From the Floor: Risk premium flight hits oil — #SaxoStrats#SaxoStrats
- Oil slides after EIA report shows unexpected gasoline build
- Risk premium exits oil in one "swoop" as geopolitical tensions ease — Hansen
- French/German 10-year spread closes at highest since 2012 — Boye
- Markets pricing in "high chance" of damaging outcome — Boye
- Sterling rally holds steady above key $1.2775 area — Hardy
- FTSE100 slide should find support soon — Garnry
- Cocoa hits nine-year low as Ivory Coast supplies boosted — Hansen
By Martin O'Rourke
The recent oil rally towards year highs that has been underpinned by heightened geopolitical concerns was punctured quickly late Wednesday after the EIA reported a surprise build in gasoline stocks.
"There was a big move in oil markets after the build in gasoline stocks," says Saxo Bank's head of commodities strategy Ole Hansen. "Inventories tend to drop in gasoline at this time of year and refinery demand remains very strong."
"Strong gasoline demand is now needed if we are to avoid simply moving surplus from one barrel to another."
That spooked bulls adding to a gradual easing of the perceived geopolitical risk.
"With some geopolitical risk on the wane, what we saw was the risk premium being taken out of the market in one big swoop," says Hansen.
Brent crude was at $53.30/barrel at 0655 GMT. It had been at $54.80/b at the same time Wednesday. WTI crude was at $51.15/b at 0655 GMT. It had been at $52.33/b at the same time Wednesday.
WTI took a big hit after the EIA report Wednesday
"I don't see this as the beginning of a new downtrend but there has been some build up," says Hansen. "I'd expect the market to stay neutral from here."
Hansen adds that Opec will almost certainly need to extend its oil production plan into the second half of 2017 but that will require getting agreement with non-Opec parties to the deal which will require some persuasion.
The debate in France ahead of Sunday's first round in the presidential elections is getting ever hotter with Marine Le Pen pledging in front of an audience of 5,000 supporters to end mass immigration, take on the EU and restore French sovereignty Wednesday.
Le Pen is still expected to make it through to the second-round run off, but, says Saxo Bank's forex chief John J Hardy, the big surprise scenario could see centrist Emmanuel Macron as expected line up against the scandal-hit conservative Francois Fillon.
"Macron represents what would be something of a quiet revolution for France representing the possibility of building real political coalitions instead of the usual mix of very right or left leaning governments ," says Hardy. "A Fillon v Macron run off is the surprise scenario rather than Melenchon v Le Pen."
Sterling could get a boost from that, given that UK prime minister Theresa May would probably find a victor out of Macron and Fillon far more easy to deal with, says Hardy.
"The most positive result for sterling would ironically be for Fillon to reach the second round," says Hardy. "The GBPUSD rally has held up very well above 1.2775 and if we look higher then 1.30 or even 1.35 is on the horizon."
"The key test is the first round Sunday."
Sterling rally holds comfortably above 1.2775
Markets are seemingly not quite so sanguine as the French/German 10-year bonds spread closed at its highest since 2012, helped no doubt by that shrill rhetoric from Le Pen.
"Government yields rebounded a bit perhaps because of the fall in oil prices and the elections Sunday," says fixed income trader Michael Boye. "Markets are pricing in a high chance of a damaging result."
"The French/German spread closed at its highest since 2012 and we could see further weakness as France issues a spate of new bonds today."
French/German 10-year spread closed at 79 Wednesday but had improved Thursday morning
Those who cheered the Brexit vote last summer and who no doubt will be eagerly anticipating May's 'referendum' on the referendum on June 8 , have often pointed to the stellar fortunes of the FTSE100 since June 23 as the perfect riposte to a remain camp fearful for the UK's fortunes outside of the EU.
It conveniently ignores the huge multinational presence on the index, however, which has enjoyed a massive fillip on the back of sterling's post-Brexit weakness, given that earnings are typically denominated in foreign currencies.
But sterling's performance since Tuesday has well and truly exposed that myth forcing the UK100 to give up all its 2017 gains and raise the prospect of falling through the 7,000 barrier if sterling strength continues.
"The price reaction in FTSE100 has been very strong even if we did see a bit of sterling weakness set in yesterday," says Saxo Bank's head of equities strategy Peter Garnry. "It could continue to fall from here but I think it will stay above key levels and it should find support soon."
Garnry meanwhile flags up an encouraging start to the earnings season in the US, where investment bank Morgan Stanley was in the vanguard of "a strong rebound in US operating earnings and we are definitely out of that weak period with the strong dollar and very weak commodity prices."
"Morgan Stanley surpassed Goldman Sachs on fixed income trading for the first time in 2011 and its set up with a lower cost base is really panning out for them," says Garney. "For Goldman meanwhile, it looks like an ugly start in Q1."
A strong start to US earnings season
Source: Bloomberg, Saxo Bank
We like it hot but as far as markets are concerned, a dramatic oversupply of cocoa has sent the bulls running for cover as the bean hits a nine-year price low.
"Cocoa looks absolutely horrible," says Hansen. "We had a false-start rally last month but we needed to get back above $1,955/tonne fairly soon or we risk further downside on more supply coming from the world's biggest producer Ivory Coast."
Cocoa closed at $1,873/t Wednesday.
We like them, but there are far too many of them. Photo: Shutterstock
Martin O'Rourke is managing editor at Saxo Bank