Oil is up close to 9% this morning after OPEC agreed a deal to cut around 2% of global production starting in January.
That has seen energy shares rocket, and bond rates soar. It’s also seen the US dollar strengthen materially as traders bet on policy divergence between the Fed and other central banks.
On stocks the Nasdaq is under pressure but the Dow and S&P are currently less than 0.2% either side of flat.
The impact of this has been that the Aussie dollar has been knocked for six but futures traders on the ASX have marked the December SPI 200 contract 13 points higher.
Here’s the scoreboard (6.49am AEDT):
- Dow: 19148 +27 (+0.12%)
- S&P 500 2002 -2 (+0.1%)
- SPI 200 Futures (December): 5,455 +13 (+0.1%)
- AUDUSD: 0.7390 +0.0090 (-1.2%)
The top stories
1. OPEC pulled a rabbit out of the hat and got a production cut done. Oil has shot higher after OPEC agreed the deal that only a day ago looked lost. The fact that Russia has already signed on suggests the members played ducks and drakes with traders and the markets over recent days. But while we can quibble over the that there is no denying the impact the move has had on markets.
Nymex Crude is up close to 9% at $49.20, Brent is up a little more than 8% and back above $50 a barrel.
The Saudis agreed to a cut of 500,000 barrels, Iraq stepped up with a cut of 200,000, UAE, Kuwait and Qatar will cut by 300,000 barrels and Russia has joined in with a cut of 300,000 barrels a day. Other non-OPEC countries will also cut by a total of 300,000 barrels. The total of cuts – around 1.8 million barrels a day – takes out 2% of global productive capacity.
2. OPEC’s deal drove bond rates higher in the US and that hammered global currencies – especially the yen. A few months ago the OPEC deal would have been seen as good thing – a circuit breaker – in a world of low inflation and low growth. But in a globe now expecting Donald Trump’s policies to be reflationary, it has bond traders fretting on the impact it will have on the Fed.
As a result, US 10-year Treasuries are up 9 points to 2.38%, German 10s rose 6 points to 0.28%, while UK 10-year gilts rose 4 points to 1.28%.
That rise in bonds meant the US dollar was much stronger across the board overnight as traders bet the Fed will have to be more aggressive and that the differential between it, and other nations rates, will grow. Of particular note is the policy of the Bank of Japan to keep its 10-year bond at 0% regardless of the inflation and economic outcomes. As a result, the yen has lost 1.65% overnight and is trading at 114.20 this morning.
3. The Aussie dollar got hammered last night and today’s Capex could put it under acute pressure. The Aussie dollar spent the week so far testing, but failing, the 75 cent region. That fact, and the big falls in Shanghai and Dalian futures markets yesterday, put some psychological pressure on AUDUSD traders but the currency was hanging tough at 0.7480 last night.
But for the second night in a row, the moves in the yen knocked the Aussie for 6 and it’s fallen 1.25% to sit this morning back below 74 cents at 0.7392.
That sets up the chance for pressure on the release of today’s Capex data which could confirm that Australia’s Q3 growth might struggle to print any growth at all.
4. And here is the bloodbath on Chinese commodity futures yesterday. David Scutt has the details here. But suffice to say a look at the final scoreboard needs no other word but “ouch”.
5. The Fed’s Beige Book that it uses to brief FOMC participants is upbeat on the US economy. Akin Oyedele reports the Fed said the economy expanded across most districts but of particular interest in this post-Trump election victory environment is that the Fed said “Demand for manufactured products was mixed during the current reporting period, with the strong dollar being cited as a headwind to more robust demand in a few Districts”.
That’s particularly interesting in the context not only of US growth and company earnings but also of the big surge in US dollar against Asian and emerging market currencies recently. We’re likely to see some push back from new treasury secretary Steve Mnuchin to US dollar strength.
6. Speaking of Steve Mnuchin – he’s the ex-Goldman banker Trump has tapped to be Treasury secretary. And he says his first priority is tax cuts. “We want to cut the corporate taxes, which will bring back growth,” he told CNBC.
Bob Bryan wrote overnight that Trump’s treasury pick said these tax changes would be able to bring the US economy to “sustained 3 to 4% GDP growth”. Trump said multiple times on the campaign trail that 4% growth to gross domestic product was attainable.
From Ric Spooner at CMC Markets, here’s today’s Stock to Watch
Medibank warned yesterday that its revenue for the first 4 months of the year is slightly below its expectation. Its market share has continued to decline after losing 2.5% of its customer base last financial year. The company is forecasting F17 operating profit to be flat on the previous year.
The market appeared relatively unperturbed by this with the share price closing unchanged at $2.60.
The issues are well recognized and Medibank’s new CEO has strategies in place to make the company more customer focused.
However, in a very competitive environment there is obviously plenty of risk, at least until Medibank can get to the stage of stabilising its market share without too much pressure on margins.
A bearish construction of this chart would be that it’s in the process of forming a triangle pattern as investors wait for more evidence. A drop below the triangle support could see the stock headed for lower supports including the 78.6% Fibonacci retracement level around $2.25. Looking at things the other way, it would take a move up through resistance at $2.81 to become more comfortable that this is not a stock locked in a big picture downtrend.
Ric Spooner is chief market analyst at CMC Markets. You can follow Ric on Twitter: @ricspooner_CMC