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Oil: Race to the Bottom Kicks Off

Published 11/17/2023, 02:06 AM

This week could hardly be better in terms of economic, political, and geopolitical news. The US inflation slowed more than expected, the US politicians inked a short-term deal to avert a shutdown. On top, the US retail sales fell last month but fell less than expected, the initial jobless claims rose, and the US unemployment benefits reached the highest level in almost two years, factory production fell more than expected and homebuilder sentiment fell to the lowest level for the year.  

The US 2-year yield fell again to test the 4.80% level for the third time since the beginning of this month and the 10-year yield slipped below 4.50%, again. The S&P 500 consolidated gains above the 4500 psychological level, and Nasdaq 100 remained bid a few points below the summer peak. Small stocks in the Russell 2000 however fell 1.50% yesterday, and the Chinese stocks couldn’t extend gains after the Biden-Xi summit. Nasdaq’s Golden Dragon China index spent just one day above its 50-DMA -thanks to fresh stimulus measures announced by China earlier in the week, then returned below this level.  

Alibaba (NYSE:BABA) called off its much-expected cloud division spin-off this week because the company serves Chinese tech and AI companies and needs advanced chips – the kind of chips that Nvidia (NASDAQ:NVDA) makes – to compete with Amazon (NASDAQ:AMZN) Web Services, or Microsoft’s (NASDAQ:MSFT) Azure. And with the US chip export ban looming, it’s certainly not the best timing to take on a new challenge. Investors are not ready to go back to Chinese tech names in the middle of a chip war between the US and China.  

FX and Commodities

The US Dollar Index held ground at the 100-DMA, but remains offered near the major 38.2% Fibonacci retracement, as the softening Fed expectations increase bets against the greenback. The EUR/USD consolidates gains after being propelled into the medium-term bullish consolidation zone. Earlier this week, the EU revised its 2023 growth forecast for Europe down to 0.6%, but it said that it sees growth return to the old continent by next year. Even Germany, which is suffering from a severe economic slowdown, could grow. Recession or not, the European Central Bank (ECB) is not expected to cut its interest rates until, at least, July next year. The ECB’s slight hawkish note could support a further rise to the 1.10 mark. Cable, on the other hand, returned below its 200-DMA after a softer-than-expected inflation report released earlier this week revived the Bank of England (BoE) doves as well. 

In commodities, gold surfs on falling yields and high tensions in the Middle East. The yellow metal extended its gains to $1988 yesterday but should see resistance into the $2000 level in the absence of any major news.  

American crude sank to $72pb yesterday, after having tested and failed to clear the $78/80 resistance earlier this week. The 3.6-mio-barrel increase in the US inventories last week served as a good excuse to sell the top, along with the rising worries of global slowdown. No one cares about the Middle East carnage or OPEC cuts. At the current levels, oil is oversold, and we could see another correction attempt, but gains will likely remain limited.  

Could OPEC do anything about it? Yes, but not now. The market focus has heavily shifted to the weakening demand outlook from tightening supply If Saudi announces further supply cuts, and if the market doesn’t react, its finances will take a bigger hit. As such, the selloff could extend below the $70 mark. Key support stands at $63.50, the May dip.  

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