Summary: Markets have been jolted by a surprise decision at the weekend by OPEC to cut crude oil production by a million barrels a day. This has led to weak risk sentiment to start the week as oil prices have soared some four dollars a barrel after rising as much as seven dollars a barrel in overnight trading. The US dollar firmed and gold prices dropped as global bond yields surged on the inflationary implications.
S&P 500 futures rallied 1.4% on Friday extending March gains to 4.1% for the continuous S&P 500 futures marking a fascinating month with a banking crisis out of the blue and a historic repricing of policy rates. However, as we have seen since the beginning of the year ‘animal spirits’ are back in the market driven by retail investors leading to significant ‘buy-the-dip' activity. This month, the main topic in equities will be about inflation and whether data will continue to lean in favour of a recession because that could become a key obstacle for equities.
CSI 300 gained 0.7% oil and gas names surged on news that nine of the OPEC+ countries cut production, and domestic chipmakers advanced as foreign competitor Micron was under cybersecurity review by the Chinese authorities. Hong Kong’s Hang Seng Index dropped by around 0.5%, driven by weaknesses in the technology space. Hang Sent Tech Index shed more than 1%, with Weibo (09898:xhkg), Bilibili (09626:xhkg), Kuaishou (01024:xhkg), and Baidu (09888:xhkg) down 4-8%. Chinese Developers climbed, as new home sales in China’s top 100 cities grew 19% y/y in volume terms and 29% y/y in value terms in March. Caixin China PMI Manufacturing came in at 50.0, below 51.5 the prior month and the 51.4 consensus estimate.
FX: crude oil jump plays along risk sentiment fault lines in FX
It was somewhat surprising to see the US dollar closing last week on a strong note as risk sentiment continued to surge into the close of trading last week. Some of that action may have been down to end-of-quarter flows everywhere and end-of-financial year flows in the case of Japan, as the JPY finished the week/financial year with a strong flourish after weakening for much of last week. The surprise OPEC production cut at the weekend (see below) produced a round of risk-off across FX, taking the US dollar higher, with EURUSD dipping back below 1.0800 into this morning and GBPUSD below 1.2300 after teasing the 1.2400+ range resistance on Friday. It’s a busy week ahead on the US economic calendar with the March jobs report up on Friday and it’s the last week with the Bank of Japan under Kuroda’s leadership, with considerable anticipation around the April 28 BoJ meeting. Australia’s RBA meets on Tuesday, as previewed below.
Crude oil prices jumped 8% on the Asian opening following a surprise announcement from OPEC+ they would slash production by more than 1 million barrels a day through 2023. Brent broke several key levels of resistance before running out of steam ahead of the March 7 high at $86.75. The decision was made to ensure stability and to pre-empt a potential slowdown in global demand growth. Note most of the expected +2m b/d demand growth is backloaded into the second half and with financial market pricing in economic weakness the group wanted to protect their most prized asset from a slump. In addition, they may see a slower than expected pickup in demand from China and ultimately managing to squeeze short sellers out of the market in the process was probably a bonus in their view. US production growth is slowing leaving more power in the hands of OPEC hence the much more proactive stance seen in recent months. Having left a major price gab in the market, and given the slowdown risks, the price may in the very short-term drift lower to establish a new level of support.
Gold trades lower for a second day after failing to build on Friday’s softer than expected PCE inflation report. Additional weakness was seen overnight in Asia in response to the stronger dollar and firmer yields as oil prices surged higher following the production cut announcement from OPEC over the weekend. Higher oil prices will make the task of bringing inflation under control more difficult and it could bring in doubt market expectations for +50bps lower Fed Funds rate by the end of the year. On the upside, $2000 remains the key level to watch, while support is seen at $1944 followed by $1933, the 38.2% retracement of the recent runup to $2000. In silver, watch a weekly close above $23.90 as it may signal a breakout of a two-year downtrend.
US treasury yields dipped Friday into the end of trading after a soft US Feb. PCE inflation report (see below) but erased much of that development after the weekend’s surprise production cut from OPEC. Since the zany volatility in yields on the sudden collapse of Silicon Valley Bank and ensuring focus on fragilities in the banking sector, the US 2-year yield has stabilized in the 4.00-4.15% yield range and the 10-year near 3.50%.
US Feb. PCE data on Friday fueled an extension of strong risk sentiment until the OPEC production cut at the weekend spoiled the party. The key core PCE data showed inflation rising 0.3% month-on-month and 4.6% year-on-year, both 0.1% below consensus expectations and the latter was the lowest figure in 15 months. Importantly, the area of inflation that the Fed has singled out as the most troubling, the “core services ex-shelter" measure, decelerated to 0.27% in February from 0.49% in January (which was revised down from the previously estimated 0.58%). The Fed’s March FOMC meeting forecasts that core PCE inflation will fall to 3.6% by the end of this year.
The Bank of Japan’s business sentiment survey (Tankan) deteriorated further in Q1. The headline Tankan large manufacturer index slid to 1, from 7 the prior quarter and below the consensus estimate 3. It was the lowest level since Q4 2020. Meanwhile, Tankan non-manufacturing index increased for a 4th quarter to 20 from 19, in line with expectations.
Speculators, especially those looking for directional trades in crude oil are once again in the spotlight after having been thrown under the bus by the weekend announcement of another OPEC+ production cut. The Saudi energy minister is known for his opposition against short sellers as the Kingdom attempt to control their most prized asset. “We will never leave this market unattended,” he said back in 2020. “I want the guys in the trading floors to be as jumpy as possible. I’m going to make sure whoever gambles on this market will be ouching like hell.” The mid-March banking crisis drove a sudden 10-dollar collapse in the oil price with short-sellers, especially in WTI crude playing an important part. Ahead of yesterday’s announcement, however, short covering was already under way according to the weekly COT, with the WTI net long rising 59% or 42k contracts in the week to March 28, the bulk of that being driven by short covering.
Soybeans extended their biggest gain since September after Frida’s Prospective Planting report indicated US farmers will plant a smaller than expected crop (87.5m acres vs 88.3m expected). Corn also received a boost despite the USDA raising the corn acreage to 92m, above estimates for 90.9m. In addition, crop prices were also supported by the crude oil’s rally with rising fuel prices spilling over to higher prices for biofuels produced from soybeans and corn.
The race to dominate the electric vehicle market is on with Tesla and BYD fighting for the spot as market leader. Yesterday, Tesla reported Q1 deliveries of 422,875 vs est. 421,164 taking the US-based EV-maker to around 1.7mn annualised unit sales level. Lithium carbonate prices out of China are down 62% from their peak in November last year driving price cuts across all EV models accelerating the adoption of EVs.
The power generation unit spun out of Siemens has been re-rated higher by Morgan Stanley as the energy company is expected to see significant upside from its gas turbines and wind businesses. The case for Siemens Energy is also built on low valuations ahead of a multi-year long period of growth in European power generation which will be driven by the continent’s electrification.
The Reserve Bank of Australia, the only G10 central bank with a monthly meeting schedule, is set to announce its latest monetary policy decision on Tuesday, with the market not expecting any further tightening tonight from Governor Philip Lowe and company after 10 consecutive meetings of raising rates. The rate currently stands at 3.60% after the March 7 meeting saw a language change in the statement suggesting that the RBA may look to pause its tightening even if it thinks further tightening may be necessary. AUD sold off heavily on that March 7 meeting. A Melbourne Institute inflation gauge for March was out today and showed inflation slowing to 5.7% YoY after a cycle high 6.3% in Feb.
The widely covered angle on the charges against Trump are related to hush money payments paid during his 2016 presidential campaign and specifically, the tax treatment of those payments. But the more serious potential would be that the arraignment sees Trump charged with other crimes related to his business practices. Trump is set to speak after the arraignment tomorrow.
The earnings calendar this week is light, so the equity market will focus on inflation, credit, and the economy next week, while waiting for Q1 earnings season starting up in two weeks.
Next week’s earnings releases:
0715-0800 – Eurozone Final Mar. Manufacturing PMI
1400 – US Mar. ISM Manufacturing
0430 – Australia RBA Cash Target Quarterly Outlook
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