Russia against further OPEC cuts
(by Peter Rosenstreich)
Oil has staged a solid recovery rally off $42 lows. The move to $47 was fueled by diplomatic tensions between Qatar and Saudi-led allies and expectations that OPEC would challenge the soft price with further productions limits.
While prices have marginally recovered, crude remains in bear market as surging supply has easily offset production cuts from OPEC and its partners (rate of demand inadequate).
In a hit to the crude bullish momentum, Russia announced overnight that they would not support further OPEC production reduction. It has been reported that Russian government officials will oppose further oil supply cuts, indicating the strategy would send the wrong message to the market. We agree that more cuts could trigger panic selling and highlight cracks in OPEC members failure to stick to the agreement.
Russia's onshore oil production costs stand at $18 meaning a risk of further price deprecations would start heading worryingly close for a crude dependent economy to break-even. Without the threat of Russia, additional production cuts feel unlikely. The summer-induced crude stockpile declines are likely to reverse in August as the key US driving period ends. As stockpiles replenish and the effect of OPEC supply cuts fade, crude prices should decline back towards $42.
We would remain short oil linked FX currencies such CAD, NOK, MXN. While in the short-term, sensitively to crude prices have lessened to monetary policy expectations, in the mid-term weaker oil prices will have a negative impulse for inflation and growth.
Gold price remains weak on North Korean tension
(by Yann Quelenn)
The Gold price is on its way down and has reached its weakest level since the 10th of May. Selling pressures seem none-the-less to fade around $1220.
The North Korean missile launched into Japanese waters yesterday barely boosted the precious metal for the time being. But it does not need much in our view for geopolitical issues to raise and drive higher the gold price.
Financial markets are still moving towards risk-on mode and are then moving away from the Gold safe haven. Signals sent by central banks are positive for markets. The Fed is normalising its monetary policy, the ECB may increase rates if the Eurozone recovery accelerates and last but not least, the European uncertainties are on the slide right now with only the German federal elections in September, the results of which should not be surprising.
However, we consider that it would need only a glitch to see investors back to Gold. Brexit negotiations promise to be tough, not every EU members have the same trade interest with the UK, and this will create divergence, plus markets are too optimistic about the US recovery while geopolitical risks (Middle East, North Korea) may rise at any moment.
FOMC minutes will be scrutinised for clues on balance unwinding
(by Arnaud Masset)
It has been a relatively light week in terms of economic data so far and investors are desperately looking for drivers.
After falling as much as 2%, the dollar index got some colours back this week amid building expectations for monetary tightening from the Federal Reserve.
The FOMC minutes are due for release later this afternoon (GMT 6pm) and will be the centre of the attention as investors are eager for more information about the Fed balance sheet unwinding program.
We anticipate the minutes won’t provide further clarity, especially regarding the latter subject, as a first draft of the plan has already been released in mid-June, together with the statement and projections. Given the recent weakness in inflation and lacklustre households’ consumption data, it is more likely that the minutes highlight the concerns of FOMC members.
On the other hand, Janet Yellen has expressed concerns about the negative effect of ultra-loose monetary policy, especially on the stock market. Indeed, valuations on the stock market seem completely out of touch and this raises the question of the reaction of investors when the Fed’s unwinding actually kicks in. All in all, we believe the minutes won’t fuel a dollar rally today.