API Inventories show largest build since 1985

Yesterday’s market action

Low-key start to this shortened week post-Easter Bank Holiday, as investors reflected on the successful conclusion to the talks to Iran’s nuclear programme with the continued verbal sparring between the Greek Government and its Eurozone partners. Those who believed the latest episode in this seemingly never ending drama would have been curtailed by the loan extension agreement reached in February with the IMF have been proved sadly mistaken. The negotiation of the nature and extent of the Greek reforms, conditional on the original extension, have proved difficult to say the least, and yesterday’s farcical decision by the Greeks to officially place a demand for the German Government to repay Eur 287bn in Second World War reparations certainly caught the eye. That said, market participants have long since been conditioned to this kind of Greece headline risk and the lack of volatility in the euro and European equities in the face of such statements reflects perhaps some battle-fatigue among traders and the overwhelming expectation that a deal will be reached. A Greek T-bill auction passed without drama this morning, and it will be interesting to see whether a deal agreement is the catalyst for the Euro to finally break above the key 1.11 handle resistance(the January low), having tested that level several times since late March.

Today’s View

Overnight, it was very interesting to note the stunning build of 12.2m barrels in API inventories after the US close, the largest build since 1985, indicating that the over-supply issue in the US shows no sign of abating for now even after the massive selloff we have seen in WTI over the past year. This should put downward pressure on crude today going into the widely-anticipated DOE inventories release this afternoon. However, if other major currencies continue their appreciation against the dollar this could drag crude higher. Staying with the Oil & Gas sector, Royal Dutch Shell have announced a £47bn takeover offer of fellow UK-listed E&P firm BG Group, a sign that majors are feeling more comfortable with the low oil price environment and are scouring the market for opportunities to acquire high-quality assets at discounted prices.

Elsewhere, the most closely-watched US earnings season begins today with the release of Alcoa’s Q1 results. Earnings are likely to take centre stage in the coming weeks with investors understandably worried about the impact of the strong dollar in recent months and for the first time since the Great Recession US earnings are expected to contract over the next two quarters. Staying with the US, the Federal Reserve releases their meeting minutes from the March meeting; this obviously took place before the horrendous Nonfarm Payrolls released on Friday, so their importance is compromised to an extent by further weakness seen in the US economy since Yellen & Co last met.