also be a seasonal shift with many jobs created around the busy Christmas shopping season. Consumer credit was also much lower at 16.0B (18.8B exp) after two very large previous months where consumer credit saw large growth. For the most part though the US economy looks poised to make the most of the Christmas season and many are expecting trump to take the US economy that one step further in the New Year. It could be a hard landing for markets if he fails to deliver, but for now the market optimism seems ever increasing.
On the charts the S&P 500 has certainly reached higher and the market is looking for a solid resistance level to pause at and take profit. In the past, resistance levels in uncharted territory tend to happen around key psychological levels and in this case 2250 looks likely to be the hard line that will be tough to cross for the bulls. Beyond this the obvious next level above will likely be at 2300 and I would expect the market to take a breather until Trump looks to swing his economic might to help bolster the US economy. Any push lower to support is likely to find it though at 2183 or alternatively dynamic support on the 20 day moving average, which has been quick to push back any bearish activity as of late.
Across the pacific in the New Zealand economy recent comments from the Reserve Bank of New Zealand have sparked up the market somewhat, as the governor of the RBNZ believes that the NZD has turned a corner and may be starting to retreat. However, the recent Global Dairy Auctions had its 4th consecutive jump in recent weeks and this was further backed by the ANZ commodity price index lifting 2.7% on the previous quarter, adding further fuel to traders seeking safety and yield overseas away from the turmoil.
The NZDUSD has been the major trading target and has so far managed to hold up firmly on support at 0.7113 as it looks to shrug off the bears and recent comments from the RBNZ. Right now it's even reaching outwards resistance at 0.7180 and the market will be looking to see if has the momentum and pace to continue further movements higher on the weaker USD. Despite the movements, the USDs run feels like it may not be over and more Trump economics could certainly see it moving rapidly against all the major and commodity currencies out there.
