Indices and Oil strategies

The Day So Far

Bearish start to the post-US bank holiday, S&P drifting back towards Monday’s lows and Stoxx on the lows of the day after briefly spiking higher on comments from ECB’s Draghi. However, Draghi said nothing new regarding policy and was always unlikely to contradict the similarly dovish comments made by other ECB governing council members in recent days. Therefore, the ‘dovish Draghi’ rally is likely to be less and less effective until the next meeting; indeed, there is considerable room for disappointment at the December meeting given that the markets are expecting further QE or an extension of the programme at the very least whereas sources this week suggest that a lowering of the deposit rate is more likely. This would likely have marginal impact on the Eurozone economy. German 2 year yields have dropped further into negative territory (-0.37) on ECB QE hopes and persistently low inflation for the foreseeable future. While inflation is likely to remain low, these bonds wouldn’t qualify for the ECB’s bond-buying even if the deposit rate is cut by 10 basis points, which suggests that the German bond market has gotten ahead of itself once again and could be set for a selloff if the ECB disappoints in December.

Elsewhere, copper prices hit a fresh 6-year low as commodity prices continue to get hammered. Yesterday’s strategy of short crude from $44 worked a treat as it fell all the way below $43 to challenge the October lows. Although, due to the bank holiday the DOE inventory release was pushed back to today at 16:00, the fundamentals remain weak and a challenge of the yearly lows are a distinct possibility.

The Afternoon View

This afternoon brings initial jobless claims as usual at 13:30 BST, as well as the DOE inventories at 16:00 BST, hand day and half an hour later than normal following the US bank holiday. Expectations are set for a build of 1300k, nowhere near as much the API inventories released on Friday of 6.3 million barrels. OPEC reported today that global inventory levels are the highest they have been in a decade and while no asset goes down every day, there are very clear fundamentals supporting downward pressure on the price, potentially testing the yearly lows before the OPEC meeting next month. Elsewhere, we retain our short bias in equities, both targets 1 & 2 achieved yesterday on the S&P, and are short euro and t notes. Busy day for central bankers, led by Yellen at 14:30 BST.

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