Financial market research and analysis

Doha meeting? What Doha meeting? Yesterday’s knee jerk decline in oil prices to the disappointing outcome was very quickly reversed as the day wore on. The price of the commodity is also amassing some support from the Kuwait worker strike. Market participants are evidently hoping that this will lead to a smaller global supply glut as around 60% of the country’s production is severely curtailed. This could potentially bring about a fall in output of around 1 million barrels per day. The calls for oil to go to $30/bbl in jig time may be overly pessimistic despite the strength of the dollar today. Iran, on the other hand expects to boost exports to 2m barrel per day by the end of 2016. Oil prices may well settle into a range for now especially if the dollar continues to look softer.

This dollar weakness tends to fly in the face of the Fed’s voting member Rosengren who has been rather vocal on how the market is being ‘too pessimistic on Fed’s rate hike path’. He claims that the rate path envisioned by the market would risk high inflation. But I would counter that that does not seem to be a near term risk. The market gives no more than a 49.2% chance for a December hike. Standard Chartered analysts see low probability for a rate hike to happen this year as supports to the US economy are fading.

The metals complex is flying, aided by the weaker dollar and also apparently because base metal buying is considered a decent hedge against the Chinese Yuan. The People's Bank of China set the midpoint rate at 6.4700 per dollar prior to market open, 0.13 percent firmer than the previous fix of 6.4787. Onshore one-year yuan/dollar deliverable forwards were quoted at 6.5515 around midday. The market is clearly of the view that that the yuan will depreciate more over 12 months than was implied by Monday's close of 6.5487.

Despite all the apparent risk on sentiment, silver prices are surging with gold prices also taking upside cues. The price ratio is now at a 2016 low.
Silver’s greater industrial use means it is more sensitive to the industrial cycle and potentially less of a haven than gold. Over the long term (100 years) the ratio has gone below 20 three times and neared 100 twice, so silver does look cheap relative to gold in some respects.

The BoE Governor Carney will deliver his parliamentary testimony today and could face questions about Brexit. We do not expect Carney to comment on such a sensitive political issue, other than perhaps agreeing on the risks it carries for the UK’s economy. Nothing too surprising here - we may at best expect to hear about potential measures that the BoE is preparing to take before the June 23rd referendum, as increasing liquidity to avoid market squeezes. Despite some press to the contrary, the market is fully expecting to see rates cut before a hike.  Cable extended gains past 1.43 on short-covering.

EURUSD remains comfortably bid above $1.13 but has faced some stiff resistance around 1.1330 as traders ease off buying ahead of the key risk event today – the German Zew economic sentiment for April. The ZEW is set to release its Economic Sentiment index for the next 6 months for the country as well as the current situation index.
Sentiment is expected to push to 8.2 in April from 4.3 in March while the current situation is likely to trend lower to 50.4.
Anything better than expected will support the euro and potentially see the 1.14 once again tackled.

Despite all the apparent risk on sentiment, silver prices are surging with gold prices also taking upside cues. The price ratio is now at a 2016 low.
Silver’s greater industrial use means it is more sensitive to the industrial cycle and potentially less of a haven than gold. Over the long term (100 years) the ratio has gone below 20 three times and neared 100 twice, so silver does look cheap relative to gold in some respects.

Needless to say, miners are once again on top. Anglo American (+4.37%) ,BHP Billiton (+3.79%)
Fresnillo (+3.66%). The fact that Central Chile’s mines continue to operate normally, with the exception of Bronces, is also supporting upside.
Oil  producer BP plc is also a riser. Up 1.9% as oil prices rebound. While this recovery in oil prices is a good thing, one would expect that we’re quite a distance from any meaningful reflex in the capex space as companies wait for oil to achieve some marginal neutrality.

With regards to the latent strength in the UK benchmark, the 6445/50 level represents the litmus test. Technical would suggest that this area will be a tough nut to crack given how it presented such a barrier to upside despite various challenges last year.