The most anticipated OPEC+ meeting of the year turned out to be a damp squib in the end. OPEC+ agreed to increase oil output in July and August to 648,000 bpd from the previously agreed 432,000 bpd, with the increased allocation spread across all its members, including, you guessed it, Russia. Given most of OPEC can’t even meet their present targets, with only Saudi Arabia, the UAE, and possibly Iraq, having any sort of spare capacity, and with Russia under sanctions, the entire exercise was nothing more than window dressing.
It is clear which side OPEC’s bread is buttered on and you’d have to say Vladimir Putin is having a good week by his lowly standards. Progress in Eastern Ukraine, OPEC clearly not wanting to upset him, and now a Russian restriction on noble gas exports. (these are inert gases used in the production of semiconductors amongst other things) Ukraine previously produced 30% of the world’s noble gases by the way. He must be loving it when a plan comes together.
The minuscule increase in production was a sop to US President Biden but won’t change a thing in the supply/demand equation on international markets. President Biden is going to have to show up with a lot more goodies on the table during his upcoming visit to the Middle East to change that dynamic. Sabre rattling against China, and a vacuous trade agreement that provided no access to US markets, as per his recent trip to Asia, just isn’t going to cut it. To paraphrase Jerry Maguire, if you want to cut Russian and Chinese influence everywhere Joe, show me the money.
Markets clearly felt the same as oil, which had plummeted pre-meeting on hopes of a much larger increase in production, reversed all their losses. Further indignity was served up by official US Crude Inventories, which plummeted by just over 5 million barrels yesterday. That saw both Brent crude and WTI finish a huge turnaround, closing around 2.0% higher on the day.
With Brent crude and WTI within shouting distance of $120.00 a barrel, that made the rally by US equities even stranger things. Wall Street booked impressive gains yesterday and I can only put it down to a very weak ADP Employment release, only gaining 128,000 jobs, while April Building Permits fell by 0.60% and April Factory Orders for April only rose by 0.30%.
It was the ADP Employment data that did though, even though it is an appalling indicator for the US nonfarm payrolls. I note the JOLTs data this week still showed two jobs for every unemployed American, something Lael Brainard also noted yesterday. Still, why let reality get in the way of a good story? A slowing US economy equals less Fed tightening equals lower terminal interest rates equals buy everything. The rally by Wall Street sparked a correlated risk-on rally across the rest of the markets. US yields edged lower, the US Dollar got thumped, with risk-sentiment fashionistas the Euro, Australian dollar and New Zealand dollar booking impressive gains. Even Bitcoin and gold rallied as they are inflation hedges, I mean deflation hedges, I mean stagflation hedges; oh, never mind.
We can take two things out of the overnight price actions. Equity markets, having been programmed to buy any dip over the last two decades thanks to the asset price backstop of global monetary policy, are looking for even the most tenuous reasoning to price the end of the bear market. Secondly, the trajectory of US interest rates is the one ring to rule them all with global markets and asset classes everywhere.
Today's nonfarm payroll data is expected to ease to 325,000 jobs added. A large deviation above or below that number should produce a very binary outcome for the FOMO gnomes of the stock market, and by default, be reflected in other asset classes. A high number equals Fed tightening with lots of 0.50% increases, remains on track, equals sell equities, sell currencies, buy US Dollar, sell bonds, sell gold. A low number equals less Fed tightening, buy equities, buy currencies, especially EUR, AUD and NZD, buy bonds, buy gold, and because it’s the weekend, let's buy some crypto as well. Volatility is the winner either way.
Moving out of the tail-chasing Lala land we call the US financial markets and into the real world, we see a raft of Services PMIs for May also released today. Asian releases have been a mixed bag. Australian Services PMI caught a cost-of-living sniffle as it fell to 53.2 from 56.1 previously. In contrast, Japan's Jibun PMI rose from 51.7 to 52.6 as the reopening boom continues there. European Services PMIs have obvious downside risks as will India’s at 1300 SGT today as rising living costs bite.
None of that should influence the Reserve Banks of Australia and India next week, which will both hike policy rates again. Indonesia’s CPI yesterday was benign and will likely stay Bank Indonesia’s hands this month. We can pencil in another rate hike from the Bank of Korea in July for sure after South Korean inflation for May YoY blew through the topside, rising by 5.40%.
Holidays will impact trading volumes and liquidity internationally today. Mainland China, Hong Kong, and Taipei are all dragon boating. Thailand celebrates their Queen’s birthday. Meanwhile, the UK will be closed again for neighbourhood street parties to celebrate the Queen’s platinum jubilee. Congratulations Your Majesty. On Monday, most of Europe is closed for Whit Monday, with holidays also in New Zealand, South Korea, and Malaysia.
Finally, I know markets can remain irrational longer than you can stay solvent, but did I mention that oil is approaching $120.00 a barrel, and Russia now controls large swaths of the global wheat and plant oil supply, and noble gases? Just saying….
Asian equities edge higher
Soft US ADP Employment data saw Wall Street rapidly price in less Fed tightening, spurring an impressive rally on Wall Street. With Wall Street clutching at any straw for an excuse to buy, the S&P 500 jumped 1.84% higher, the NASDAQ leapt to a 2.69% gain, and the Dow Jones rallied by 1.29%. US futures have paused for breath in Asia, all three indexes are unchanged.
Asian volatility appears to be suffering a holiday impact, rising more cautiously thanks to holidays in Mainland China, Hong Kong, Taiwan, and Thailand. Japan’s Nikkei 225 has risen by 1.15%, with South Korea’s KOSPI adding just 0.42%. Singapore is just 0.10% higher, with Kuala Lumpur easing by 0.25%, Jakarta gaining 0.90%, and Manila unchanged. Higher oil prices overnight may also be tempering gains in Asia.
In Australia, markets are slavishly following the US lead. The ASX 200 is 0.65% higher, while the All Ordinaries has risen by 0.80%, with New Zealand edging 0.30% higher.
European markets rallied yesterday, likely on hopes that OPEC+ would ramp up oil production and with Wall Street’s climb. Oil prices closed around 2.0% higher in New York, with the OPEC+ announcement mere window dressing. That is likely to limit gains in Europe initially, especially with the UK away, weekend event risk, and much of Europe on holiday on Monday.
US Dollar loses all of its previous gains
There was a wax on, wax off feel to currency markets overnight. Soft ADP Employment data spurring a risk-on rally across asset classes as the Fed hiking outlook was tempered. The US Dollar staged a broad retreat, unwinding all its gains from the day before in the major space except for USD/JPY. Asian market volatility is being dampened by holidays across the region today, including Mainland China and Hong Kong, and the UK later today.
The dollar index tumbled by 0.78% to 101.75 yesterday, an exact reversal of the rally from the day before. It is unmoved in Asia and support/resistance lies at 101.40 and 102.70. Its fate will be decided by this evening’s US Non-Farm Payrolls.
EUR/USD reversed all its previous day’s losses, rising 0.91% to 1.0750 where it remains in Asia. Resistance between 1.0770 and 1.0830 remains a formidable barrier, with support at 1.0650. Sterling reversed all its previous day’s losses, rising 0.75% to 1.2575 where it remains in Asia. It has support/resistance at 1.2460 and 1.2670. USD/JPY was almost unchanged at 129.85 as US bond yields barely moved. It remains unchanged in Asia. It has support/resistance at 129.00 and 131.30. Their fate will be decided by this evening’s US Non-Farm Payrolls.
AUD/USD staged a bullish outside reversal day yesterday, making a new low before closing higher than the high of the day before, thanks to the broad-based risk-on rally after the US data. It leapt 1.27% higher to 0.7260 where it remains today. AUD/USD has support at 0.7150, and the yesterday rally took it above its 50/100/200-day moving averages (DMAs) between 0.7230 and 0.7255 as well. A soft nonfarm print tonight could see AUD/USD rise to test 0.7350, with a weekly close at these levels being a bullish signal technically. Its fate will be decided by this evening’s US nonfarm payrolls.
Asian FX currencies booked modest gains yesterday, with the rise in oil prices tempering the fast money inflows. Both the Malaysian Ringgit and Philippine Peso actually fell yesterday, a result I suspect, of rising subsidy bills as oil prices climb higher. The Indonesian Rupiah has rallied 0.70% to 14,420.00 today, while the KRW and MYR have risen by 0.10%. With a swathe of holidays across the region today, and no PBOC USD/CNY fixing, Asian markets look content to watch from the sidelines as we head into US data today and the weekend. Their fate will be decided by this evening’s US nonfarm payrolls.
Oil stages spectacular reversal higher
A disappointing outcome from the OPEC+ meeting (for consumer nations), saw oil’s selloff in Asia yesterday completely reversed pus interest. Markets were disappointed when OPEC+ only agreed to hike production to 650,000 bpd for the next two months, instead of more structural increases from OPEC to cover the Russian shortfall. Things got worse for oil bears later in the season when the US Crude Inventory data posted a surprise 5.0 million barrel drawdown.
Brent crude fell as low as $112.50 a barrel intraday, before staging a spectacular reversal higher which saw it close 1.93% higher at 118.05 a barrel. WTI fell to near $111.00 a barrel intraday, before it reversed sharply higher, finishing 2.40% higher at 117.55 a barrel. The US Crude Inventory number impacts WTI more and causing the Brent premium over WTI to narrow sharply. In Asia, the swathe of holidays has torpedoed volumes and liquidity. Brent crude and WTI have seen some short-term long-covering, pushing them slightly lower to $117.45 and $116.60 a barrel respectively.
Markets have passed judgment on the OPEC+ moves unequivocally and clearly believe they will have no meaningful impact on the global supply/demand imbalance. The ferocity of the rally yesterday leaves little doubt that the upside is the path of least resistance. Brent crude has resistance at $188.40, $120.00, and $124.00, with support distance at $112.50 a barrel. WTI has resistance at $117.70 and then $120.00, with now distant support at $111.25 a barrel.
Gold rises sharply on falling US Dollar
It is a measure of how powerful the risk-on rally was yesterday, and how desperate markets are to price in less Fed tightening, that gold leapt 1.20% higher to $1868.50 an ounce as the US Dollar was crushed. Having probed $1874.00 in early Asian trading, it has retreated back to its starting point at $1868.50 as the morning progressed, volumes impacted by holidays in Greater China.
The chart picture shows gold is now eroding resistance at $1870.00, with the 100-DMA at $1886.00 as its next target, followed by $1900.00. there, I suspect, it will encounter heavy option-related selling initially. Support is at $1844.00, $1830.00, and then $1780.00 an ounce. I do not discount a disorderly retreat if the latter fails.
A weaker than expected US nonfarm payrolls number tonight should keep the less-Fed-tightening, risk-seeking party going. In that case, a test of $1900.00 is out of the question, followed by a gap higher if it breaks. However, gold bugs will know how quickly joy can turn to disappointment with gold, and a firm data print could well see yesterday's gains unwound with interest. Be careful out there.