Oil’s short-term risks remain tilted to the upside

Chinese authorities think that the country could achieve its 5% growth target with the stimulus measures that have already been announced, but investors not much so. On the contrary, the investor community was expecting that the government would announce a fiscal package of as much as 3 trillion yuan to complement the latest monetary measures to boost growth, but the Chinese authorities unveiled a laughable amount of 200 billion yuan in spending for next year. The worry is that the Chinese will throw money into the market without targeting troubled areas, and the lack of a fiscal leg to the Chinese stimulus package will hardly address the major issues and improve the EM giant’s suffering fundamentals. Voila. This is why we see the CSI index down by 5% today. The selloff in the HSI is more reasonable, however, after an almost 10% plunge yesterday. Mining stocks, including BHP and Rio Tinto remained under a decent selling pressure in Australia, but the bleeding in copper and iron ore slowed, the metals were flat to slightly positive in the Asian session.

If we leave our emotions aside, there is hope that the Chinese government rectifies this misstep. Xi understood that he’d better have investors to play along than against him. As such, the Chinese stimulus story can’t end on a disappointing note, there should be more: more stimulus measures, but also be more uncertainty regarding the measures’ ability to reverse fortunes.

Getting ugly

Last week, the EU imposed 45% tariff on Chinese EVs – in a decision that was strongly contested by some European countries – like Germany, and some European carmakers like VW, as they knew that bringing such a massive tariff of Chinese car imports would result in retaliation from the Chinese authorities and would fire back on the European companies. And that’s exactly what happened. The Chinese authorities didn’t take long to announce that they will also put tariffs on European cars, brandy and luxury goods. The news didn’t resonate well across the European markets, but the losses in the Stoxx 600 remained limited to only 0.55% yesterday.

The selloff mainly concerned energy companies like Total and Eni, and their British and American peers as crude oil took a dive on disappointing fiscal spending plans from China.US crude tumbled below the $73pb level and is consolidating near the $74pb this morning. Some suggested that the possibility of a ceasefire in the Middle East helped accelerating yesterday’s selloff. I am little convinced when the first thing I see in the morning is how Israel’s response to Iran would be ‘significant’ (Bloomberg). Therefore, oil’s short-term risks remain tilted to the upside, while the long-term outlook is comfortably bearish due to ample global supply, prospects of weakening global demand, and sluggish Chinese growth until (and if) proven otherwise by the data.

Little concerned

Despite a 10% plunge in Hang Seng, the major US indices did well, yesterday. The S&P500 gained 1%, Nasdaq advanced 1.55% as Nvidia jumped 4% as the US 2-year yield eased below the 4% mark on balanced comments from the Federal Reserve (Fed) members. Some said the Fed should continue to focus on the employment market, while others said that the Fed should remain careful with the inflation leg. Overall, the comments and the economic data would justify a 25bp cut from the Fed in November, and that’s what the activity on Fed funds futures suggests today: a 88% chance of a 25bp cut.

But boy, these probabilities chance so rapidly. Due today, we will have a look at the latest FOMC meeting minutes to understand how and why the Fed opted for a 50bp cut at the latest meeting whereas they had the opportunity to start easing by a safe 25bp and avoid all that volatility, uncertainty and confusion around that decision. Then, we have a CPI update from the US scheduled for Thursday. If we see any undesired strength there, we could see the probability of a no cut take off as rapidly as the probability of a 50bp cut did last week.

Matching fundamentals and technicals

The US dollar index consolidates near a major Fibonacci level, the 38.2% retracement on summer retreat, near the 102.50 level. Parallelly, the EURUSD consolidates near its own major Fibonacci retracement level, 1.0980. A move above or below these levels, respectively, will send the US dollar into a medium-term bullish consolidation zone, and the euro into the medium-term bearish consolidation zone. A sufficiently soft US CPI update could prevent that from happening, while a stronger-than-expected read would leave little doubt about the view that the euro deserves to weaken from the actual levels. There is not much to prevent the European Central Bank (ECB) from announcing a few more rate cuts in the coming meetings to support the slowing European economies when headline inflation has fallen below their 2% target. Core inflation, however, is another story. But the fact is, I like when technicals match the fundamental story, and the US CPI will provide a good basis to justify a fresh move in the USD to one way or the other.

And speaking of central banks, the Reserve Bank of New Zealand (RBNZ) announced a 50bp cut today, as expected. The kiwi-dollar is testing the 200-DMA to the downside this morning, with a stronger case for a slide below the 60 cents level.