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From the Floor: Oil hits bumpy patch on mixed signals — #SaxoStrats

   • Oil slumps to 6-week low before recovering on surprisingly bullish API report
   • Oil prices knocked by Saudi prince's remarks, lifted by drop in API oil and fuel stocks
   • EIA report today will help determine strength of support towards $47/b, the March low
   • Gold trading lower and testing $1,257-53/oz band of support
   • Global equity markets still bullish, but momentum has faded in S&P 500
   • Apple Q2 revenue disappoints, hit by weaker iPhone sales; shares lost 2%
   • Treasuries trading slightly firmer ahead of Wednesday’s FOMC; no changes expected
   • Market well prepared for a June Fed rate hike, now priced at 67% likelihood
   • Eurozone yields tread water ahead of French 2nd-round presidential vote on May 7
   • ECB intervened heavily to support French bonds in run-up to 1st round of election
   • Greece 10-year yield rallied to 3-year low after deal to cut spending

Saxo Strats banner
By John Acher

Oil prices were whacked by contradictory signals on Tuesday, knocked first to six-week lows by remarks from a Saudi prince and then recovering later in the day in heavy volume on a surprise drop in US oil and fuel stocks.

Meanwhile, equity markets remained strong despite signs of fading vigour in the S&P500 futures and a disappointing quarterly result from Apple.

“We had a very volatile end of the day yesterday in the crude oil markets,” says Saxo Bank’s commodities strategy chief Ole Hansen. (Read also Hansen's latest on the oil markets and watch a short video with his commentary here.)

"We dropped below the $48 level […] and it triggered quite a big selloff, it dropped another more than half a dollar, and during that process there was very, very, heavy volume," Hansen says. "We saw more than 150,000 lots of crude oil change hands during that hour when the market was under pressure.”

“What kicked it off – apart from the technical breakdown – were also comments from the Saudi crown prince Mohammad bin Salman who basically said in an interview that Saudi non-oil revenues beat expectations in Q1," Hansen says.

“That led the market to believe that they might be less stringent about their support for the oil price because of the revenues from non-oil, but it did hit the market at a time when it was already under pressure,” Hansen says.

But prices erased some losses, returning to “relative safety” around the $48/b level, after the American Petroleum Institute’s fresh data showed a surprise drop in both crude oil and fuel.
“The drop in both of these yesterday helped stabilise the market,” Hansen says.

That shines the spotlight on the weekly report later today (1430 GMT) from the US Energy Information Administration. “It is going to be quite a crucial report -- the market needs some good news sooner or later in order to stabilise following the renewed weakness we have seen because of the increased supply from Libya, the strong rise in production from the US,” Hansen says.

“So a change in distillates and gasoline could have a soothing impact on the market,” he says.
US crude oil production has been rising strongly, averaging an increase of 30,000 barrels since October, but slowing down for the past couple of weeks. “Last week, we only saw a 13,000 barrel increase, and if we see another weak number on production [from the EIA], that could also attract some support to the market,” Hansen says.

“We need to stay above this $47.50 to $47.80 area because we are already testing the uptrend from last March, but below that we have the triple lows from March, which on all three occasions triggered quite a strong buying response,” Hansen says. “So it’s going to be an interesting afternoon.”

WTI oil price holding above 47.50/barrel
WTI oil price
Source: Saxo Bank 

Strength in equities

The equity markets remained generally bullish on Tuesday, though the momentum in the S&P500 is showing signs of fading, says Saxo Bank’s equities strategy chief Peter Garnry.

“We climbed a little bit across the spectrum, and we got new highs in the Nasdaq,” Garnry says. “Overall, momentum is still looking very strong, especially driven by the cyclical sectors -- technology stocks, consumer discretionaries and industrials.”

“Industrials have really performed extremely well due to the very bullish earnings season,” Garnry says.

But he adds: “We are seeing pretty clear fatigue here – a pause for the last five trading sessions in the S&P500 futures. We did not manage to push to that 2,400 level and beyond after the big noise around the tax bill from the Trump administration.”

Second-quarter results from US technology darling Apple after the Tuesday close missed analysts’ expectations for revenue, as iPhone sales were hit, apparently by consumers waiting for new products.

“It was driven by weaker iPhone sales. That was a disappointment to investors who had been buying up Apple shares in hope of the huge replacement cycle everyone is expecting for Apple,” Garnry says. “Apparently their customers are holding back, they are waiting for the iPhone 8.”
Apple shares fell 2% on the disappointing result.

Danish insulin producer Novo Nordisk reported better-than-forecast revenue and earnings and lifted its full-year forecast. “A very strong result, the cost cutting is working,” Garnry says.

Earnings reports are due on Wednesday from Facebook, Kraft Heinz, AIG, MetLife, Time Warner, Reynolds, and others.

European bonds tread water 

The fixed-income markets are keenly awaiting the statement from the Federal Open market Committee this evening (1800 GMT), though no changes are expected.

“The focus will be on any hints of an upcoming move,” says Saxo Bank’s fixed-income trader Michael Boye. “The market is quite well prepared for a June hike. It is priced at 67% at the moment.”

The bond market is also interested in any remarks about the heavy balance sheet that the Fed has accumulated since the financial crisis through its quantitative easing programme.

“There has been some speculation that they could be ready to reduce the balance sheet, and any comments about that will be very interesting to look out for,” says Boye. (Read also Boye's new weekly bond market update, dealing with this same subject, here on TradingFloor.)

Bond markets in Europe are somewhat quieter, with yields treading water ahead of the second round of the French presidential election this Sunday, but interested in a German auction of new 10-year bonds on Wednesday.

Fresh ECB data on Tuesday showed that the European Central Bank had bought a higher-than-normal proportion of French debt ahead of the first round of the French election last month, Boye says. 

They deviated quite a bit from the capital key, and first of all that tells that the panic in the French government bond markets was probably even more severe than we thought it was, even though the spreads there expanded quite a bit -- the ECB intervened quite heavily,” Boye says.

“It also tells us, in terms of future crises, that the ECB is actually quite willing to deviate from their normal pattern and step in and try to intervene if there is stress in the Eurozone system,” he says. “So, if we see a similar situation in another country later on, it is quite likely that the ECB is willing to go pretty far in intervening and using its purchase programme actively.” 

The Greek 10-year yield rallied to the lowest level since 2014 after Greece reached a deal with international creditors to cut spending. “The next big trigger could be if the IMF and European Union could agree on some debt relief – that is obviously the hope of Greece – but if they do, there could be even further gains in Greece assets,” Boye says.

Greece 10-year yield drops to lowest since 2014 on rescue deal
Greek 10-YR
Source: Bloomberg

Gold at support

Gold is trading lower, but holding within a band of support at $1,257-53/oz, Hansen says.

The focus in the gold market is on Wednesday’s Federal Open Market Committee meeting, but, with expectations for no changes in interest rates from the Fed, that could prove to be a non-event and the attention will remain on the June FOMC meeting and the US jobs report on Friday.

“We are still in a range. It is still defensive, but we maintain a neutral stance [on gold] at this stage,” Hansen says.

Copper prices are stuck between renewed supply disruptions and concerns about Chinese demand going forward, with high-grade copper providing support, Hansen says.

 Riyadh. What happens to Saudi support for oil prices when the kingdom's diversification strategy pays off and it gets more of its revenues from non-oil sources? Photo: Shutterstock

John Acher is a consulting editor at TradingFloor
Market Predator Market Predator
Sound quality OK, level could be increased next time. Thx. guys.


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