Oil and bond rates surged again overnight as the impact of the OEPC agreement to cut production once again proves to be the biggest driver of markets. Oil was up 3% and US 10s have climbed to 2.45% – the highest level since June 2015.
That move put some mild pressure on stocks but it was the big fall in technology which was the real drag on US markets. The Nasdaq fell 1.52% while the sectoral measure of tech stocks in the US fell an even greater 2.22%.
European stocks, with the exception of Italy, were lower and the combination of all of the above means that futures traders on the ASX have marked the December SPI 200 contract down 12 points after yesterday’s big 60-point rally back to 5500.
Elsewhere the US dollar’s rally has stalled with the Aussie back above 74 cents while the Canadian dollar and Norwegian krona are stronger – buoyed by the oil move. The euro is up as well, the yen is also higher and sterling benefited from more chatter about a soft Brexit.
Here’s the scoreboard (7.51am AEDT):
- Dow: 19187 +65 (+0.35%)
- S&P 500 2188 -10 (-0.48%)
- SPI 200 Futures (December): 5,489 -12 (-0.3%)
- AUDUSD: 0.7414 +0.0024 (+0.32%)
The top stories
1. Oil surged again overnight – here’s the background to how the the surprise agreement was made. That OPEC got a deal done given internal hatreds is remarkable. Reuters reports that Russian president Vladimir Putin was actually integral to its success after he worked at a head of state level with the Saudis and Iranians to smooth over their usual reticence to work together.
It’s a great tale which says the deal “started when Putin met Saudi Prince Mohammed in September on the sidelines of a G20 gathering in China”.
Have a look at the story for more details. But this is important to the outlook for the price of oil because it suggests the production freeze will stick. Many of those who thought a deal wouldn’t get done are now saying that it won’t hold together and so on. But the price of crude was up another 3% overnight and even credit rating agency Fitch said that the deal will rebalance the market faster than folks expect next year.
2. And here’s another reason the OPEC cut should stick – it is a sign of “tough economic circumstances”. Elena Holodny reports that Helima Croft, the global head of commodity strategy at RBC Capital Markets and one of the few analysts who has argued an agreement would get done, said the “announcement reflects the tough economic circumstances faced by the sovereign producers and the desire for a measure of relief to shore up domestic support”.
Spot on. The fiscal, and political, imperatives require a higher oil price for most of the oil producing world. The cut should stick and prices will likely continue to rise in 2017 as this becomes apparent.
And yes, as the Wall Street Journal reports, the OPEC cut could give a lifeline to US shale oil producers. Oil will find a level once shale production comes back online at some level above $50. But the key for OPEC is to change the conversation not drive prices to $80, I think.
3. As we end the week the launch of the Santa Claus rally for the ASX200 is tantalisingly close. Yesterday’s more than 1% surge on the ASX200 caught many traders and investors by surprise. The close at 5500 is tantalisingly close to the 5515 level which is where the downtrend line stretching back to the 6000ish highs last year sits.
Throw in last week’s high of 5520.9, call it 5522, and that’s the level traders are watching to see if the ASX can actually break and start its run toward Christmas. Naturally the overnight lead from Wall Street doesn’t look fabulous for a move higher with the S&P 500 off 10 points. But US financial stocks were 1.09% higher so maybe the banks can do the heavy lifting today. A weekly close above 5522 would be an important one for the market.
4. Here’s music to a stock market bull’s ears – BAML says the S&P 500 could rise 400 points. Pre-election, most traders and investors were hoping for an eventual shift away from the central bank induced low growth low inflation world as governments around the world shifted gears toward fiscal policy.
But the election of Donald Trump meant the subtle shift has morphed into a paradigm shift. That’s seen sell-side analysts on Wall Street get more bullish, Bob Bryan reports. And according to Savita Subramanian, Bank of America Merrill Lynch’s head of quantitative and equity strategy, the net impact could be a big surge in stocks.
“With the S&P 500’s indicated dividend yield currently above 2%, that implies a 12-month price return of 17% and a 12-month value of 2576,” said Subramanian.
5. I don’t want to ruin your weekend but there is a really important referendum in Italy on Sunday – it could move markets Monday. Italy’s stock market did something strange last night. It rallied 0.99% while other European bourses pulled back as much as 1% in Germany and 1.2% in Switzerland.
That’s weird in front of Sunday’s vote on constitutional reform. But clearly traders are betting even if Renzi loses the vote nothing will happen. That seems reasonable but no one really knows.
Having said that though, David Scutt reports the folks at Danske Bank have had a pop at trying to work out the various permutations of a “yes” or “no” vote for markets. They’ve helpfully produced this flow chart.
6. And of course the most important data point on the monthly data calendar is out tonight – US non-farm payrolls. With the Fed rate hike in December a lock, non-farms tonight are a little less influential than usual. But that said, given where forex markets and bond rates are right now, a surprisingly better or worse outcome than the forecast of +180,000 jobs for November would move markets pretty aggressively.
The data is released at 12.30pm AEDT and Akin Oyedele has everything you need to know ahead of the jobs data here.
From Ric Spooner at CMC Markets, here’s today’s Stock to Watch
QBE Insurance Group
QBE has rallied from the depths of despair after disappointing with its profit result in August. The stock has gained 25% over the past 4 weeks.
The reason is higher interest rates. At its half yearly report, the global insurer had investments and cash of $25.7bn.
The majority of this is in short term bonds. At the half year, the year to date return on this the investment portfolio was 1.62 pa%. This looks like being much better in future given the recent steep rise in bond yields.
Higher interest rates also help QBE’s balance sheet by reducing the value of future insurance claim liabilities which are calculated by discounting at the prevailing interest rate.
$12.40 looms as the next major chart test for the share price. There’s resistance around that level including the May high and it coincides exactly with the 38.2% Fibonacci retracement of the decline from $17.51 to $9.21.
Ric Spooner is chief market analyst at CMC Markets. You can follow Ric on Twitter: @ricspooner_CMC