Financial market research and analysis

It appears that both OPEC and non-OPEC producers are well decided to sustain the recovery in oil prices. Last week, Brent’s failure to break above $55/barrel and the WTI’s downside correction towards $50/barrel apparently displeased Saudi Arabia and brought the world’s leading oil producer to unexpectedly signal a larger output cut than previously agreed on at the November 30^th meeting in Vienna. In addition, Russia reiterated its plans to pump lower quantities in 2017.

Oil prices hit a seventeen month high in Asia. Both Brent and WTI gapped higher at the open and rallied past 4% into the European open. Decisive comments from the supply side could encourage a further rise of the price of a barrel of WTI to $55, before $58.15 (major 38.2% retracement on Jun’14 to Jan’16 drop). The barrel of a Brent could challenge $60/barrel for the first time since mid-2015.

The impending Aramco IPO could be a reasonable explanation for Saudi’s eagerness in securing a mid-term recovery in oil prices. The value of Aramco will of course increase if Saudi Arabia manages to generate a sustainable momentum to help oil prices higher.

Nevertheless, as the price of a barrel rises, an increasing number of oil producers are expected to reach the breakeven point and return to the market. At around $70/barrel, we expect many producers that have been left off-sight to restart producing. Therefore, the depth in the supply side could rapidly jeopardize the recovery in the mid-term.

Energy stocks lead the FTSE higher at the open

The FTSE opened upbeat; energy stocks (+1.26%) lead gains as firmer oil prices boosted demand at the open.

Royal Dutch Shell (+3.26%), BP (+2.18%)

While on the flip side of the coin, AIG (-1.84%) cheapened along with the other European airlines stocks.

Lufthansa (-1.85%), Air France KLM (-1.55%)

UK mining stocks were mixed. BHP Billiton (+3.06%), Anglo American (+2.68%), Rio Tinto (+1.06%) and Glencore (+1.50%) gained at the open, while Randgold Resources (-1.36%) and Fresnillo (-0.17%) started the week behind the curve, as gold further cheapened to $1154.

Turkish lira slides

The Turkish lira remains on slippery ground following the weekend’s terrorist attacks at the central district of Besiktas in Istanbul. Combined with high political and geopolitical risks, questionable central bank independency and President Recep Tayyip Erdogan’s aggressive push for lower interest rates, rising social unrest and overheating discussions regarding the looming constitutional referendum that would give President Erdogan the supreme power, tensions on the lira and lira denominated assets are certainly not ready to ease.

In addition, higher oil and commodity prices are expected to reinforce the selling pressure on the lira.

Although the substantial fall in the lira could encourage technical traders to build fresh long positions in the short-term, we reiterate our mid-term bearish bias in the lira against the leading G10 and EM currencies and warn that even short-term, long exposure to the Turkish lira is very risky.

Chinese stocks sold off, AUD and commodities traded mixed

Chinese stocks cheapened, as China announced a 6.5% growth target for 2017. Chinese stocks fell the most in six months. Real estate stocks got hammered.

Hang Seng index lost 1.61%, while Shanghai’s Composite plunged by 2.47%.

Commodities traded mixed. Copper futures retreated by 0.15% while iron ore futures surged 3.25% on a recent report that Chinese iron ore imports bounced from an eight-month low, to the third highest level on record. The latest Chinese data showed a 9.1% week-on-week fall in iron ore stocks from Australia, suggesting the possibility of seeing higher demand sooner rather than later.