US markets
Yesterday was another volatile day for US stocks, but markets remain buffeted by positive signs on U.S.-China trade. But its far to early to get overly optimistic about a quick end to these tensions. Still, as per the US administration modus operandi to give a little then pull back, both Commerce Secretary Ross and Treasury Undersecretary Malpass asked China for hard deadlines. So we expected a bit of a mixed start to the Asia session.
Brexit
UK PM May’s no-confidence vote was firmly center stage Wednesday. PM May has survived a Conservative Party confidence vote and lives to fight another day—actually another 12 months as per Tory party rules.
But make no mistake, this was a narrow victory suggesting a deal is less likely as the results skew the probability distribution further against a Brexit agreement. The 117 dissent votes coupled with the DUP and the opposition, add up to a clear majority against May’s deal and if her deal fails in Parliament eventually, a no-confidence motion in Parliament remains probable outcome.
Indeed, another treacherous Brexit climb lies ahead. This will leave the pound extremely vulnerable to headline risk, even more so since the pound rallied with investors expecting May to win and strengthen her mandate, not sure if that is the actual outcome given her slimmer margin of confidence than expected.
Fortunately, no PM May’ hem but unfortunately no Brexit catharsis either.
Oil markets
The DOE data for the week ended December 7 painted a completely differing picture for Tuesday’s American Petroleum Institute hefty drawdown which supported the oil market yesterday. The Energy Information Administration reported early Wednesday that U.S. crude supplies fell by 1.2 million barrels for the week ended December 7 short of analyst’s expectations
And while OPEC is well on their way to balancing global oil markets, OPEC's forecast is not offering up a particularly favorable landscape for oil markets next year as recent estimates suggest global demand will be 31.4m barrels a day of the cartel’s crude next year, 2.1m b/d less than demand from 2017, but production for outside of OPEC. Primarily driven by shale drillers where the output is set to soar to 2.16 million barrels a day versus 1.28 million per day.
And while the US markets have pulled back from energy dependence after shifting to a brief net exporter of oil, US oil is set to move firmly into a net export mode in 2019.
All of which suggests OPEC needs to come up with a thicker supply cut down the road given that product as crude oil production from the world’s three largest producers—US, Russia, and Saudi Arabia—were at or near record levels in November.
Also, US Energy Information Administration has revised its 2019 price forecasts for Brent and West Texas Intermediate to $61/bbl. And $54/bbl., respectively, which are both $11/bbl. lower
Currency Markets
GBP: The pound looks precarious as Thresa May is probably set to embark on more whistle-stop tours to build support for her Brexit vision, which means more headline risk. The Brexit Sisyphus team gets set to push another boulder up the mountain, with predictable results.
EUR: The ECB has been relatively candid in guiding the market’s expectations for the upcoming meeting. We expect guidance on interest rates to remain unchanged in the initial press release. The main focus will be on the APP. But with the market anticipating an end APP, anything other will be interpreted as extreme dovish with a predictable result for the EUR.