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Video / 09 February 2017 at 8:35 GMT

From the Floor: Oil buyers undeterred by bearish reports — #SaxoStrats

  • Despite the fifth bearish report in a row oil continued to find buyers
  • Goldman Sachs anticipate oil inventory buildup will slow come March
  • Gold is taking a breather having hit highs of $1,243 yesterday
  • Significant rally in bonds on both sides of the Atlantic
  • French sovereign spreads contracted as Le Pen remains significantly behind
  • Investors still flocking to bunds amid Greek uncertainty and Dutch election nerves
  • Royal Bank of New Zealand dovish last night leaving rates unchanged
  • Nikkei down overnight ahead of Abe's meeting with Trump on Friday
saxo stratsBy Jack Davies

The US Energy Information Agency issued its fifth bearish report in a row on Wednesday, yet crude continued to find what Saxo Bank head of commodities Ole Hansen terms a “wall of buyers”.

“We continue to see bids coming into the market; where they’re coming from remains to be seen,” says Hansen, noting that Goldman Sachs has said it believes the buildup in US inventories – which experienced their second-highest jump on record of 13.8 million barrels – will begin to slow in March when the impact of Opec cuts begins to be felt in US imports.

“This has added a bit of focus in the market because generally we don’t see inventories in the US start to taper off until we get into April or May, so that’s going to be followed quite closely,” he adds. “In the near term, the focus now is on Friday where we see the production estimates by the Energy Information Agency. That will be followed by the monthly Opec report on Monday.”

In these reports, which Hansen says will be the truly authoritative sources, “We’re looking for a higher level of compliance to be confirmed.” 

oilSource: Bloomberg; Saxo Bank

Meanwhile, gold’s heady rise since the start of the week – having shot up by more than $20/oz since last Friday’s close – has begun to level out.  

“We’re in a relatively steep uptrend at this stage, so some consolidation can be expected. We almost reached our target of $1,250 yesterday at $1,245/oz,” says Hansen. “That basically means today I’ll be looking for the margins to look for potentially testing the bottom of the channel, which is coming in around $1,228/1,229/oz; so that’s the area of support we’re looking for today.”

Government bonds experienced a significant rally on both sides of the Atlantic overnight, reports Michael Boye from Saxo’s fixed income desk.

“In the US there’s some talk about nervousness over the lack of Trump news so far with no further details on the stimulus package yet. And in Germany we still see an effect from investors flocking around German bonds on a safe-haven bid,” says Boye.

To a large degree, this rush to bunds is being driven by anxieties over upcoming French presidential elections and the fear that pro-Frexit, anti-EU hopeful Marine Le Pen may be in with a shot of winning. But Boye notes that French sovereign spreads contracted overnight on the back off polling data showing the Front National candidate continuing to lag behind.

“Not only are the worried about the election risks in France, but also the Netherlands and possibly Italy; we have the Greece situation as well,” says Boye.

Late last night across the pond, the US Treasury issued an auction of 10-year bonds, which Boye notes was: “a little bit soft.”  

“We had a correction into the late-evening session with Treasuries trading a little bit lower and the yield has rebounded to 2.35% on the 10-year yield,” says Boye. “We got rejected at the 2.32% mark, which is the yellow from earlier in January, so that could be reason to believe that this selloff could continue into today’s session.”

All the while, each flap of US president Donald Trump’s butterfly wings continues to have reverberations across the globe.

Reporting from Saxo’s Singapore desk, Hon Wei Lee notes that the Hang Seng China Enterprises Index gained a percentage point overnight off the back of Trump’s letter to Chinese president Xi Jinping, in which he spoke of his desire to develop a constructive and mutually beneficial relationship with Beijing.

“HSCEI is up 4% since the start of the week and is trading at its two-month high,” says Wei Lee. “Expect some resistance at the 38.2 Fibonacci level and a bid off could suggest a further upside to the HSCEI index.”

But as the Chinese index got a boost from the unprecedented president, the Japanese Nikkei declined 0.5% overnight in anticipation of a meeting between premier Shinzo Abe and president Trump on Friday.

“The yen also traded slightly weaker against the greenback ahead of the meeting,” Wei Lee adds.

Saxo’s head of forex strategy John Hardy says the 111.60 area will be a key area of focus for USDJPY traders.

“It’s survived really well, it’s the Ichimoku weekly cloud level and we’re also looking at parts of the US yield curve interacting with the lows for the year; essentially the initial reaction to the Trump presidency in November,” says Hardy. “USDJPY looks like it wants to rally if it can bust above the 112.50/112.60 area and we’re seeing yields picking up again, so I’m looking for that as a trigger.”

The Royal Bank of New Zealand maintained a dovish stance on Wednesday evening, opting to leave its rates unchanged at 1.75%. 

nzdusdSource: Saxo Trader

“The key thing is their speaking out quite clearly against developments in the exchange rate, which makes sense given that kiwi hasn’t been that far recently from its all-time high in trade-weighted terms,” says Hardy. “The inflation target of 2% being pushed out to Q2 2019 from Q4 2018 is thoroughly icing any anticipation of rate hikes in the near future.”

“It’s pretty easy for kiwi to weaken given how far it has risen before this statement,” he adds. “There could be some further legs on this trade but it’s going to take some time to turn around the kiwi charts.” 

trump and abe
Friday's meeting in Washington will be the first between Abe and Trump since the latter assumed the US presidency. Photo: Wikimedia commons

Jack Davies is a consulting editor at TradingFloor
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