The day ahead 31 May 2016

Good morning,

Tokyo led Asian stocks higher on Monday, as the Nikkei heads towards a close above 17,000 points for the first time in a month, after the yen plummeted against the strengthening dollar. Data released earlier in the session showed Japanese industrial output unexpectedly rose 0.3% in April, suggesting production is holding up despite weak exports and the impact from a series of earthquakes that struck southern Japan during that month. Shares in Shanghai surged +2.43% , Hong Kong +1.25%, while the ASX slipped  -0.19%. Underpinning Asian sentiment, European shares hit one-month highs on Monday amid otherwise light trade with markets in London and New York closed for public holidays.

In FX space the Aussie gained against its peers as building approvals data for April came in much better than expected (+3% against -3% exp). The positive sentiment also saw the Kiwi rally, whilst sterling soared above the 1.47 only to quickly retreat back towards the 1.4650 handle against the US dollar. The Euro is also under pressure as we head towards the European open.

Gold rose for the first time in 10 days -- breaking its longest losing streak in more than a year and currently sitting at $1212. Although strongly underpinned amid the extended broad based US Dollar correction, it looks to build a recovery towards the 100 dma located around $1217.50. Oil pushed back towards the psychologically key $50 a barrel mark as moves were limited ahead of Thursday's meeting of the Organization of the Petroleum Exporting Countries. WTI sits at %49.58 and Brent at $49.73.

So to the day ahead and it looks to be a busy day as we enter the last sessions of the month. First up we have  German Retail sales (0700 BST) and Unemployment Report (0855 BST). Last week’s sentiment data suggests that Germany’s moderate growth trend will roll on, based on survey figures for consumers, the financial community and the business sector. There’s still concern about the near-term outlook, according to business polling, but overall, the mood points to more of the same: Economic expansion that’s less than stellar but strong enough to support the Eurozone's modest recovery. Forecasters are looking for a positive retail sales number of 1% whilst the jobless rate is set to remain unchanged at a low 6.2%. Close attention will be paid to the monthly update on changes in the number of newly unemployed workers for deeper context about the labour market trend.

Canadian GDP (1330 BST) The economy declined 0.1% in March, its first decline since November 2015 and the estimate for April is more of the same. According to Bank of Montreal, first quarter GDP is expected to rise nearly 3% annualized, thanks to solid growth at the turn of the year and a nice boost from net exports. Unfortunately, it said, the economy lost momentum as the quarter progressed, with March GDP expected to come in flat after a small contraction in the prior month adding Canada is going to get some sizeable volatility in the months ahead due to the Alberta wildfires and resulting drop in oil production.

US Consumer Confidence Indicator (1500 BST) Last week’s revised data for the University of Michigan’s Consumer Sentiment Index for May points to an improvement in the mood at the Q2 midpoint. The benchmark was revised down a bit from the preliminary reading for this month, but the index still posted a solid bounce higher against April – and relative to recent history as well. The CSI’s strength bodes well for today’s release of the Conference Board’s Consumer Confidence Indicator (CCI), a competing measure. The two indices track one another, although there can be substantial differences in the short term. Economists think that today’s first look at the May data for CCI will post a solid rise to 96.0 for May against 94.2 in the previous month. A firmer reading for the Conference Board’s index isn’t surprising in the wake of CSI’s latest jump. If the upbeat forecast holds, the case will strengthen for arguing that consumer optimism is rising in the second quarter.

Trade Smarter

Anish 

What To Expect At $20 Oil?

Ladies and Gentlemen

As we saw Oil dip below $30 per barrel yesterday, we have seen somewhat of an overnight reprieve in the Oil trading sessions of Asia and Europe. However,  it is very hard to find reasons to be optimistic in current conditions, especially with the over-supply and concerns about China growth. The pain low Oil prices has so far caused for Oil investors and Oil producing countries may just be a taste of things to come as we head to $20 per barrel. 

We are now confronting $20 Oil and the likelihood is fairly great. Clearly Oil markets cannot maintain these prices (below $30) for very long and the question is for how much longer?  The Gulf Economies as well as other Oil producing countries are suffering immensely, such as Malaysia - who are losing $68 million for every $1 decline in the price of Oil. Oil producers too.. EconocoPhillips - losing $2 billion for ever $10 decline and yesterday Petrobras announcing it is lopping $30 billion of it's 5-year spending plan... Hours late, BP announces that they would slash 4,000 jobs. 

If there is some sort of optimistic note to leave you on and that was last year China (2nd largest consumer of Oil) imported a record amount of Crude, but that was simply taking advantage of low prices... and if/when prices go up they can start taking advantage of their huge stockpiles. 

$20 oil just acts to dig an even deeper hole from where you need to be before the markets look to open up again! 

Best of luck guys! 

Anish8FX @Atom8.com

The 2015 Oil Price Conundrum

Ladies & Gentlemen, 

Over the past year Oil has "started" its biggest price decline since the Financial Crisis. Today the price of Oil went below $40.00 and the Markets are currently sitting on this level (3 month low), to me - waiting only for the next break lower. This move lower was supported by yesterdays data from the US showing that Crude Stock Piles have been expanding for the past 8 weeks now. 

Here is where the trouble lies.. Demand is at record highs, especially from India and is expected to rise by 1 million barrels per day every year in this decade. But the issue is with Supply. The Supply-side is controlling the Market and it does not seem to be slowing! We have way too much Oil & OPEC led by Saudi Arabia have been more focused on targeting Market share, rather than price stability. 

How much Supply do we actually have? Well have a look at the Chart below and you can see from the "Surveillance Map" the Orange Line mapping out 530 km (about 3 billion barrels of oil). If you were to put these in Oil Tankers and line them up together, that is the route... From London to the south of Glasgow. 

Chart of the Day

Source : @JavierBias2

What about Geo-Politics? Well the Oil prices spiked up as an immediate reaction from the Paris attacks. To me, that could just be a panic trade and the Fundamentals are clearly running the Oil Market here. Syria, in reality is not a big Oil producer but is in the neighborhood. I think you would need to see a real Geo-political shock in a large Oil producing country to have a sustained effect on Oil Prices. 

Could we see $30? - Yes!  I think the markets will tick away to $30 during the course of 2016 and perhaps even lower into 2017. Ultimately, it is the refiners that buy the Crude Oil and if they are not making any money anymore... heading into winter... they want to keep their margins growing. They would definitely be in for a hard time for the next few years to come. 

As always, Trade smarter. 

Anish8FX @Atom8.com

The Saudi Spending Phenomenon - Will It Ever Stop?

Ladies & Gentlemen,

All Market eyes have been eyeing up Oil Prices, some are calling a further slump in 2016 and others are a bit more optimistic (seeking the $50 mark). However, with these lower prices, how has the World's biggest Oil player reacted & will it really hurt the Saudi Economy?

You would of actually never of guessed there to be an Oil slump from the shine of the Saudi economy and that is no accident, it is Saudi (well-planned) policies in action. The wealth from the Oil revenues has been shared and the public have firmly supported the Al Saud family, even as turmoil beckons on the horizon.

The IMF predicts that within 5 years, the Kingdom will run out of Financial Assets... But is that really true (raised eyebrow)? In theory, if they continue to spend at the rate they are & Oil prices remain low, then yes! However, they currently stand at a (Positive) 100% net cash : GDP ratio & if you look at a Country like Japan, who's net:GDP is -200%, I begin to differ with the IMF. Saudi literally are operating with no debt.

figure : Bloomberg source

Can this be protected for the Future? What if Oil prices continue to fall? I think you will start to see Saudi Arabia slowly decrease their heavy military contracts & begin opening their Economy up to foreign investment, by way of issuing Government debt or opening investment into Saudi stocks. More recently, the Saudi government to pull in about $70bn from Equity markets to begin adding more liquidity within their own markets -  "Welcome world to the Tadawul".

We could also see (like Qatar) a higher increase in Western Property purchases... Again another indication for potentially more spending.

Saudi issuing Debt? Really? How friendly would that be? Honestly speaking (ok - be careful here Anish #whips...) The country has been caged about opening it's Markets to the World and if done, would be extremely gradual, as they drift away from traditions. Most Governments generally support their Economy, by way of tax receipts.
However, over the past 3-4 decades, Saudi has been funded with Oil receipts.

Reality Check.. Oil still costs $3 to get out of the ground and with current production levels, Saudi are still generating $300-400bn from Oil revenues alone (at least)!

It looks like the Saudi powerhouse is only going to get stronger, especially as Investors from around Asia flock in. The next 5-10 years will be critical for the Kingdom, to really impose its strength as the World's largest Economy, alongside China.

Trade Smarter & Best of Luck for the week ahead.

Best wishes
Anish @ Atom8FX