More of the black stuff
It's one day to go to the crunch Opec meeting on Friday, and the news coming out of the pre-summit international seminar in Vienna indicates more – and not less – supply.
“Yesterday we had Iraq saying it would increase production in June; Iran could increase production by half a million barrels within a month of sanctions being lifted and of course Saudi Arabia has actively been increasing production over the last six months," says Saxo’s head of commodity strategy, Ole Hansen.
All in all, the market has been taking this increased supply negatively and the WTI crude price has moved back below $60. The current weakness of the dollar is exacerbating oil’s predicament by putting further downwards pressure on the commodity.
Fresh data from the US yesterday showed an expected seasonal dip in inventories but this had negligible impact because the data also showed that production remains robust.
Nervousness ahead of Opec is also a factor in a widening of the spread between the two global benchmarks, WTI and Brent. The spread is now out to $4 for the first time in around two months.
“WTI will be stuck in a range around $60 today and is unlikely to move much ahead of the Opec meeting on Friday as well as the US nonfarm payrolls numbers,” Hansen says.
US oil production rises and WTI/Brent spread narrowing:
The black stuff keeps flowing and Opec won’t curb it
Swings and roundabouts
Much else hinges on the NFP data – most notably the direction of the dollar. The greenback came under pressure yesterday as the euro's ascent renewed in the wake of the European Central Bank press conference.
The ECB's president Mario Draghi offered little concern on the volatility in the bond market and this had European bond markets again in a steep descent and the euro spiking higher to new local highs in most pairs.
"There were huge swings in EURUSD option volatility post the ECB announcement," says Jeppe Norup from Saxo's FX Options desk.
"We saw the big rally in the euro yesterday after the rather hawkish ECB conference. One-month EURUSD vols traded firmly around the 13.15 area which is still in the high end for the year. Today we see a little blip in EURUSD 1-month at-the-money volatility options."
He says the risk of big moves in gaps are still to the downside in EURUSD. "Everybody is waiting for tomorrow's US nonfarm payroll figures. Overnight EURUSD is marked at 26 vols which is 1.25 figures for a straddle."
Saxo Bank's head of fixed income Simon Fasdal adds that we can expect more volatility in the bond market in the days ahead.
The not-so-lucky country
Volatility is also the name of the game in Asia, where stock markets finished mostly in the red with the Shanghai Composite down 3.5% on concern that waves of new share offerings will sap liquidity in other stocks.
But the biggest news was in Australia. After strong GDP figures yesterday we got a pretty ugly surprise with Australian retail sales and trade data.
"What a difference a day makes," says Saxo Bank's Christoffer Moltke-Leth, live from the trading floor in Singapore. "Retail sales stagnated and came in flat vs. 0.3% gain expected. The trade deficit was a bit of a disaster blowing out to a record 3.9bn in April.
This is the largest deficit ever recorded as major storms on Australia’s east coast shut coal and Iron ore ports and limited shipments."
Moltke-Leth says the retail sales data furthermore signal a deterioration to the start of Q2 from strong economic growth in Q1 as households’ balance sheets come under pressure from weak wages growth. "The Reserve Bank of Australia will be pretty disappointed about today’s data and AUDUSD took a beating down 70 to 0.7710 low."
Elsewhere in the Asia session EURUSD was steady at 1.1269 having rallied about 2.5% so far this week. US Treasury yields rose 10 bps to 2.37% in tandem with German bunds up 17 bps to 0.88% and higher treasury yields helped the USDJPY rebound modestly to 124.56.