Video

Playlist: KHC:xnas

Show less
Video / 03 November 2016 at 8:17 GMT

From the Floor: Oil rebounds after three weeks of losses —#SaxoStrats

#SaxoStrats
  • Wednesday's FOMC a non-event, as expected; supported Dec hike expectations
  • Oil price bouncing after losing 13.5% in three weeks
  • Too early to rule out Opec deal to cut production — Hansen 
  • Gold has reached key battleground between $1,305 and $1,310/oz
  • Prospect for December US rate hike priced in to precious metals
  • China Caixin PMIs hit 3-year highs, suggesting economy keeping momentum in Q4
  • Volatilities higher across all currencies, driven by Trump momentum
  • Market consensus is to sell USD if Trump wins — Norup
  • Implied chance of a December Fed hike at 78%
  • Signs that Saxo asset allocation model going defensive — Garnry
  • Facebook Q3 results beat expectations, but ad sales decline surprised
SaxoStrats banner
 
By John Acher

Oil prices bounced on Thursday after a further selloff on Wednesday, while fresh Chinese manufacturing data overnight bolstered the view that the world’s second-largest economy has maintained its momentum in the fourth quarter.

Wednesday’s Federal Open Market Committee meeting proved to be a non-event, as expected, with the Fed keeping rates steady but striking a sufficiently hawkish stance to keep up expectations of a December hike.

“The Fed is definitely massaging the markets for a rate hike” says Saxo Bank's equities strategy chief Peter Garnry, noting a 78% market-implied probability of a December US hike.

Asian stocks ended mixed on Thursday after a short-lived recovery on rising oil.

Oil is bouncing after losing 13.5% in the past three weeks. Brent crude traded up 0.6% at $47.14/barrel, and WTI was up 0.5% at $45.56/b by 1006 GMT.

”Yesterday we saw another big selloff in oil markets, which came after the US inventory report which has become notoriously erratic in recent weeks,” says Saxo Bank’s commodities strategy chief Ole Hansen.

A big surge in US crude oil imports last week accounted for most of the jump in the US Energy Information Administration’s oil inventories figures on Wednesday.

US Crude oil imports

“It’s still really Opec that is the key focus in the market,” Hansen says. “It’s too soon to rule out an Opec deal to cut production. The 13.5% selloff we have seen so far over the past three weeks is a sharp reminder of the implications of failure. So we will see a deal at the end of November, though the impact of it remains to be seen.”

The oil market is now a bit more balanced than it was three weeks ago. Hedge funds have lightened up their books, net longs have been reduced. “And that leaves the market in a bit of a better position to react to news,” Hansen says.

Saxo Bank introduced a short-term trade idea on Wednesday to go long on Brent crude from around $46.60/barrel, with a stop relatively tight below that, at $45.90/b and targets at $48.00 and $49.25/b, Hansen says.

“Whether this market is still a sell-into-rally market after the big selloff we have seen – well, I think today should probably give us a clue so the price action today could be quite decisive for where we go in the short term,” Hansen says.

US election fear drives gold

Gold, which has been driven up by safe-haven buying on US election fears, has reached its key battleground between $1,305 and $1,310/oz, Hansen says.

Gold price
Source: Bloomberg

Prospects for a December US rate hike have been priced into gold, so the main risk that remains is the US election next Tuesday, with prospects for gold sharply diverging around that event.

“It seems like it has become a bit of a binary event for the gold market, and that has led to a big surge in the demand for options,” Hansen says, adding that the one-month 25% risk reversal has had its biggest jump to calls since the Lehman collapse in 2008.

“It is so difficult to call – because a Clinton win potentially may just trigger some short-term weakness, while with a Trump win some are even calling for $1,400 [for gold],” Hansen says.

Volatilities up

The FX options market remains choppy.

“Volatilities have traded a lot higher across the board for the last couple days,” says Saxo Bank FX options trader Jeppe Norup. “This is mainly due to the risk-off sentiment in the market, and mainly because Trump has gained a lot of momentum.”

Besides Dollar-Mexico, dollar puts have been in very strong demand, Norup says. 
For EURUSD risk reversals now favour euro calls out to and including one-month, he says.

”The reason for the big skew in risk reversals at the moment is that there is a market consensus to sell the dollar if Trump wins the election,” says Norup, adding that since Trump remains the underdog, so a surprise Trump victory would trigger the most volatility.

 
Risk rotation

”Interesting developments in the US session last night,” says Garnry.

Saxo Bank has 16 different asset classes in its tactical asset allocation model, and Wednesday saw four of them closed out – commodities, international stocks, biotech stocks and US real estate. “And we very close to getting a close-out in preferred stock as well, predominately driven by financial stocks and banks,” Garnry says. 

“There are definitely signals here that our tactical allocation model is going defensive,” says Garnry, adding, however, that the signals could be wrong too, and there could be a mean reversion in risk-on sentiment. “A lot of this is driven by Trump’s momentum,” he says.

“At least our tactical asset allocation model, which has very strong performance, is rotating out of the more risky asset classes,” Garnry says.

Facebook’s third-quarter results beat expectations on Wednesday, but a surprise decline in ad sales hit the stock in aftermarket dealings.

“Still strong numbers on the top line and for operating income,” Garnry says. “They say they will see a significant decline in ad sales growth rates.”

“What might be a new phase for Facebook […] is that investor sentiment could actually shift and we could probably see a decline in Facebook shares, and then, as the quarters and years progress, they will slowly ramp up growth rates again as they push out sales in Messenger and the Instagram application,” Garnry says. 

Today’s major earnings reports from Starbucks, Kraft Heinz, Activision Blizzard, come after the market closes.

Oil storage tanks
 A surge in US oil imports accounted for a jump in oil inventories. Photo: iStock

John Acher is a consulting editor at TradingFloor.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Tradingfloor.com permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Tradingfloor.com and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Tradingfloor.com is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Tradingfloor.com or as a result of the use of the Tradingfloor.com. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through Tradingfloor.com your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. Tradingfloor.com does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail