Article / 15 November 2017 at 1:50 GMT

Morning Report APAC: Oil slips on forecast gloom, base metals slide

APAC Sales Trading Desk / Saxo Capital Markets
Singapore

 

  • The International Energy Agency said oil demand is weaker than many believe
  • The IEA's demand observations drove a 3% overnight slump in crude prices
  • Falls for oil and other commodities were the main drivers for a selloff in the USD
  • Base metals fell after China posted weaker than expected industrial, sales data

 By Saxo APAC Sales Trading

Economic data of the day (Singapore Time; GMT+8hrs)
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Speeches
  • 1500 – Australia: RBA assistant governor Luci Ellis gives speech in Melbourne
  • 1500  – EU: ECB governing council member, and governor of the Central Bank of Ireland Philip Lane speaks in Dublin
  • 1600 – US: Chicago Fed President Charles Evans speaks at European Conference in London
  • 1800 – EC: chief economist Peter Praet, BoE chief economist Andy Haldane, National Bank of Denmark governor Lars Rohde speak in Frankfurt
  • 2100 – UK: Ben Broadbent, BoE deputy governor for monetary policy, speaks at LSE
  • 0510 – US: Boston Fed President Eric Rosengren speaks on US economy in Boston

Overnight news, oil and other commodities

  • Crude oil dropped 3% overnight after International Energy Agency said that global oil demand is actually much weaker than everyone thought. The IEA lowered its demand forecast by 50,000 bpd in 2017 and 190,000 bpd in 2018, raising concerns that the oil market is actually not as healthy as it seems. That puts demand growth at 1.5 million barrels per day this year, and only 1.3 mb/d in 2018.
  • The IEA warned everyone that there isn’t a new, higher price floor at $60/barrel. The bearish figures included a downward revision of Q4, 2017 oil demand by 311,000 bpd. Part of the reason for weaker-than-expected demand is because oil prices are up about 20% since September.
  • US shale, and other non-Opec producers will add a whopping 1.4 mb/d of fresh supply in 2018, essentially offsetting nearly all of Opec’s efforts. The IEA said that oil demand “will struggle to match this” huge increase in supply.
  • The lower than expected Industrial Production in China at 6.2% (Exp. 6.3%) from 6.6% are creating fear that the economy may have peaked in the 1st half of this year and the demand for commodities will drop which triggered a selloff in Commodities overnight.

 Overnight news, Germany

  • GDP in Germany came in better than expected at 0.8% QoQ (Exp. 0.6%) and 2.8% YoY (Exp.. 2.3%) with a stable inflation at 0.0% MoM and 1.6% YoY.
  • The ZEW survey continued to improve at 88.88 following the release of strong GDP data.
Overnight news, UK
  • CPI disappointed and came at just 0.1% month on month (Exp. 0.2%), and 3.0% in year on year terms (Exp. 3.1%). Core CPI came in at 2.7% (Exp. 2.8%). The PPI figure was also lower than expected at just 0.2% MoM (Exp. 0.3%) and 2.8% YoY (Exp. 2.9%).
  • The main upward contribution to the 12-month rate came from the food and non-alcoholic beverages category as prices rose by 0.4% between September and October, after falling by 0.5% at the same time in 2016.
  • One of the most significant downward effects came from fuel costs. Pump prices fell by 0.4% in October, compared with a rise of 2.3% a year earlier.

 

Foreign exchange

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  • The drop in oil and other commodities were the main driver for a selloff in the USD. The 10year yield dropped 3bps to 2.37%. The USD selloff was also exacerbated by the strong GDP data in Germany creating a short squeeze in EUR.
  • DXY has suffered from a flurry of stop losses when it broke back below the H&S support at 94.00. The close tonight will be important to see if we will manage to confirm again the H&S made since end of July.
  • EURUSD had a massive squeeze higher on only stop losses after the strong GDP data in Germany and the ZEW survey. It’s all about positioning and all the short term players being short below the H&S support at 1.1670.
  • GBPUSD managed to rally on the back of a broad USD selling but a lot of interest to sell the pair are coming quickly. So far the pair has been supported at the 100d MA so we could also get a decent squeeze higher due to positioning.
  • Emerging Markets: It’s a mixed day for EM because USD sold off but Commodities as well and equities are following so there was very little interest on any direction for the non-commodity currencies. However, USDBRL on the back of a selloff in soft commodities.


Foreign exchange movements

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  • Vols higher across the board as risk off sentiment continues and as EURUSD broke out of the last weeks tight range and back of higher German GDP.
  • 1 month EURUSD has gone up from 5.85 to 7.25 over the last two days, because of the spot move but also because 1 month now includes Fed and ECB moves in December (which is 0.7 of the move in vol).
  • Markets are looking to buy topside in EUR as well as downside in AUD, NZD, while the flow has been mixed in USDJPY. Downside buying in shortdates while buying of midterm topside.
Rates
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  • US treasuries bull flattening re-emerged, as strong PPI data however equities, dollar and oil weakness fuelled speculation of asset allocation to fixed income.
  • Core European bonds were higher, taking the hint from US treasuries amid risk off feel loomed in the market overnight. Gilts yield was lower after soft CPI print.  

Commodities 

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Leading equity indices

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US equities

  • Lam Research Corp. gained almost 2% after hours after the chip equipment provider said it will buy back up to $2bn in shares over the next 12 to 18 months and its board also approved raising the quarterly dividend by 11% to 50 cents a share.
  • Buffalo Wild Wings Inc. surged 24% as The Wall Street Journal reported on Monday that a private-equity firm Roark Capital Group had bid more than $2.3 bn for the restaurant chain.
  • Taubman up 4.8% as seen Elliott Management amass a "sizable" stake in the shopping center operator, though the stake remains below 5%. The report said the activist investment firm has spoken with Taubman about various options including going private. Taubman has already come under attack by activist Jonathan Litt's firm, Land & Buildings Investment Management.

European equities

  • Tesco shares jumped 6.2% after the U.K. Competition and Markets Authority provisionally cleared a merger between the supermarket chain and wholesaler Booker Group (+6.8%)
  • Vodafone rose 5.1% after the telecom raised its outlook for fiscal 2018, with pretax profit for the first half rising 55% year-over-year.

Hong Kong equities

  • Earnings Watch: Tencent Holdings Ltd. reports its third-quarter earnings after the market closes in Hong Kong on Wednesday. Analysts polled by S&P Global Market Intelligence expect Tencent to report earnings of 15.7bn yuan ($2.36bn), a 48% increase over the 10.6bn yuan earned during the same period last year.
  • IPO: Tencent-backed Yixin Group, a Chinese online automobile transaction platform to debut on November 16, raises Hong Kong’s retail offer shares by 219.7mln to 307.54mln shares as 561 times subscribed; $HK10 per share in grey market among institutional investors, rising more than 30% from its IPO price of $HK7.70.


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The International Energy Agency says global oil demand will struggle to match added crude output from US shale oil producers and other non-Opec sources. Photo: Shutterstock

 
– Edited by Robert Ryan


This report was compiled by the Saxo APAC Sales trading team in Singapore – the home of social trading. Follow the team on @SaxoStrats or post your comment below to engage with Saxo Bank's social trading platform. 

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