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Video / 12 December 2016 at 8:29 GMT

From the Floor: China sells off as crude surges — #SaxoStrats

#SaxoStrats
   • Further production cut talk sees WTI crude gain 5% to $54.50/barrel
   • Eleven non-Opec nations, including Mexico and Russia, agree to cuts
   • Total production decrease adds up to 558,000 barrels/day: Moltke-Leth
   • 'This could take 1.8m b/d off the market in H1'17': Hansen
   • Chinese equities sell off as forward yield curve shifts dramatically
   • Shenzhen Composite loses nearly 4.8% of its value in one session
   • Chinese 1-year yields surge by 10 bps to 2.6%
   • USDJPY breaching key level pre-European open: Hardy

SaxoStrats
By Michael McKenna

European bourses are opening in the green this morning on a risk-on surge linked to the production cut-spurred rally in crude oil. Chinese shares, however, were unable to take part in the rally that saw WTI gain 5% to $54.50/barrel proved unable to halt the largest stocks selloff in six months for mainland exchanges.

The bearish shift, which left the Shanghai Composite down by just shy of 2.5% and the Shenzhen Composite down by nearly 4.8%, came on a variety of factors, most notably a shift in the forward yield curve, a crackdown on equity purchases by insurance firms, and concerns over the outlook for the mainland property market.

“The last time we saw such a shift in the Chinese forward yield curve was in August of 2015,” says Saxo Bank Global Sales head Christoffer Moltke-Leth, adding that “one-year yields surged 10 basis points to 2.6%” as inflation expectations rose.

Beyond the massacre seen in Chinese shares, however, the phenomenal rally put in by crude oil following the announcement of a production cut agreement by 11 non-Opec nations boosted risk sentiment into the European open even as Asian shares remained bradly lower on Chinese contagion.

“The cuts announced today will see a 558,000 barrel/day reduction in oil output, says Moltke-leth, with Saxo Bank head of commodity strategy Ole Hansen adding that the cuts could “take 1.8 million b/d off the market in the first half of 2017”.

Hedge funds, says Hansen, bought 81,000 lots of WTI crude futures in the week ending December 6, an increase mainly spurred by short-covering.

Additionally, notes Saxo bank’s head of commodity strategy, the US rig count rose to the highest level since January last week as US shale producers continue to respond to rising crude prices.

In FX markets, reports Saxo Bank head of forex strategy John J Hardy, the oil rally saw AUDCAD dramatically give way in the wake of Hardy’s December 2 statement that the pair would be an interesting candidate for those looking to trade the oil trend while avoiding the USD strength that continues to weigh on USDCAD.

Elsewhere, says Hardy, today’s European open saw traders push USDJPY determinedly higher (the pair is now trading around the 115.87 level, just shy of the 116.00 Big Figure).

USDJPY

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Source: Saxo Bank

EURUSD is another pair, adds Hardy, that could be entering a key pivot area as the benchmark pair’s trendline continues to point to the 1.05 area ahead of this week’s Federal Open Market Committee meeting.

With the US dollar remaining very strong into Wednesday’s meeting, where a 25 bps interest rate hike is widely expected, Ole Hansen reports that gold is under pressure.

“The positive risk sentiment is another factor weighing down XAUUSD,” adds Hansen.

Finally, Saxo Bank’s commodities head tells us that the cotton net-long position has reached a record high on temporary Indian supply concerns while John Hardy points to a thin data calendar ahead of the Wednesday FOMC session, with Tuesday’s Swedish and UK CPI prints the main items of note.

Shanghai
Was today's Shanghai selloff just the beginning of a larger rout? Photo: iStock

Michael McKenna is an editor at TradingFloor.com

Editor’s note: From the Floor takes advantage of TradingFloor.com's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.

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