Crude Bulls Looking For $55 A Barrel

Hopes that the Trump administration would usher in a pro-business, pro-growth environment continue to drive stocks and yield higher and favour the dollar on rate differentials.

Yesterday, the S&P 500, Dow Jones Industrial Average and Nasdaq Composite closed out to complete a trifecta of records as equities continued their postelection rally.

Investors continue to favour financials, health-care and industrials stocks on bets that President-elect Trump would loosen regulation and boost infrastructure spending.

Do the present U.S market fundamentals justify the recent moves or are the asset price moves built more on hope? Currently, many of Trumps policy proposals lack detail, and it’s not very clear what support Trump will actually get from Congress.

1. Global equities only know one direction and that’s up

Asian regional stocks rallied to new one-week highs overnight, aided by yesterday’s trifecta gains stateside.

MSCI’s broadest indexes of Asia-Pacific ex-Japan were up +1.3%, supported by a +1.3% rally in Aussie shares. Both Korean and Hong Kong bourses rose +0.9% and +1.3% respectively. Investors in Japan were unfazed by the overnight earthquake in northern Japan. The Nikkei closed flat as the impact from the earthquake was limited.

It’s worth noting that analysts believe that most of the flow into equities seems to be retail-oriented with institutional investors waiting to get a clearer picture on Trump’s economic team.

In Europe, indices are trading generally higher aided by energy stocks. Energy, commodity and mining stocks leading the gains in the FTSE 100, while the utilities sector is supporting Eurostoxx.

S&P futures are set to open in the black, +0.3% higher.

Indices: Stoxx50 +0.6% at 3,054, FTSE +0.9% at 6,839, DAX +0.4% at 10,726, CAC-40 +0.6% at 4,559, IBEX-35 +0.6% at 8,658, FTSE MIB +1.8% at 16,588, SMI -0.4% at 7,819, S&P 500 Futures +0.3%.

2. Crude oil prices to rise in H1 on cartel agreement

The markets renewed hope that OPEC will reach a deal in Vienna on Nov 30, on the back of both Iraq and Iran signaling optimism on the weekend surrounding the proposed supply-cut deal, coupled with Russian ready to freeze crude output at current levels, has many analysts revising higher their 2017 crude oil prices to +$55 a barrel from +$45.

However, analysts do expect H2 prices to soften a tad, to +$50, on an expected resumption in OPEC
production growth, and a U.S shale supply response to the H1 rally.

Ahead of the U.S open, Brent crude oil futures are up +32c or +0.65% to +$49.63, while U.S. West Texas Intermediate (WTI) crude futures trade +35c higher, or +0.73%, at +$48.59 a barrel.

Investors continue to support industrial metals. Copper has added another +1.5% to trade +$5,644.50 a metric ton, while zinc and lead have both rallied more than +1% overnight.

Gold is little changed, trading flat at +$1,217 but remaining at the mercy of USD moves.

3. Trump bond rout takes breather

U.S 10-year yields are slightly lower (+2.291% vs. 2.337%), off a 12-month high, after completing the biggest two-week rise in 15-years (+1.68% pre-election). Dealers remain somewhat hesitant to pick up product despite the aggressive backup on fears that this selloff has more room to go before peaking out. However, if Trumps policies turn out to trail market expectation, then these elevated yields look very attractive.

Similar to forex, investors should expect market volatility to rise over the next 48-hours in fixed income as trading will get thinner in this holiday-shortened week.

4. “Big” under pressure for a second consecutive day

Ahead of the U.S open, the dollar is inching lower for a second straight day following its sharp postelection rally. The Dollar Index (DXY) is trading down -0.2%. Yesterday, it declined -0.5% snapping its ten-day winning streak.

The FX markets continue to focus on the incoming Trump administration and the likelihood of massive fiscal stimulus, while potentially ignoring any upcoming data series. The market is trying figure out whether the USD is on the cusp of a new “bull run” on back of potential fiscal stimulus or are investors a tad overly optimistic on what can be delivered by the Trump administration?

Little has changed for the majors ahead of the open – the EUR/USD trades atop of €1.0634, GBP/USD at £1.2475, while USD/JPY tested below the ¥101.30 level in Asia after reports of a 7.3 magnitude earthquake near the Fukushima coast line, but the initial safe-haven flows faded as little damage was reported. The pair trade at ¥110.70 in Europe.

5. EM: Malaysia struggles to curb ringgit slide

Malaysia’s efforts to clamp down on currency speculators since Trumps win are rattling investors and raising the possibility of capital controls being implemented, last seen during the Asian financial crisis 20-years ago.

The ringgit has been one of the main casualties from rising yields in the U.S. MYR is down -5.4% month-to-date, the second-biggest decliner among Asian currencies behind JPY.

Bank Negara Malaysia (central bank) has been proactive in intervening to try and stem the currency slide, however, U.S yield differentials continue to make their job very difficult.

With foreigners owning more than +50% of the Malaysia’s government bond market, authorities cannot afford to change the goal posts too quickly, it will destroy investor confidence and cause massive liquidity issues – Asia crisis deja vu 1997 when regional currencies lost -50% of their value.

The central bank’s key move in recent days has been a request to foreign banks operating in its domestic foreign-exchange markets that they refrain from speculating in NDF’s linked to the MYR.

Its a fine balancing act, but are authorities up to the task? Malaysia’s economy is vulnerable to a strong dollar, weak commodities and peaking globalization as the country heavily relies on exports. Not helping the situation is that political risks are also rising.