The Day So Far
Last night’s API inventory drawdown of 5.6 million barrels has proved no panacea for WTI crude as it broke $35 this morning, dragging equities lower in the process. Global crude inventories remain around 3 billion barrels so it will take more than one solid drawdown to materially affect the fundamental outlook for crude. The Yen has made a new high against the dollar, while the Bund and T notes stay bid in correlated risk-off positioning. This has very much been the story of 2016, as investors fret about global growth, the unwinding of years of ultra-accommodative Fed policy and the upcoming earnings season. On that note, do not underestimate the importance of reports this morning that Apple is cutting production of its latest iPhone models by 30% amid weaker demand from China. Apple has been one of the darlings of this bull market, rallying from a low of $11 in January 2009 to over $100 today and the market is very sensitive to developments regarding their iPhone sales. A new product launch is due later this year. The S&P has now broken the yearly lows and looks set for further downside depending the US data this afternoon.
The Afternoon View
Massive day for data today, in particular the ADP employment report at 13:15 GMT and ISM Non- Manufacturing Composite half an hour after the cash open. The Department of Energy inventories release caps off the busy day for data at 15:30 GMT. At the moment, there is a clear difference in opinion between the markets expectations for Fed rate hikes in 2016 and the FOMC’s own ‘dot plot’; Fed Funds Futures are pricing in two hikes this year, while the dot plot is suggesting between three and four hikes, but a string of strong economic data could force the market to re-evaluate. This would not be good news for equities, which are already under pressure, and the minutes from the December FOMC meeting will also be closely watched this evening for hawkish undertones. Our bias for the day remains the same; bearish equities and bullish t notes, although the t notes call to some extent depends on the data. Short euro and crude from their respective pivots are the other strategies.
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