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Market Commentary

Futures lower As Chinese “Good News Is Bad News” For Fed, Oil Drops As Doha Concerns Emerge

Heading into yesterday´s datagasm from China, SHCOMP tumbled and Yuan was strengthening (while money-market rates were ticking higher). Then it began… Retail Sales BEAT (+10.5% vs. +10.4% exp), Industrial Production  BEAT (+6.8% vs. +5.9% exp), Fixed Asset Investment BEAT (+10.7 vs. +10.4% exp) and last – but not least – GDP MEET (+6.7 vs. +6.7% exp) – though still the weakest since Q1 2009. The post-data reaction was initially opsitive but then faded fast as reality hit on the lack of stimulus coming.

After last night’s China 6.7% GDP print which while the lowest since Q1 2009, was in line with expectations, coupled with beats in IP, Fixed Asset Investment and Retail Sales (on the back of $1 trillion in total financing in Q1)

the sentiment this morning is that China has turned the corner (if only for the time being). And that’s the problem, because while China was a good excuse for the Fed to interrupt its rate hike cycle as the biggest “global” threat, that is no longer the case if China has indeed resumed growing. As such Yellen no longer has a ready excuse to delay. This is precisely why futures are lower as of this moment, because suddenly the “scapegoat” narrative has evaporated.

The other key event that will set the market tone today is this Sunday’s OPEC meeting in Doha. As a result, crude prices have softened for a third day in a row in the wake of comments that the Iranian Oil Minister will not attend the meeting (however the OPEC governor will be present). This will undoubtedly have potential ramifications for negotiations this weekend as Iran are seen as a key player in striking a deal given their resistance to such a deal. Therefore, the absence of the Iranian oil minister could be seen as a negative for what is already set to be a difficult weekend of discussions.

So,“OPEC don’t want prices to go back down.”

Citi further soured the mood with a report that the Doha meeting is “is all about nothing, no matter what agreement might be forged,” and warns to expect a “sharp oil market sell-off” on Monday if there’s no accord, while a slower sell-off will occur if there’s a formal agreement with “no teeth.”

Elsewhere, European stocks little changed, with investors wary of potential disappointment from the talks. Europe halted a five-day advance.

In summary:

  • the final session of the week sees the weekend’s Doha meeting take full focus as the energy complex guides price action through much of the morning.
  • WTI and Brent both started the session at elevated level as many participants forecast some form of deal between OPEC and non OPEC nations in an attempt to freeze oil output and bring a halt to the 18 month slide in oil prices.
  • However, after the Iranian oil minister stated he will not attend Doha discussions but the OPEC governor will be there, WTI and Brent futures fell from their best levels.
  • Notable underperformance has been seen in the DAX led by financials and auto names, with the likes of Volkswagen reporting a fall in their brand sales.
  • Separately, Bunds have seen upside today, trading above the 163.50 level, benefitting from the softness in equities, while also bolstered by EUR 36b1n of redemptions from Italy, Netherlands and France.

This is where markets stand now:

  • S&P 500 futures down 0.2% to 2073
  • Stoxx 600 down 0.3% to 343
  • FTSE 100 down 0.4% to 6342
  • DAX down 0.6% to 10037
  • German 10Yr yield down 2bps to 0.15%
  • Italian 10Yr yield down 1bp to 1.34%
  • Spanish 10Yr yield down less than 1bp to 1.5%
  • S&P GSCI Index down 0.8% to 337.1
  • MSCI Asia Pacific down 0.2% to 132
  • Nikkei 225 down 0.4% to 16848
  • Hang Seng down 0.1% to 21316
  • Shanghai Composite down 0.1% to 3078
  • S&P/ASX 200 up 0.8% to 5157
  • US 10-yr yield down 2bps to 1.77%
  • Dollar Index up less than 0.01% to 94.91
  • WTI Crude futures down 1.3% to $40.97
  • Brent Futures down 0.9% to $43.44
  • Gold spot up 0.1% to $1,230
  • Silver spot up 0.3% to $16.21
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