“The main driver overnight has been the oil markets,” says Saxo Bank’s chief commodities strategist Ole Hansen. “We’re seeing some weakness coming in again following the API which yesterday reported a 14.2 million barrel rise in weekly inventories – that’s the second-highest on record.”
However, he cautions that while US Energy Information Agency surveys have been predicting output of two million barrels a months, “Surveys have been underwhelmed in the last three weeks.”
“We had three consecutive bearish oil market reports, but on all three occasions we managed to see oil trading higher,” Hansen continues. “The question is whether that pattern can be maintained and that will be the focus today.”
A particular driver of recent oil-market weakness, he notes, is gasoline: “We’ve seen gasoline inventories going up faster than expected and demand staying well below what’s seasonal for this time of year.”
This, he says, must be due to technicals. “Otherwise the drop we’ve seen in the last four weeks would signal a US recession, and that’s not what the other data are pointing to.”
A key level for gasoline – which has retraced 50% of its value prior to Opec’s November announcement – is $50.70/barrel, says Hansen.
“That’s what we’ve been bouncing off on a couple of occasions and if we break below that then we might have to start focusing on the 50%, which is down at $48.75/b. So, key for the markets this afternoon, no doubt about that,” he adds.
Hong Wei Lee reporting from Saxo Bank’s Singapore desk noted that Iranian oil minister Bijan Zangeneh announced overnight that Opec had agreed to reduce output as part of their effort to reach $60/b by the second half of this year.
While oil is struggling to find a strong footing, gold is on an upward trajectory as investors look for a safe haven in an increasingly uncertain world. This, says commodities head Hansen, is despite the strength of the dollar.
“We have had a bit of a triple-top development in gold over the last three days, just below $1,236/oz – that is the level that’s going to offer some resistance today,” says Hansen. “We still think that the gold market is targeting $1,250/oz to the upside so long as we stay above $1,220/oz support.”
One of the factors driving investors towards gold – uncertainty over the outcome of the upcoming French presidential elections – is also sending European bond investors towards bunds, notes Saxo’s head of fixed-income trading Simon Fasdal.
“Bunds continued to strengthen and caught up with all of the early losses from yesterday, so we’re trading unchanged on the opening around 163.5,” says Fasdal. “We’ll still be looking for a move lower at some point. It’s always difficult to say where the exact point is but in yield terms we’re already all the way back to 35 basis points from the half-a-percent high that we reached last week.”
He notes that supply of bunds won’t be a problem, as Germany is issuing a fresh batch today. Driven by the same French electoral uncertainty, the main story in the European bond markets are the French-German government spreads, he adds.
“There was a minor correction is yesterday’s sessions, but as we can see from the charts there’s still a very elevated level in the French 10-year spread; it remains at a 4-5 year high at 77 basis points,” says Fasdal.
Saxo Bank head of equities Peter Garnry notes with concern that Europe appears to be stagnant.
“I’m a little bit worried on the Dax at the moment,” says Garnry. “The 11,400-450 level is pretty key here, so watch out for that.”
Also a point of concern for Garnry is the energy sector, where he says operating income to net debt levels are higher than any other sector: “I would be extremely surprised if we didn’t see some ramifications of that.”
Elsewhere though, he notes with optimism for the metals and mining sectors that Rio Tinto came out with far better results than expected.
“I think it will keep mining in focus today,” Garnry says. “I have been saying for some time that I think we are overweight on materials. I think the results from Rio Tinto really confirm that strong momentum and what we’re seeing now in the commodities space is more of the big research firms upgrading their outlook for copper.”
Head of commodities Hansen also notes a strong rally on high-grade copper of late, which he ascribes to continued concerns about supply disruption due to strike action: “Which could lead to the first supply deficit in a number of years.”
“If we see strike action, that will reduce supply and give the market some upside impetus,” says Hansen. “$2.74 is the key, that’s the high we’ve seen rejected a number of times.”
Saxo head of forex John Hardy notes that while rates did not react to the Bank of England’s mooting of inflation risks, the British pound did.
“This created some interesting moves on the charts. Cable posted a hammer on the day because earlier in the day it wilted through some key support levels around 1.24,” says Hardy. “You wonder whether we’re finally going to trace out a test a neckline for the head and shoulders that was created post-Brexit vote.”
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