Investors Stay Cautious Ahead of OPEC and NFPs
Risk Appetite remained soft overall yesterday and today in Asia, with investors refraining from adding to their risk exposure, perhaps due to end-of-month and end- of-quarter portfolio rebalancing, and/or because the US employment report is due to be released tomorrow. As for today, the main event on the agenda may be the OPEC+ meeting, which may prove decisive for the faith of oil prices, and also affect oil-linked currencies, like CAD.
USD STRENGTHENS, EQUITIES SLIDE, OIL-TRADERS AWAIT OPEC DECISION
The US dollar continued strengthening against all the other major currencies at the last day of H1 2021, recording its biggest monthly rise since November 2016. It gained the most versus JPY, CHF, and AUD, while it eked out the least gains against NZD and CAD.
The strengthening of the US dollar and the weakening of the Aussie suggest that financial markets traded in a risk-off fashion yesterday and today in Asia. However, the relative strength of the Loonie and the Kiwi, combined with the weakening of the yen and franc, points otherwise. Thus, with the FX world painting a blurry picture with regards to the broader market sentiment, we prefer to turn our gaze to the equity world, in order to clear things up. There, major EU indices were a sea of red, and although market sentiment improved somewhat during the US session, it softened again during the Asian session today.
European equities slid yesterday, despite Eurozone’s inflation data confirming the view that the ECB is unlikely to start considering withdrawing monetary policy support any time soon. The headline rate ticked down to +1.9% yoy from +2.0%, while the core one stayed unchanged at +0.9% yoy. European investors may have refrained from adding to their risk exposure at the end of the month and the quarter respectively, perhaps due to portfolio-rebalancing.
Sentiment improved during the US session, with the Dow Jones gaining the most and the S&P 500 hitting a fresh record high. Only Nasdaq slid somewhat. Market chatter suggests that this may have been due to the better-than-expected ADP employment report. That said, we don’t believe that this was due to that. In our view, a strengthening labor market could add more credence to the views of Fed officials who want to start raising interest rates as early as next year, which is a negative for stocks. Remember that many stocks are valued based on the discounted earnings expected in the years ahead, and thus, higher rates mean lower present values. Market participants may have come to that realization later, during the Asian session today, and that’s why appetite softened again.
The next event that may affect expectations around the Fed’s future plans is the official US employment report, due out on Friday. Nonfarm payrolls are expected to have increased by 700k, more than May’s 559k, while the unemployment rate is anticipated to have ticked down to 5.7% form 5.8%. Average hourly earnings are anticipated to slow somewhat in monthly terms, but the yoy rate is forecast to have surged to +3.6% from +2.0%, adding to fears that inflation may continue to fly well beyond the Fed’s objective of 2.0%. This is likely to strengthen further the case for an earlier tightening by the Fed and may add extra support to the US dollar. At the same time, although this would mean further progress in the world’s largest economy, it could hurt equities, as higher rates mean more expensive borrowing, and (as we already noted) lower present values.
As for today though, the main event on the agenda may be the OPEC+ meeting, which may prove decisive for the faith of oil prices, and also affect oil-linked currencies, the likes of CAD and NOK. Media chatter now suggests that producers are likely to agree on an increase in output, between 500k and 1.0mn bpd, starting in August, with the latest surge in oil prices giving them ample reasons to believe that the market can absorb this kind of an increase. That said, although Russia is pushing for an increase, Saudi Arabia is more cautious. Therefore, with that in mind, and also taking into account the concerns over fresh restrictive measures due to the fast spreading of the covid Delta variant, which could result in decreasing demand, we believe that the final decision will be near the lower end of the range of expectations, namely at around 500k. In our view, this is unlikely to impact much the broader path of oil prices. It may allow the current uptrend to continue. For oil prices to correct decently lower, we think that a number beyond 1.0mn may be needed.
USD/CAD — TECHNICAL OUTLOOK
USD/CAD traded lower yesterday, but hit support at 1.2355 and then, it rebounded. Overall, the pair continues to trade well above the upside support line drawn from the low of June 1st, as well as above a steeper line, taken from the low of June 10th. In our view, this keeps the near -term picture positive.
That said, in order to get confident on more advances, we would like to see a clear break above yesterday’s high of 1.2423. This may encourage the bulls to push the action towards the peak of June 21st, at 1.2486, the break of which could see scope for extensions towards the 1.2535 zone, defined as a resistance by the high of April 22nd.
Now, in order to abandon the bullish case for a while and start examining whether a downside correction has started, we would like to see a dip below 1.2340. This would also take the rate below the upside support line taken from the low of June 10th and may open the path towards the low of June 28th, at around 1.2285. If that level is broken as well, we could see the slide extending towards the low of June 23rd, at 1.2252, or the upside support line drawn from the low of June 1st.
BRENT OIL — TECHNICAL OUTLOOK
Brent crude oil traded higher during the European session Wednesday, but hit resistance slightly below 76.05 and the, it pulled back. Since June 21st, the black liquid has been moving sideways, between 74.55 and 76.45, but the broader path remains to the upside. Thus, we would consider the near-term outlook to be cautiously positive.
A clear and decisive break above 76.45 would confirm a forthcoming higher high on both the 4-hour and daily charts and would take the price into territories last seen in 2018. The next resistance is marked by the highs of October 26th and 29th of that year, at around 78.00, and if that level is not able to stop the advance, we will aim for the peak of the 23rd of that October, at around 79.85.
The move that could signal that the bears have gained the upper hand, may be a dip below 74.00. This will confirm a forthcoming lower low on the 4-hour chart, as well as the completion of a short-term trend reversal. The bears may then decide to push the battle towards the low of June 21st, at 73.00, or the low of June 17th, at 72.05. If both barriers prove to be temporary obstacles on the sellers’ way south and break, we could then see the slide extending towards the 70.75 zone, which acted as a decent support between June 3rd and 8th.
AS FOR THE REST OF TODAY’S EVENTS
Besides the OPEC+ decision, we also have the final Markit manufacturing PMIs for June from the Eurozone, the UK and the US, as well as the ISM manufacturing index for the month. As it is always the case, the final Markit prints are expected to confirm their preliminary estimates, while the ISM index is expected to have declined fractionally, to 61.0 from 61.2. The initial jobless claims for last week are also due to be released and expectations are for a decline to 390k from 411k.
As for the speakers, we have four on today’s agenda and those are: BoE Governor Andrew Bailey, ECB President Christine Lagarde, ECB Chair of the Supervisory Board Andrea Enria, and Executive Board member Frank Elderson.
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