Oil prices jump on Saudi attacks, equity futures fall and gold gains

Brent crude jumped 19%, as WTI crude surged 15% at the weekly opening bell, after a drone attack on Saudi Arabia’s state oil company Aramco halved the country’s production over the weekend. This has been the biggest one-time disruption in oil supply in the history, which has resulted in the largest single jump in prices in record.

As the dust settles, oil markets consolidate gains near 10% in the session, with the possibility of a deeper downside correction as Saudi said it could restore the half of production by Monday, and Donald Trump allowed the US to tap into the country’s Strategic Petroleum Reserve as a buffer.

In addition, the Chinese industrial production growth slowed to 4.4% y-o-y in August, versus 5.2% expected by analysts. Retail sales weakened to 7.5% over the same period versus 7.9% expected by analysts and 7.6% printed a month earlier. Slower production and sales data in China kept the worries of a weaker global demand on the table, despite the short-term supply shortages in oil markets.

Back to the supply side, the Saudi incident increased tensions between the US and Iran, as the US accused Iran of the drone strikes on Aramco. Iran refused. But regardless of who is responsible for these attacks, the US accusations on Iran can only wash away the hopes for improved diplomatic relations between the two countries following Bolton’s departure last week. Hence, oil prices should settle higher than their pre-attack levels.

On the other hand, the attacks came at a sensitive time for Aramco. The company could see its IPO valuation pulled lower as it prepares to go public.

The US dollar traded mixed. Oil currencies outperformed; Canadian dollar (+0.45%) and Norwegian krone (+0.59%) gained the most against the US dollar.

Energy stocks rallied 4.15% in Sydney and mining stocks gained 1.73%. But other industries traded in the negative territory. Industrials (-1.50%) led gains on higher energy cost worries.

US and European futures were offered. Dow futures lost 0.54%, DAX futures erased 1.10%.

FTSE futures (-0.50%) slid, as well. But Britain’s energy stocks will likely outperform on the back of significantly stronger oil prices and offset a part of the overall weakness.

Stocks in Hong Kong (-1.15%) were hit by another weekend of anti-China protests.

Gold gap opened past the $1500 an ounce on the back of a pile of bad news and advanced to $1512 as risk-off capital poured into precious metals. Silver surged 2.70% to $18 an ounce.

Gains in Swiss franc remained limited, as lower Eurozone interest rates raised bets that the Swiss National Bank (SNB) could also lower its rates at Thursday’s monetary policy meeting. Although the pricing in Euroswiss futures hinted at the possibility of a 25-basis-point cut in August, the actual prices suggest no change at the SNB’s September meeting.

The euro remained flat, but the pound slid slowly lower from 1.2523 against the US dollar on news that Boris Johnson would defy the Parliament’s no-deal Brexit ban to take the UK out of the EU by the October 31st deadline. But the probability of a no-deal Brexit decreases by the day. Johnson will talk with EU officials today. Pound traders should remain cautious given that Johnson’s temperamental Brexit approach could possibly give a shake to the market. Inability to find an agreement could stretch the Brexit period to 2022 according to Brexit Secretary Steve Barclay, a nightmare for both Boris Johnson and the central bank who crave for a minimum of certainty on the European front.

From a technical standpoint, Cable trades near the sensitive 38.2% Fibonacci resistance of 1.25 on March – September decline. Clearing the 1.25 offers would indicate a mid-term positive trend reversal in sterling and encourage a further rise toward 1.2670 (50% Fibonacci retracement) and 1.2740 (200-day moving average) against the US dollar.

 

It is time for the Fed to take control of its destiny

The Federal Reserve (Fed) meeting is the biggest event on this week’s economic agenda. The Fed is somewhat forced to lower its rates by another 25 basis points on Wednesday, as the policymakers have their hands tied due to stretched market expectations. No action from the Fed would send the world equities and bonds tumbling.

But this month’s cut could be accompanied by a less dovish policy statement to cool off the dovish Fed expectations for the coming meetings and give the Fed a broader choice than just cutting the rates further.

The US 10-year yield recovered to 1.90% from 1.43% at the beginning of this month.

 

Opening calls

FTSE to open 31 points lower at 7336

DAX to open 124 points lower at 12344