Uneasy calm across markets this morning

The Day So Far

Uneasy calm across markets this morning as investors reflect on the blockbuster newsflow from last week, culminating with another solid US NonFarms report and OPEC announcing no change to their crude production for the coming six months. The OPEC news was perhaps the bigger story of the two, with the NFP number slightly better than expected all-but-confirming a Fed rate hike next week. However, the delay of the pressure conference following the OPEC meeting led to some to speculate that a last-minute change in policy, ensuring a choppy session in WTI crude which nevertheless ended the week below the $40 handle. The lengthy meeting reflect how divided OPEC has become, as some members favour a cut in production and others wanting to continue to go toe-to-toe with the shale and deep-sea drilling. In the end, the cartel’s failure to cut production almost certainly guarantees more downside in crude, with a test of the yearly lows of $37.50 likely before the end of the year.

The other big catalyst for the strong rally in US equities through to the close was ECB President Draghi’s dovish speech as he sought to limit some of the damage done the previous day. He reiterated his now-familiar ‘whatever it takes’ commitment towards fighting persistently low inflation, leading to some mild profit-taking in the eur/usd following the extraordinary 400 point up move on Thursday. The S&P, which had began to drift lower from 2077.50 resistance, broke back above there following his comments and closed within 10 points of the 2100 level. Not much in the way of major moves this morning, although crude has continued lower thus far, challenging the $39 handle.

The Afternoon View

Calendar on the quiet side today as is often the case the day after NFP. Our bearish bias for equities remains intact, perhaps even more so in the wake of Draghi’s failure to exceed expectations and with just over a week to go until the FOMC meeting we think much of the ‘Santa’ rally has already taken place and look for range bound at best for equities in the coming weeks. Long euro, which may seem odd just over a week before a Fed hike but the inverse correlation with equities continues to work so we are long eur/usd along with our short S&P call. Short crude once more now we have broken the $40 handle, and short t notes are our other ideas for this afternoon’s session.

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