European stocks slide in wake of Fed minutes

Morning Note

European stock markets continue to trip the ranges – sliding sharply this morning following yesterday’s jump. The FTSE 100 dropped 1.3% in early trade to the 7,050 level, whilst the Euro Stoxx 50 declined 1.7% to test 4,000. Asian shares were broadly weaker overnight, with a steep fall in South Korea registered as daily Covid cases there surged. Bonds are still bid as weaker hands get washed out with the 10yr Treasury note yielding 1.28%, a new 5-month low in the wake of the Fed meeting minutes – it’s either sending a warning signal or it’s just a flush before the move higher. US stock markets were mildly higher yesterday, with futures pointing to a drop at the open. Apple shares hit a fresh record, whilst meme stock favourites such as GME, WISH and AMC fell sharply. In London, money transfer app Wise got off to a solid start as shares rallied on the first day of trade. Shares in troubled Chinese ride hailing app Didi fell another 5% as it faces a lawsuit from US shareholders.

Minutes from the FOMC’s meeting in June showed pretty much what we knew; policymakers are moving but with a degree of caution. “Various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated” but it is “their intention to provide notice in advance of an announcement to reduce the pace”. Meanwhile China is back in the game – the State Council issued a statement saying it would seek “to increase financial support to the real economy” by using “monetary policy tools such as RRR cuts”.

Deliveroo reported a better-than-expected rise in revenues in the second quarter but cautioned it would not lead to better profits. Gross transaction value (GTV) rose 76% year-on-year to £1.7bn. For the full year, the company raised its GTV growth estimate to 50-60% from 30-40%. However, gross margins are seen in the lower range of what was previously communicated, with management citing investment and lower average order spend. Looks to me like it should be making more money if GTV growth is a full 20 percentage points higher than expected. Poses serious questions about the model if it cannot at least deliver margins in the upper range of expectations on such impressive sales growth.

Oil prices slipped as the gulf between OPEC and the UAE showed no signs of closing. The UAE signalled it could open the spigots to pump at will. The fear is the supply deal could unravel, heaping more crude on the market. WTI (Aug) held at $73 the first time but cracked on the second attempt and quickly declined and found support at $71. Another test at this level can be expected.

Oil chart showing prices of crude on 08.07.2021.

Finally, it was great to see Wembley almost full last night with tens of thousands of fans. No masks, plenty of singing, social distancing forgotten. So why can’t my kids have a school sports day? The inequities of opening up are legion, almost as much as the inequality of lockdown. We can only pray the mask-wearing Covid Stasi are silenced for good and we can get on with our lives.

OPEC+ meeting breakdown sends oil sky high

Commodities

Oil reaches some of its highest levels for years as OPEC and allies walk away from July’s meeting.

Oil trading

OPEC+ were on the cusp of making a new deal at its July meetings, but talks have broken down.

What the market was anticipating as being more of a formality than a full-blown tussle has turned into something sour. July’s meeting has been abandoned.

The cartel and allies have been steering the course of oil markets successfully over the pandemic, but now faces a major hurdle in establishing harmony.

The UAE and the rest of the cartel are at loggerheads over OPEC+’s production tapering proposals. A plan to raise output by 400,000 bpd from August to December, and keep cuts in place beyond the April 2022 deadline, are yet to pass muster with the UAE.

The emirate is willing to accept the deal if its quota requirements are upgraded to match Saudi Arabia’s. Obviously, as OPEC top dog, the Saudis aren’t particularly keen on that. As such, meetings have been called off.

What’s bad news for OPEC is good news for oil traders. Prices have shot to highs not seen since November 14. WTI is trading at $76.65.

Brent crude is pushing the $78 level, trading at around $77.70 at the time of writing.

However, the breakup of talks suggests two things. Firstly, that competition amongst OPEC+ is growing in the face of higher global oil demand and higher prices. Second, concerns about global oversupply are still there.

Away from OPEC, US crude inventories are now at some of their lowest levels for years. A combination of slowing domestic production and rocketing fuel demand means stockpiles continue to drop week on week.

According to EIA data, US reserves stood at 452.3m barrels as of week ended June 25th. That is a 15.2% year-on-year increase, and also 3.4% lower than in the same week in 2019.

Stocks at Cushing, Oklahoma, the US’ designated NYMEX crude futures delivery point, have dropped too. Stocks were down 1.5m barrels as of week ended June 25th, totalling 40.1m barrels – a 23.3% decline against 2019’s pre-pandemic levels.

Natural gas trading

Natural gas prices started the week at a bullish $3.738.

However, weather forecasts may cause fluctuations in demand over the coming weeks. According to NaturalGasWeather predictions, national demand is expected to ease this week with heavy showers over the Great Lakes and East.

Next week, national demand will increase next week due to hot conditions over the West and warm conditions over the South and East.

Attention is being paid to Cyclone Elsa brewing in the Gulf. Demand may fall upon the colder, rainy temperatures Elsa could generate. LNG cargoes could also slow.

Overall, the pattern remains just strong enough to be bullish over the coming week and into the next.

Looking at stockpiles, the EIA’s report for week ended June 25th showed natural gas in storage rose 76 bcf during the review period.

The injection boosted stockpiles to 2.558 trillion cubic feet (Tcf), which is still 5.3% below the five-year average of 2.701 Tcf for this time of year.

Oil hits highest since Nov 2014, possible gold breakout

Morning Note

Oil advanced to its highest since Nov 2014 as OPEC+ abandoned its July meeting, after the United Arab Emirates stood its ground over production increases. The failure to agree to increasing production in August and beyond leaves the market even more in deficit than before, so front month WTI spiked to a near 7-year peak this morning close to $77. Saudi Arabia and Russia had agreed to increase production by 400k bpd monthly from August to December, adding an additional 2m bpd from current levels of supply by the year end. However the UAE wanted to recalculate the baseline for its production quota as it has significantly increased capacity in the last 2-3 years. This is an interesting moment for the path of oil prices – does the breakdown signal a push to $100 is on, or will it lead to more uncertainty and more oil on the market longer term? The short-term effect is less oil on the market (bullish), but it exposes the OPEC+ production deal to a risk of breaking down, which could see producers pumping much more (bearish). There is a risk that compliance with current production quotas will lessen, whilst the UAE could yet threaten to leave OPEC and pump what it chooses. Sec gen Barkindo said a new meeting would be called in due course.

Stock markets in Europe edged a tad lower this morning after finishing higher on Monday despite a weak start to the session. Indices continue to tread well-worn ranges. US futures are steady as Wall Street returns to life following the long weekend. The FTSE 250 hit a new record high in early trade as England heads towards the lifting of all Covid restrictions on July 19th. Clearly reopening is good for domestic growth, so it’s been seen as a positive for UK-focused stocks.

Shares in Chinese ride hailing app Didi slumped as much as 28% in pre-mkt trading after the app was removed from the country’s app stores. It’s a complicated picture – there are reports Didi knew of a regulatory crackdown and was even asked to delay its IPO. Didi says it had no knowledge of the actions by the cybersecurity regulator. The stock only started trading on Wednesday and the ban announced Sunday. China is cracking down on big tech, but the decision to remove the app from domestic platforms appears to be timed for maximum impact and embarrassment. China’s Communist Party is bristling at the number of Chinese companies listing in the US this year, but there is a genuine concern at the heart of this – regulators are not impressed at the way Didi and other Chinese tech companies handle data. The SEC will not be impressed either way.

Sainsbury’s reports like-for-like sales rose 1.6% in Q1, with sales across the board higher than expected in the quarter as it benefitted from continued pandemic-related restrictions. On a two-year basis, total retail sales are up more than 10%. Management raised the profit outlook for the year to £660m against £630m anticipated. Sainsbury’s says it will use some additional profit to invest in the customer offer – yesterday it announced £50m on targeted price reductions on ‘everyday essentials’. Supermarkets have done well out of the pandemic, but it’s unclear the extent to which reopening will negatively impact sales against some very tough comparisons. Inflation is also risk in this ultra-competitive sector. If you’re a shareholder, the last thing you want is a supermarket price war right now.

It’s been a tough year for Ocado shareholders as the reopening trade went against them, leaving the stock down ~14% YTD. But shares are up 2% this morning after another solid half-year report. Group revenues rose 21.4% to £1.3bn, with its retail business growing to £1.2bn, up 19.8%. The waiting game continues abroad: International Solutions revenues of £26.6m but management affirmed that Ocado Smart Platform (OSP) fees are building as expected. Group EBITDA more than tripled to £61m, but still the group reported a loss before tax of £23.6m, though this was down from £40m last year. Meanwhile Morrisons is steady at 266p as investors bank on another offer or two before this bidding war ceases.

Australia’s central bank said it will begin tapering asset purchases to maintain the target on the country’s three-year yield. The Reserve Bank of Australia will pare weekly bong buying from A$5bn to A$4bn as it continues to target a yield of 0.1% on its three-year paper, while leaving the benchmark interest rate unchanged at 0.1%. Overall, the message was a little more hawkish than expected, with the tapering and change in language around the forward guidance. AUDUSD advanced to its highest in a week, with 0.76 offering near-term resistance.

Elsewhere, the dollar fell as the European session got underway. GBPUSD continues to break out of the downtrend.

Chart showing GBPUSD performance on 6th July 2021.

Gold is firmer with a bullish MACD crossover confirmed on the daily chart and push clear of $1,800 now possible.

Gold price action indicated on a multi symbol chart.

Stocks firm ahead of jobs report, waiting on OPEC

Morning Note

European stocks rallied again in early trade after yet another record high for Wall Street as investors look ahead to today’s big jobs report from the US. The FTSE 100 rose above 7,150 for its best since Jun 18th and close to the post-pandemic peak set a few days before at 7,189.63. The DAX was up 0.4% in early trade to 15,666. Travel & leisure, basic resources and tech lead the way higher on the Euro Stoxx 600 this morning, whilst banks and retail are down. Earlier saw the S&P 500 notch a 6th straight record close, finishing above 4,300 for the first time at 4,319.94 with all sectors in the green, led by a 1.6% pop for energy stocks on higher oil prices.

All eyes today turn to the US jobs report, the monthly nonfarm payrolls. Initial jobless claims declined to 364,000 last week, data yesterday showed, the lowest level since the pandemic started, but there are still more than 11m Americans receiving pandemic-related benefits. Today’s NFP is expected to print around 700k, but as ever the range of estimates is quite wide. That would imply an improvement from May’s 559,000, while the unemployment rate is expected to decline to 5.6% from 5.8%. Whilst we know the Fed has signalled it’s not ignorant to inflation risks, we also know that the labour market is a key factor in determining the likely timing and pace of tightening when it does happen. Since the Fed’s last meeting, which the market took as a sign of more hawkishness (from a very dovish base), the equation for markets has changed slightly. US 10-year yields trade around 1.46% ahead of the report, whilst US equity index futures are mildly higher.

OPEC failed to agree on an increase in production yesterday, as the UAE emerged as a dissenter against plans to gradually raise production by an additional 400k bpd each month through to December until the baseline for its own output is raised. The agreement in principle would also have led to the production deal being extended through to the end of 2022. The failure of OPEC members to agree to the deal means the planned OPEC+ meeting has been pushed back to today and could go on into the weekend. If OPEC cannot agree a deal, it could mean there is no agreement to gradually raise output, leaving production at current levels and forcing prices higher in what’s already seen as a very tight market.

WTI (continuous) remains well supported above $74.20 after spiking on yesterday’s news before paring gains a touch. The market seems to still expect a deal to be struck – failure could see another leg up.

Chart indicating movement of oil spot contracts.

Elsewhere, the bid for the dollar we have seen all week continues, with GBPUSD trading at the lowest since mid-April at 1,3750, which yet take it back to the double bottom at 1.3660.

GBPUSD performance indicated on a chart.

EURUSD also dropping to weakest since early April, bear flag playing out still, possible extension to the March low at 1.170. But in both cases the dollar is starting to look a little stretched.

Performance of the EURUSD currency pair.

Bitcoin futures around $33k, still trades under 200-day SMA.

Performance of Bitcoin contracts.

European stocks kick off July with strength, eyes on OPEC+

Morning Note

European stock markets have made a solid start to the second half of the year, making up for yesterday’s losses, whilst Asian shares got the session off to a soft start. Equity indices are looking positive this morning as the FTSE 100 rose 1% and popped above 7,100 again, with the Euro Stoxx 50 and DAX also both +1%, but continue to tread over well-worn ranges.

European and global stock markets have enjoyed a strong run-up in the last six months as a combination of ultra-loose monetary policy, fiscal largesse and a vaccine-enabled reopening of economies allowed investors to look ahead to a brighter future for earnings and growth. Now there are risks on the horizon, but the market remains biased to the upside. That’s been evidenced by fresh record highs on Wall Street as the S&P 500 notched its fifth-straight record closing high. The broad index has risen more than 14% this year, while both the Nasdaq Composite and Dow Jones are up by more than 12%. As bond yields remain subdued, US markets have benefitted from a rotation out of the reflation/reopening trade back into the mega cap growth/tech/growth area of the market, which is propelling the market to new records. The lack of such companies in European indices is perhaps a factor in why they have failed to keep pace.

Data from Asia overnight showed China’s Caixin Manufacturing PMI slipped to 51.3 from 52.0, amid concerns about cases in Guangdong. Meanwhile Japan’s Tankan survey showed a bounce for large manufacturers, with the index up to +14 from +5, its highest level in two and a half years. Services was less positive at +1 from -1.

Eyes on the NFP report tomorrow – still expected at around +700k for June. Yesterday’s ADP report printed 692k vs 600k expected, though the headline beat was offset by revisions to the previous report. Anyway no one cares about ADP – the key labour market tomorrow will be a market mover. Still in the US, pending home sales jumped 8% in May compared with April, the highest level of activity for the month since 2005. Today sees the release of the US ISM manufacturing PMI (exp. 61) and initial jobless claims (exp. +388k).

The focus today is on the oil market as OPEC and its allies convene to decide on production for the month of August and potentially beyond. As we explained in our preview, whilst the market is increasing tight there are one or two concerns about the rise of the Delta variant and what that could do to demand in the second half of the year. OPEC thinks demand should rise 6m bpd in 2021, with 5bpd of that figure due to arrive in H2. This presents a risk as oil demand recovery is weighted to the second half of the year and may not emerge due to new restrictions on mobility in response to new waves of the virus. This could leave OPEC+ cautious about raising output now. Moreover, it does not have the spectre of US oil dominance hanging over it in the same way as it has had in the years preceding the pandemic. US oil production remains about 2m bpd short of pre-pandemic levels and the whole paradigm of US energy has pivoted since the election. The US is not the swing producer anymore and can’t just open the spigots at will, which leaves OPEC holding all the cards.

EURUSD bear flag: Solid US data helped lift the dollar, with EURUSD hitting its lowest since April. That bear flag highlighted earlier this week proving reliable and seems to confirm a breakout from the bullish channel of the last year or so. With the new low consider possible extension to the 1.1705 March low, also the 38.2% retracement of the 2016-2018 rally.

Chart indicating EURUSD currency pair performance on 01.07.2021.

Dollar index highest since early April, extending gains after rebounding from the double tap on the 200-day SMA.

Dollar Index performance displayed on chart.

USDJPY: Eyeing breakout from the channel as it keeps above 111 and looks tests the trendline resistance around 111.250. Break of the trendline calls for test of March 2020 highs around 111.70.

Performance of the USDJPY currency pair.

 

OPEC+ preview: Delta dawn to delay production cuts sunset?

Commodities
  • OPEC+ expected to maintain slow increase in production
  • WTI & Brent trade close to three-year highs
  • EIA inventory report shows further tightening

The Organisation of Petroleum Exporting Countries and its allies (OPEC+) convene on Thursday, July 1st to discuss the next phase of production constraints. The cartel is already increasing output by 2.1m bpd from May through to July and has successfully carried off this increase whilst still presiding over rising prices. The focus on the meeting is whether to maintain this gradual easing of production curbs in August and potentially beyond. Market expectations suggest OPEC+ will increase output by around 500k bpd in August but there are still plenty of unknowns.

On Wednesday, OPEC secretary general maintained a bullish outlook for oil demand recovery this year but pointed to risks on the horizon. He said that while OECD oil stocks are now below the 2015-2019 average, significant uncertainty in oil markets calls for prudence, highlighting the considerable risk to demand outlook from Covid variants.

Demand recovery is uncertain. Whilst US air travel passenger numbers are almost back to 2019 levels, and German diesel demand has recovered to pre-pandemic levels, there are clearly risks that the spread of variants like Delta around the globe will constrain or delay the pick-up in demand that has generally been expected to take place this year. Delta keeps OPEC mindful of being too loose and suggests it might err on the side of less production for the time being – particularly as so much of this year’s demand is seen returning in the second half (see below).

E.g., Japanese oil demand is still pretty soft with consumption in May down 8.5% vs 2019. It highlights that outside of China, a combination of relatively low vaccination rates and the Delta variant continue to weigh on local crude demand.

Nevertheless, OPEC is unlikely to have to contend with a surge of Iranian oil imports onto the market as progress on the nuclear deal to lift sanctions is slow, with talks delayed, and may never happen. Meanwhile US production has not recovered as quickly as one might have thought – the rig count is higher at 470 but well below the ~800 before the pandemic.

Barkindo said global oil demand should rise 6m bpd in 2021, with 5bpd of that figure due to arrive in H2. This presents a risk that oil demand recovery is weighted to the second half of the year and may not emerge due to new restrictions on mobility in response to new waves of the virus. This could leave OPEC+ unwilling to ease of restraints as much as the market thinks it will. On the other hand, there is evidence the market is increasingly tight and OPEC may prefer to ease off a touch to loosen it. Goldman Sachs reckons global demand will rise by an additional 2.2m bpd by the end of 2021, which would leave a 5m bpd supply shortfall. “Ultimately, much more OPEC+ supply will be needed to balance the oil market by 2022,” the bank said in a note.

An internal OPEC report seen by Reuters indicates the cartel is worried the market will return to surplus after the self-imposed output curbs end in April 2022. This could lead to discussion about extending supply cuts beyond that date. An extension would pick up the back end of the curve, which is looking a bit tired, and net would be considered bullish for prices, but could be offset by a larger-than-expected increase in the near-term to compensate some members.

Prices have rallied strongly this year, but members of the cartel need even higher crude prices. The OPEC average fiscal breakeven oil prices stand at $93, according to RBC, which thinks OPEC+ could add anything from 500k bpd to 1m bpd in August.

EIA weekly report

Ahead of the meeting, the latest EIA report today shows a continued draw on inventories. Stockpiles declined by 6.7m barrels, vs the estimated draw of 3.8m, supported by a net 500k bpd decline in imports and a 200k bpd increase in refinery demand. Total products supplied over the last four-week period averaged 20.0 million barrels a day, up by 13.3% from the same period last year.

US commercial crude oil inventories decreased by 6.7 million barrels in the week to Jun 25th from the previous week, yet another weekly draw that leaves inventories at their lowest since March 2020. At 452.3 million barrels, inventories are about 6% below the five-year average for this time of year. Total motor gasoline inventories increased by 1.5 million barrels, whilst distillates fell by 900k.

WTI price action

Post the EIA report it’s pretty much as you were with all eyes on OPEC+. As we flagged in Tuesday’s morning note, there is something of a technical hitch for oil. So far this market has been a buy-the-dip affair as WTI edged up above $74 this week to its highest in almost three years, moving close to a 6-year high in the mid-70s; and market fundamentals are solid as supply remains tight. But Monday’s outside day bearish engulfing candle is a potential red flag, while the bearish MACD crossover on the daily chart is another. RSI bearish divergence is a third with a higher high on the price met by a lower high on the 14-day RSI, indicating buyer exhaustion. This is not necessarily the top but would call for a potential near-term pullback such as a ~10% correction as seen in Mar/Apr this year.

500k bpd is the baseline – go beyond that to 750k, 1m then it’s a bearish reaction in the market. Go under and it’s bullish. But these would be only the immediate responses and market fundamentals remain positive even with more crude coming on stream. Technicals are less inclined to support the bullish outlook in the immediate near-term sense. A temporary pullback would allow for the bulls to take a breath before resuming the uptrend.

Crude oil price action chart ahead of OPEC+ July meeting.

Week Ahead: Bank of England to follow Fed with hawkish tilt?

Week Ahead

The Bank of England gives us a fresh monetary policy update this week as inflation pressure starts to build. Will the first readings give the bank jitters or is it made of sterner stuff? Elsewhere, PMI data comes from the US, UK and EU, following on from a bumper may. OPEC and allies are busy too with another range of policy-deciding meetings kicking off. 

Andrew Bailey and the Bank of England are next week’s headline act. The UK’s central bank delivers its latest monetary policy decision and is expected to stand pat, though it comes against a backdrop of fast economic growth and rising inflation. 

A change in thinking could be underway. Governor Bailey has repeatedly stated in the past that if prices consistently outstrip the BoE’s 2% inflation target, he’ll have no problems tightening up policy. In this instance, that could mean a rate hike. 

The BoE’s base rate has remained at 0.1% for the past year as part of the range of emergency pandemic economic measures enacted by the bank.   

Consumer price inflation rose 2.1% on an annualised basis in May, according to Office of National Statistics figures released last week. Month-to-month inflation clocked in at 0.6%.  

There is no indication, however, that a rate change will happen immediately. While there is more at play here, a lot of inflationary pressure stems from the reopening of the UK economy, and base effects from 2020. But consistency will be key. If we see more inflation increases month to month, the BoE may be forced to react 

Turning to data, purchasing manager index readings from the US, UK and EU are released this week. All these major economies will be looking to build on May’s impressive momentum.   

For instance, IHS Markit’s US manufacturing PMI hit its highest levels since October 2009 in May, with a reading of 61.5. Domestic demand and consumption spurred on US manufacturing last month, but producers are still warning of supply chain issues, including raw material and labour shortages. A lower reading in June may be realistic.  

US services’ expansion outstripped manufacturing. May’s PMI read 70.1, jumping away above April’s 64.7. Higher consumer confidence paired with the US’ impressive vaccine rollout explains the high level of new service sector business. 

Likewise, the UK experienced an eye-popping level of services output growth in May as lockdown restrictions loosen. The sector’s PMI reached 62.9 – the highest level since May 1997. Manufacturing surged, driven by a deluge of new orders, reached 65.6 last month, a 29-year high. 

May was also a good month for Eurozone business activity. IHS Markit’s composite EU PMI reached a three-year high, with a score of 57.1, comfortably above April’s 53.8. Remember, growth is indicated by a reading of 50 or higher, so while the pace wasn’t as fast as in the UK or US, the EU showed good signs of economic resilience last month. Can it do the same again in June? 

Sticking with data, the final reading of US Q1 GDP growth is also due this week. The final reading acts as a sort of confirmation, a check of economic health in broad terms. May’s earlier advanced figure was 6.4%, showing signs of an economy poised to boom. PMI flashpoints back this up. Double digit GDP growth could be on the way in Q2 too. 

Away from raw economic data, OPEC and allies gather on Thursday for another series of meetings. Rising oil prices will no doubt put the cartel in a good mood, but it needs to proceed with caution here. Any unexpected spikes in production output, as opposed to OPEC+’s current steady tapering programme, could result in oversupply, despite confident global demand recovery forecasts. 

OPEC+ decided in April to return 2.1 million barrels per day (bpd) of supply to the market between May and July. We could see a wider plan come together this week for post-July tapering. 

The cartel is sticking with its optimistic oil demand outlook. Its June monthly report states demand would rise by 6.6% to hit 5.95 million bpd in 2021. The forecast was unchanged for a second consecutive month. 

How OPEC and allies proceed is critical here. With WTI and Brent reaching over $72 and $74 at the time of writing, some of the highest prices for years, the signs of intensified global oil demand are there – but any oversupply may tip the scales back to retraction instead of price growth.  

Major economic data 

Date  Time (GMT+1)  Asset  Event 
Mon 21-Jun  2.30am  AUD  Retail sales m/m 
       
Wed 23-Jun  8.15 am  EUR  French Flash Manufacturing PMI 
  8.15 am  EUR  French Flash Services PMI 
  8.30 am  EUR  German Flash Manufacturing PMI 
  8.30 am  EUR  German Flash Services PMI 
  9.00 am  EUR  Flash Manufacturing PMI 
  9.00 am  EUR  Flash Services PMI 
  9.30 am  GBP  Flash Manufacturing PMI 
  9.30 am  GBP  Flash Services PMI 
  1.30 pm  CAD  Core Retail Sales m/m 
  1.30 pm  CAD  Retail Sales m/m 
  2.45 pm  USD  Flash Manufacturing PMI 
  2.45 pm  USD  Flash Services PMI 
  3.30pm  OIL  US Crude Oil Inventories 
       
Thu 24-Jun  All Day  OIL  OPEC+ Meetings 
  12.00 pm  GBP  MPC Official Bank Rate Vote 
  12.00 pm  GBP  Monetary Policy Statement 
  12.00 pm  GBP  MPC Asset Purchase Facility Votes 
  12.00 pm  GBP  Official Bank Rate 
  1.30pm  USD  Final GDP q/q 
  3.30pm  GAS  US Natural Gas Inventories 

 

Key earnings data 

Date  Company  Event 
Mon 21-Jun  Naspers  Q4 2021 Earnings 
     
Wed 23-Jun  Markit  Q2 2021 Earnings 
     
Thu 24-Jun  Nike Inc.  Q4 2021 Earnings 
  Accenture plc  Q3 2021 Earnings 
  FedEx Corp.  Q4 2021 Earnings 

Oil runs into resistance at $70 ahead of OPEC, inventory reports

Oil tested big resistance at $70 this week as prices hit their highest since before the pandemic, however a lack of momentum has seen WTI ease back ahead of the OPEC monthly report this week and the usual EIA crude oil inventories report. 

Three-year high for WTI

WTI and Brent contracts rose sharply last week to make new highs as OPEC+ stuck to its plan to only slowly raise the level of output through to July. Whilst vaccines and the reopening of economies have left the market in deficit, helping to drive prices up 35% this year, the persistence of cases in some parts of the world combined with ongoing travel restrictions in Europe/US means there are still doubts about how quickly demand will recover this year.  

Nevertheless, prices hit their highest in almost three years on Monday as the situation in India in terms of covid cases seemed to improve, whilst the post-OPEC bounce held firm. 

Thursday sees the release of the latest OPEC monthly oil market report.  Last month’s report saw the cartel reiterate its belief in a strong recovery in world oil demand in the second half of 2021. This month’s report is not expected to show much change from the previous version, which said demand will rise by 5.95m bpd this year, up 6.6% from 2020 levels. 

Ahead of this, traders will look to Wednesday’s inventory report from the Energy Information Administration (EIA). Last week’s EIA inventory report showed stockpiles declined by 5.1m barrels, a larger-than-expected draw that helped to support the bullish view on oil prices as demand in the US recovers.  

OPEC in control? 

The world’s largest oil trader said this week that the US has handed back control of the oil market to rivals. 

OPEC+ seem to have the handle on crude prices as S. production has failed to catch up to pre-pandemic levels, Mike Muller, Vitol’s head of Asia, said at an online conference. “There’s a perception in the market that control is with OPEC+,” Muller said at the Gulf Intelligence event. “It will take a long time for US oil to come back.” 

Meanwhile traders are also eyeing Iranian oil coming back on stream as a potential nuclear deal moves tentatively closer.  

Indian oil demand in focus ahead of OPEC JMMC meeting

OPEC JMMC meets tomorrow with all eyes on India as coronavirus cases mount.

Oil trading

Oil prices started the week on the back foot, but have traded higher at the time of writing, following continued OPEC+ optimism in demand recovery.  WTI is back above $62. Brent is trading above $65 too.

Global demand is still forecast at around 6m bpd for 2021. The surplus built up throughout the pandemic is expected to be gone by the end of Q2 too. All good news, but we’re not out of the woods yet. OPEC+ has raised concerns over the situation in India.

Indian Covid cases are soaring again. 350,000 were reported on Monday 26th May, putting pressure on the Indian government to lockdown again. As India is the world’s third-largest crude importer, importing 4m bpd at peak, its current conditions point towards slower recovery.

Japan’s Covid cases are being carefully monitored from an oil perspective too. In the world’s fourth largest oil importer, cases have started to flare up again. Vaccine rollout there has been slower than expected.

Even so, we’re not anticipating any alteration to OPEC+’s recovery roadmap. Crude output is likely to increase in line with tapering agreements established at the general meeting earlier in the month. A further 2m bpd is being added back to production quotas between May and June.

Turning to US storage data, commercial crude oil inventories grew by 0.6 million barrels from the previous week, according to the EIA’s most recent report. At 493.0 million barrels, crude oil inventories are about 1% above the five-year average for this time of year.

However, gasoline stocks have fallen 3% below the five-year average for the first time in 2021, which could suggest more mobility for US citizens, and this higher demand for petroleum products moving forward.

Natural gas trading

Can you feel that tantalising hint of spring in the air?

Natural gas weather forecasters can. A “perfect weather pattern” is about to hit the US’ key demand areas. Colder temperatures are giving way to Spring warmth, ending heating degree day season. Cooling degree days are on their way, which is likely to play into lower demand from here on out.

Last Thursday’s EIA Natural Gas storage report stated rose by 38 Bcf for the week ended April 16, roughly matching S&P Global Platt’s 37 Bcf forecast by analysts increase.

Total stocks now stand at 1.883 trillion cubic feet, down 251 Bcf from a year ago but 12 Bcf above the five-year average.

More US LNG output could be on its way. Rystad Energy predicts record US natural gas production in 2022, at 93.3 Bcf annually. The figure may rise to 100 Bcf by 2024. Key gas basins may attract significant investment as a result.

Total US LNG output reached a record in 2019, at 92.1 Bcfd. Production declined in 2020 to 90.8 Bcfd thanks to the Covid-19 pandemic. Volumes may fall even further this year, down to 89.7 Bcfd, but that could reverse quickly once the pandemic subsides and activity picks up in US gas producing regions.

Tesla questions remain, BP and HSBC profits leap, GME roars higher on equity offering

Morning Note

Record highs for the S&P 500 and Nasdaq yesterday failed to really kick start the European session this morning with the major bourses all looking a bit sloppy in the face of a raft of big corporate earnings announcements. We’re into the meat of earnings season proper now with 173 S&P 500 companies that account for around half the market capitalisation are reporting this week. So far so good: of those that have already reported, revenues are up 10% on average, while earnings are up by a third. A stunning turnaround from last year’s pandemic washout, driven by a combination of massive fiscal stimulus, extraordinarily accommodative monetary policy and a vaccine-led cyclical bounce back of epic proportions.

Tesla posted better-than-expected earnings in the first quarter. The company posted GAAP net income of $438m with earnings per share coming in at $0.93 on $10.39 billion in revenue, up 74% from a year ago. Some $518m in regulatory credits helped, whilst it added $101m to its bottom line from the sale of Bitcoin after its $1.5bn ‘investment’ announced in February. Is this an automaker or not? I have been very sceptical about this Bitcoin position and what it exposes the company to. Shares slipped more than 2% in after-hours trade following the results. Still, it was a record quarter for sales and progress is being made on the delayed new models with the new Model S landing on customers’ driveways by May 2021 and Model X deliveries to commence in Q3. Tesla also pointed to Model Y production ramps at Fremont and Shanghai going well. Meanwhile buildout of Berlin ‘Gigafactory’ is continuing to move forward, with production and deliveries remaining on track for late 2021, Tesla said. Chip shortages are a problem, but Tesla suggests it’s finding ways around. And although margins did pic up, there are maybe some questions over margins with the lower average selling prices – excluding regulatory credits the margins in the core auto business were 22%. I don’t think these results really tell us an awful lot more than we already know about Tesla.

BP profits jumped to $2.6bn, easily beating analyst expectations and well ahead of last year. Looney says the company is in good shape. As he puts it, these results really put to rest some of the fears investors may have had around this stock as it’s managed to reduce net debt ahead of schedule and is delivering shareholder returns. Looney seems really committed to pushing the dividend, which I suppose you can do if you are not doing any more oil and gas exploration. Still, he better keep some back for those wind turbines. BP is confident that China and the US will drive the recovery in crude demand.

The reduction in net debt is eye-catching, with the figure down around $18bn in the last year from $51.4bn to $33.3bn, meeting the objective a year early. Reported profit for the quarter was $4.7bn, compared with $1.4bn profit in Q4 2020 and a loss of more than $4.3bn a year before. Underlying replacement cost profit came in at $2.6bn, compared with $0.1bn for the previous quarter. BP said this was driven by an exceptional gas marketing and trading performance, significantly higher oil prices and higher refining margins. Dividend of 5.25 cents per share declared and shares rose more than 2% in early trade in London.

HSBC profits rose 79% from a year ago on a mixture of improving economic conditions and a reduction in provisions for bad loans. Among other things, the company noted solid growth in Hong Kong and UK mortgages. Interestingly for a bank that has been seen to put all its eggs in one Asian basket as other regions have been less profitable, all regions were profitable in Q1 and notably the UK bank reported pre-tax profits of over $1bn in the quarter. Reported profit after tax was up 82% to $4.6bn, while reported profit before tax rose 79% to $5.8bn. The bank said that reduced revenues, which fell 5% $13bn, continued to reflect low-interest rates. Provisions for bad loans were less than expected, particularly in the UK, mainly reflecting a better economic outlook and government support schemes. As such reported provisions for bad loans was a net release of $0.4bn, compared with a $3.0bn charge a year ago. Shares rose a touch in early trade.

Sticking with banks – UBS this morning admitted it took a $774m hit from the Archegos fiasco. This is not as large as the $5.5bn for Credit Suisse, but nevertheless shows how the fallout was wider than initially thought. Despite this, profits at UBS rose 14% to $1.8bn. Wealth management profits rose 16%, whilst investment banking was down 42%. UBS, which has fallen 2% this morning on the update, says it has now unwound all its exposure to Archegos. Nomura meanwhile says it is 97% out and has taken a $2.3bn loss on its Archegos exposure, adding that it expects to book about $570m more in charges related to Archegos this financial year.

Shares in GameStop rallied almost 12% and added a further 9% in after-hours trade to hit $184.50 after the company completed its at-the-market equity offering. In an update to investors yesterday, management said they had sold 3.5m shares of common stock and generated aggregate gross proceeds before commissions and offering expenses of approximately $551m, Roughly, that means they got this offering off at about $157 per share. Net proceeds will be used to continue accelerating GameStop’s transformation as well as for general corporate purposes and further strengthening the company’s balance sheet.

As I previously argued, shareholders who have been bidding up the stock should be pleased by the offering. Although it entrails a meaty dilution, the cash call is entirely expected and without a big capital raise now that takes advantage of rally in the stock, Chewy.com founder Cohen might not have the cash to fulfil the ambition of becoming the Amazon of Gaming.

Elsewhere, oil prices trade higher with WTI back above $62 as OPEC’s technical committee stuck to an optimistic view of demand growth whilst also cautioning about the rise of the coronavirus in India, the world’s number three importer of crude. The technical committee, which met ahead of Wednesday’s meeting, indicated that demand growth is still seen around 6m bpd in 2021, whilst the stock surplus should be eliminated by the end of the second quarter. There are also concerns about Japan, the fourth largest importer of oil. Copper prices continue to advance, hitting a fresh 10-year high this morning, whilst US 10-year yields pulled back from 1.6% yesterday in a choppy session ahead of this week’s Fed meeting.

FOMC preview: Wait and see mode

The Federal Reserve kicks off its two-meeting today. This week’s meeting of the Federal Open Market Committee (FOMC) ought to pass off without too much fanfare or market noise. Even as the economic indicators improve, the Federal Reserve remains in emergency mode. The Fed should be thinking about thinking about tapering, but it likely will not want to signal this just yet. It remains the case, it should be noted, that the Fed is now in a reactive policy stance where it is waiting for the data to hit certain thresholds rather than acting pre-emptively. We also know that not only is the Fed happy to let inflation get hot, but it is also focused squarely not just on employment but the ‘right’ people getting jobs. It’s a central bank that is taking a political angle to its policy making. In any event, tapering of the Fed’s $120bn-a-month asset purchase programme will be signalled well in advance, and this is not the time to do it.

Bond yields have cooled somewhat since the March meeting, with the 10-year note chopping around in a 1.55%-1.60%. In any event, if the rise in nominal yields was not a worry then, it’s certainly not one now. Fed speakers including chairman Powell have made it clear they think rates will move up because of the screaming cyclical bounce, not because people are worried about inflation.

Meanwhile, since the March meeting the pace of vaccinations has meant over half of all adults in the US have had at least one vaccination. Jobless claims have hit the lowest since the pandemic struck more than a year before and retail sales are powering head. The IHS Markit composite PMI hit a record high in April as all corners of the economy picked up steam. Despite this the Fed will remain cautious with regards to the outlook, citing the risk of fresh infections. Chairman Powell will need to acknowledge the economic recovery in progress but seek to tamp down expectations. And despite the strong demand impulse combining with weak supply to put upwards pressure on prices, he will stick to the line that any inflation will be temporary.

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