Indices and Oil strategies

Yesterday’s market action

The market action yesterday was lead by continued weakness in European and US bonds, with the German Bund now retracing all of its post-QE gains and then some as the deflationary threat to the Eurozone shows signs of ebbing and very crowded long positions were shaken by last week’s comments from ‘The Bond King’ Bill Gross that Bunds represented “the short of a lifetime”. Other threats to the bond markets come from Greece, where with less than a week to go until the crucial Eurozone Finance Ministers’ meeting there remains scant evidence that a resolution between the IMF, the European Commission and the Greek Government is forthcoming. Indeed, yesterday brought news that the IMF and the European Commission at now at loggerheads regarding whether to impose a haircut on Greece’s clearly unsustainable debt load. The uncertainty has finally started to spread to other European Sovereign bond markets, with Italian and Spanish debt coming under some pressure, although the immediate contagion effect from a ‘Grexit’ on other countries’ debt markets should be limited by the considerable explicit support provided by the ECB through their ongoing QE programme. Finally, US t notes continued to selloff despite mixed data, with the ISM non-manufacturing composite reaching its highest level since November countered by a much larger than anticipated US trade deficit in March. The inability of t notes to rise in the face of disappointing economic data could reflect the sobering notion that perhaps the Federal Reserve has little choice but to raise rates this year, even by a token amount, to give them some ammunition to ease if/when the next recession looms.

Today’s View

The raft of European Services PMI data released this morning provided further evidence that the Eurozone is rebounding quite nicely and giving fillip to the euro, which trades comfortably above the 1.12 handle, the currency pair consolidating after last week’s strong breakout above previous resistance around the 1.10-1.11 level. Turning to crude, last night’s API release finally gave some fundamental basis for the strong recovery in oil prices over the past month, showing a drawdown of 1.5 million barrels of oil versus expectations of yet another week of supply increases. Today’s DOE inventory release will be watched for confirmation that finally perhaps the supply glut in the US is easing. Expectations are for a slight build once again of 1.9 million barrels. Crude has remained well-supported just below $62 ahead of the release, but with expectations ratcheting up and crude up almost 50% from the 2015 lows traders should be wary of the ‘buy the rumour-sell the news’ trade. Crude has continued to rise in recent weeks even after this extraordinary run of weekly US inventory builds. Elsewhere, the API Employment Change at 13:30 will be very closely followed by investors after last month’s very disappointing Non-Farm Payrolls release. A solid number beat here should support equities across the board and might give dollar bears the chance to pause for breath and take some profits ahead of Friday’s Non-Farms release. Lots of speakers to look out for too, with Fed Chair Yellen and IMF Chief Lagarde due to speak at 14:15 and German Finance Minister Schaeuble at 13:00.