The Day So Far
Typically quiet post-NFP markets to begin the week, with only European equities really seeing some decent volatility, the Dax falling 100 points from the open before recovering back to the 11,500 level. Investors are undoubtedly still parsing over Friday’s US jobs report, a non-committal set of data that leaves those who still favour a September hike still confident in their view. The dollar has strengthened gently against all the major currencies, perhaps reflecting that expectations for a September hike in the wake of Friday’s data have marginally increased.
Crude meanwhile, has found some support at the 28th January low after falling further on Friday following the release of the Baker Hughes rig count, which revealed that onshore rigs in the US had risen for the third straight week. As discussed previously, the resilience of the US shale producers in the face of falling crude prices and shrinking margins is remarkable, cutting costs and becoming more efficient. This would suggest that the Saudis’ strategy of squeezing less-competitive producers by flooding the market and gaining market share as a result is set to fail unless they manage to force prices below $40. This strategy would also be very damaging for them over a longer term period, as they, like many OPEC producers, need oil at much higher levels to balance their budgets.
The Afternoon View
Not much in the way of data this afternoon, so we are expecting a continuation of the quiet markets witnessed so far today. We retain our short bias in equities and dollar strength following Non-Farms, although the house view is for a hike later on in December. In any case, investors are placing far too much importance on the timing of the first hike and not on the trajectory of the Fed’s funds rate, which is suggesting a very gradual hiking cycle. Big week for data both sides of the pond, US retail sales on Thursday and the German ZEW survey on Tuesday, as well as a host of Euro area Q2 GDP on Friday.
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