- Oil retreats after breaching $50/barrel on Thursday
- Oil looks set to drift further lower; could test lower side of ascending wedge
- USD goes into consolidation mode awaiting key US economic data next week
- Core bonds firm, yields down considerably across the German curve
- Equity markets rally could be set to extend
- Danish DONG Energy's IPO will attract plenty of attention
By John Acher
Crude oil fell on Friday after a failed breach of $50 per barrel on Thursday, and looked set to retreat further as the commodity's efforts to rally did not inspire follow-through buying.
The US dollar shifted into consolidation mode in anticipation of key US economic data next week that is seen as crucial to determining whether the US Federal Reserve's recent hawkishness is indeed in the driver's seat.
Both the UK variety, Brent crude, and its US counterpart WTI crude climbed above $50/b on Thursday but failed to get a foothold. Brent fell to $48.79/b and WTI to $48.87/b by 0922 GMT on Friday.
“The $50 level that we have been talking about all week was finally reached and breached yesterday, but instead of triggering some follow-through buying, it was almost a damp squib and the market drifted back down again,” says Saxo Bank's commodities strategy chief Ole Hansen.
With that magnet out of the way, and with the formation of an ascending wedge on the price chart, there is an increased risk of retracement to at least the bottom of the wedge and prospects for correcting further lower, Hansen says.
“So [we’re] looking to sell crude – with half around now and then half at today’s pivot, which is $49.60/b, with a target of moving it down to $47 followed potentially by $45,” Hansen says, referring to his fresh #SaxoStrats trade idea.
“We’ve had a lot of focus on $50, we’ve had a lot of news priced into the market, we’ve seen the contango curve collapse because of producer hedging at the back. It just feels that now is not the time to have a clear break above $50, so looking for a correction on that one,” Hansen says.
Ascending wedge patterns often resolve in very steep selloffs, he adds.
WTI's ascending wedge shows rising risk of a steep correction
The US dollar swung into a bit of a consolidation mode on Thursday.
“The new lows in EURUSD are not holding well, and it poked back above 1.12 briefly," says Saxo Bank's FX strategy chief John J Hardy. “USDJPY still not able to maintain the 110 level.”
On the USDJPY
side of things, there’s been noise from the G7 summit and its statement was not particularly supportive of Japan’s intervention agenda, Hardy says.
“It discouraged once again competitive devaluations, though there was a bit of language in there about excessive moves, so of course if Japan’s back is sufficiently up against the wall with yen strength, it will act, but it will probably require considerable acceleration of volatility first,” Hardy says.
“Next week is really key for dollar pairs,” Hardy says, pointing ahead to the key US data, above all the PCE inflation measure on Tuesday and the jobs report on Friday, which will be watched as signposts on the way to rate normalisation at the data-dependent Federal Reserve.
needs to stay below 1.12 and close today on the weak side for any near-term encouragement, Hardy says. "If the US data next week is a bit weak, we’ll be pushing up to the Fibonacci retracement areas, probably up towards 1.13 plus.”
“The volatility has been decreasing here, the market conviction is quite weak,” says Hardy, showing the 50-day exponential moving average for EURUSD.
EURUSD chart shows dollar consolidating and 50-day exponential moving average (lower graph)
“Next week is about all of that data, so that’s what we’re looking at from here for the dollar and where it focuses the strength,” Hardy says.
“We have a bit of an awkward appearance by the Fed’s Yellen – I’m sure she’s not really happy to have to appear right before the weekend, late on Friday,” Hardy says. “It’s not meant to be a major policy speech, it’s kind of a ceremony and a chance for her to get lauded by a professor at Harvard University.”
Core bonds firm
Core European government bonds strengthened.
“We’re seeing a fresh test for the Bund future just now at 164.2 so this time it looks like it [164 price] will finally break, and that will take the 10-year yield down to 12 basis points,” says Saxo Bank fixed-income trader Michael Boye.
“We’re actually seeing quite a reaction over the whole German curve – we have the 2-year German yield a couple of basis points lower as well, which is a huge move for this paper – the yield is down to minus 53 basis points,” Boye says.
“At the moment, I haven’t really seen any news we can attribute that too except for the very bullish sentiment that we have seen these past couple of days,” Boye says.
Spanish bank Banco Popular issued a profit-warning on Thursday and a rights issue to cover losses from its real estate portfolio. The share plunged to the lowest level in 26 years.
“It’s quite a warning for the entire sentiment in the Eurozone periphery,” Boye says. “We’ve seen a lot of noise and troubles in the Italian banks as well, so with spreads at very low levels still because of ECB interference, there is still a lot of bad debt to be covered, so that is kind of a warning sign here.”
Oil’s inability to rally convincingly also affects sentiment in the equity markets.
“At this critical point, we are negative on energy and resources, so mining and chemicals, due to the slowdown in the global economy,” says Saxo Bank’s equity strategy chief Peter Garnry.
“$50 is the crucial point, if we go significantly above that, then obviously we are not negative any longer,” Garnry says. “For the time being, it has been rejected.”
The breakeven level for shale oil producers is around current price levels, but many Opec countries need higher oil prices to balance their budgets. “So you have all these dynamics sloshing back and forth,” Garnry says.
This week has been an important one in equity markets, with a strong move higher in the S&P 500, which could be extended if the macroeconomic environment remains positive and if the chances of the UK leaving the European Union through its June referendum continue to decline.
“It could be a signal that we could extend with a small rally over the coming weeks if we continue to get macro surprises and the Brexit probability goes down further – that has been the two main catalysts this week,” Garnry says, adding that the May data have given investors hope for a turnaround after the previous month’s gloomy signals.
“If we keep on with these macro surprises, it could continue, and this week was a signal for that,” Garnry says.
Landmark Danish IPO
Denmark’s state-owned DONG Energy, a leading European wind-power producer, published the offering document for an IPO on Thursday. The company is offering between 15.1% and 17.4% of its
existing stock at an indicative price range of DKK 200-255 per share through a sell-down by the current owners.
“There will be a lot of focus on it because it is one of the more pure plays on renewable energy – it’s around 75% of the business – and they are using their very stable utility business here in Denmark to catapult their massive investments in renewable energy,” Garnry says.
Risks to the DONG share price include risks related to climate credits, but costs in solar and wind power are coming down. “I think that trend will continue, so as the years go by renewable energy will be more competitive against other energy resources,” Garnry says.
DONG’s offering is valued a little higher than the European industry average, Garnry says. “So they are betting that people will invest in this setup because the growth will be higher in the renewable energy space.”
Markets will listen closely to a speech by Fed chief Janet Yellen on Friday.for any signals about
whether a summer US rate hike is coming. Photo: The Fed
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