From the Floor: Oil shorts 'feel the pain' — #SaxoStrats#SaxoStrats
• WTI heading into resistance at $50-50.90/barrel area, support at $48.75/b — Hansen
• Gold scrabbling around for support at $1,236/oz and $1,228/oz — Hansen
• Global equities rebound continues but S&P500 not yet convincing — Garnry
• S&P 500 call shifts to neutral but rise still capped below falling trendline — Garnry
• Bunds rising despite risk-on moves as markets discount ECB action — Boye
• Markets may be dismissing ECB action in 2017 prematurely — Boye
• China PMI's hit near-five year high but earnings disappoint — Su
• Grains markets get ready for likely market-shifting report this evening — Hansen
By Martin O'Rourke
It's been quite a remarkable recovery in oil prices this week after a drift towards $45/barrel had begun to look very likely but the ship turnaround has not been without pain with short positions catching it in the neck.
"We've had weeks of longs suffering but the strong recovery coupled with a triple bottom on WTI has meant the shorts are feeling the pain," says Saxo Bank's commodities chief Ole Hansen on the line from Portugal. "The triple bottom has given buyers enough confidence to start picking it up again."
"The rally has also happened while the dollar has been rising indicating that there is some underlying strength in the market," says Hansen, pointing to additional price-supportive factors in new supply issues out of Libya and Opec's willingness to keep its message on production costs live and present.
Brent crude was at $52.44/barrel at 0655 GMT. WTI was at $49.59/b.
WTI rise given strong platform by triple bottom
"The market looks like it is coming back into some balance now with resistance for WTI in the $50-50.90/b zone," says the commodities chief. "A close above $50/b would affirm the case and even if there is downside, it would have to go all the way to $48.75/b before we could say this is a change in the picture."
"There is still a risk it could drift lower though."
It's a different outlook for gold which, having failed repeatedly at the $1,261/oz resistance, is looking over its shoulder for support at first $1,236/oz and then $1,228/oz.
"Gold is in trouble and with the gold/silver ratio at a four-week low and the dollar strengthening, that is reducing upside potential," says Hansen.
The global equities rally that effectively brushed aside US president Donald Trump's failure to get his healthcare bill passage through Congress as nothing more than a mild inconvenience, has continued unabated, helping S&P 500 cross that critical line at 2,350.
"S&P500 is above 2,350 but it is still below the falling trendline that we have been highlighting for a while now," says Saxo Bank's head of equities strategy Peter Garnry. "This doesn't feel like a robust rally yet."
Garnry's position on S&P has moved to neutral but no more as the trendline dynamic remains the fundamental dynamic in the direction of the US index into the weekend.
Garnry is much more sanguine about the prospects for Europe where easing inflation in Germany at 1.5% year-on-year versus 1.9% expected reaffirms his belief that this is a better bet for now.
"As far as inflation is concerned, there is also the oil price factor which has to be taken into account," says Garnry. "If we see oil prices more or less stay at the same level over the next few months, then the inflation input from oil will be at zero by June."
Disappointing earnings results out of China overnight, where Hang Seng China Enterprises, China Railway Group and PetroChina all missed targets reports Shiyun Su from the Saxo's Singapore hub, casts some doubt over the underlying strength of the global equities push, offsetting China's best PMI performance in nearly five years in the process.
S&P500 rally not yet able to breach the falling trendline
Easing inflation in Europe has made its presence felt in bunds which, despite the general risk-on mood, have risen to 161.40, reports the fixed income desk's Michael Boye.
"It reflects a view in the market that there will be a more cautious stance taken by the European Central Bank regarding any more moves this year," says Boye. "We think that while the market is pricing this out, it is far too early too call."
The spread of German 10-year bunds to their US Treasury counterparts Is once again out to nearly 210 points, notes Boye.
Spread just shy of 209 points
A five-year bond issue out of Papa New Guinea worth $500 million slated to go online this year, could also have market optimists salivating, says Boye.
"Papa New Guinea tried this before and if it is successful, it is testament to the strong underlying demand in emerging markets," he says. "For some though, this will be a sign that the market is getting too heated."
It isn't always the most glamorous of segments, but grains will take the commodities front seat this evening when the US department of agriculture releases its keenly awaited crops report.
The market has already priced in a strong-supply report forcing soy beans down 7% and wheat and corn down 5% so any risk is likely to the upside, says Hansen after a shifting in positions from a net long of 400,000 to 90,000 in the shorts position.
"The risk/reward is to the upside but do expect a lot of volatility."
The report will be published at 1600 GMT.
What will tonight's crop report show? Photo: Shutterstock
Martin O'Rourke is managing editor at Saxo Bank