What a volatile session for the oil markets! WTI crude prices first dived 4%, then jumped nearly 5% from five-month lows on Thursday, after news that two US tankers were attacked in Gulf of Oman hit the headlines, leaving oil markets without a clear short-term direction. The US Secretary of State Michael Pompeo accused Iran for the incident, adding more fuel to the fire.
Presently, two opposite forces are in game for oil traders: the global economic slowdown and rising stockpiles pressure the oil prices downwards, while the ongoing tensions in the Middle East push the prices upwards. But the wider picture suggests that the rising expectations of a Federal Reserve (Fed) rate cut, the US sanctions on Iranian oil and an OPEC+ announcement to at least extend the oil production cuts beyond June could eventually give a short relief to the bulls, reversing some of the 8.5% drop in net long WTI positions since the beginning of this year.
The Canadian dollar is testing the 100-day moving average (0.7490) on the downside against the US dollar. The surge in oil prices could translate into a stronger Loonie only if the price correction becomes sustainable.
The S&P500 advanced 0.41% to a five-week high on Thursday, as energy stocks gained 1.25% on the back of the spike in oil prices.
But elsewhere, the sentiment was rather mixed. The Hang Seng index (-0.52%) extended losses on the back of Hong Kong's extradition bill debate. Shanghai's Composite softened 0.26%. Japanese stocks were better bid, as the final data confirmed 0.6% expansion in industrial production in April, the capacity utilization improved 1.4% versus -0.4% a month earlier.
Investors moved into low yielding but safer assets at the second half of the week. Gold traded at $1345 per ounce, the yen and the Swiss franc gained versus the greenback on rising tensions between the US and Iran. Meanwhile, the trade war between the US and China is nowhere close to resolution.
The US data wasn't good news either. The US initial jobless claims came in at 222K last week, slightly higher than expected, and the continuing claims unexpectedly advanced to 1695K on week to June 1st. The US 10-year yield tanked to 2.08%. The probability of a July Fed rate cut advanced past 84%, in line with the activity in the US sovereign bonds market.
But Friday's data stream could reverse the sentiment before the weekly closing bell. US consumers may have loosened their purse strings in May. Analysts expect a 0.6% m-o-m rise in advanced retail sales versus -0.2% printed a month earlier. In addition, the industrial production in the US may have expanded by 0.2% over the same month, versus a 0.5% contraction printed a month earlier. Encouraging data could cooldown the US bonds purchases before next week's FOMC meeting, but the longer-term bias will likely remain dovish.
FTSE futures show no signs of stress on Boris Johnson's first round victory
The FTSE closed flat on Thursday, as neither the jump in oil prices nor a softer pound helped reversing losses in energy stocks. Cable fell to 1.2662 before steadying near 1.2670/1.2680 in Asia. The one-week pound-dollar volatility jumped to a week high. But on the other hand, the GBPUSD 1-month risk reversals became less negative, indicating that traders bet for a less bearish pound-US dollar market in the coming weeks.
Looking at the UK's political scene, it becomes increasingly likely for Boris Johnson to take the lead of the Conservative party after the first round of votes on Thursday showed a very strong domination for the former foreign Secretary. Boris Johnson got the support of 114 Tory MPs. Jeremy Hunt got the second-best outcome with 43 votes. It is now time to assess whether the Brexit negotiations under the leadership of Boris Johnson could lead to a deal with the European Union. But provided Boris Johnson's strict attitude against the EU, it is well possible that the UK walks out without a deal. Nevertheless, Johnson stated that he was ‘not aiming for a no-deal outcome'. The time will show.
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