Financial market research and analysis

Cable bounced back from 1.3015, as the UK revised its 1Q growth estimate a touch lower than expected. According to the second GDP estimate, the British economy may have expanded by 0.2% quarter-on-quarter versus 0.3% expected previously. This would mean a yearly growth at 2.0% versus 2.1% printed earlier.

The biggest highlight of the GDP revision has certainly been the unexpected 1.6% decline in 1Q exports, versus a sharp reversal in imports to 2.7% from -1.0%. Larger government spending and improved business investment couldn’t compensate the import-export gap.

The FTSE 100 stagnates near the 7500p level, as all eyes are on the OPEC meeting, in Vienna.


WTI tumbles as Saudi says 'no need for deeper cuts'

A group of twenty-four OPEC and non-OPEC nations meet in Vienna today and are expected to prolong their production cuts by nine more months to sustain the oil prices

The barrel traded just shy of $52 before tumbling toward the $50 level as Saudi said there is no need for deeper cuts.

Provided that the prices already include nine-month extension and perhaps the possibility of a positive surprise, a nine-month extension per se will likely not be sufficient to push the prices higher. Support to the downside correction stand at $50.01 (minor 23.6% retracement on May rise triggered by OPEC speculations), $49.85 (200-day moving average) and $48.85 (major 38.2% retrace, which should distinguish between the continuation of the OPEC-based positive trend and a short-term bearish reversal due to an eventual disappointment).

Since November, the OPEC and eleven non-OPEC nations agreed to cut up to 1.8 million barrels per day. The WTI crude gained 30% past $55 after the announcement. Yet the decline in exports has been much less due to large stockpiles and the global supply glut has not drained in the first quarter. The price of a barrel of WTI retreated down to $43 in the first days of May. The inefficiency in the first six months bring the OPEC countries and their global allies to extend the production cuts. The nine-month extension has already been priced in and the oil price continue climbing on speculation of eventually longer or deeper cuts. In the dirt of a positive surprise from Vienna, it could be hard to fight back the $53/55 offers.

The Loonie could be an interesting proxy for OPEC trades. The USDCAD recently broke the critical 1.3477-support (major 38.2% retrace on Jan – May rise) as the Bank of Canada (BoC) maintained the status quo. Today's decline in oil prices activated dip buyers into the 1.3380 (50% retrace) as expected. The USDCAD could regain the 1.3477/1.3500, if oil prices cheapen below the $50 level.


S&P500 tempted to renew record

The Federal Reserve (Fed) minutes from the May 2 – 3 meeting revived speculations in favour of the June rate hike, as officials believed that the first quarter weakness in the economy would be temporary and it would ‘soon be appropriate’ to raise rates.

The US dollar weakened across the board, the US 10-year yields eased to 2.25%. Given that the June rate hike was broadly priced in, the US markets were rather driven by expectations that the balance sheet reduction would only be gradual. According to analysts, if the Fed let its balance sheet shrink at the pace of the maturing bonds, its holdings would be back to ‘normal’ levels by 2020.

The Dow Jones (+0.36%), the S&P500 (+0.25%) and the NASDAQ (+0.40%) extended gains in New York. Financials (+0.88%) advanced for a second day. Goldman Sachs (+1.91%) has been the biggest gainer of the session, while JP Morgan (-0.06%) closed slightly negative.

The US futures traded higher in Asia. The Dow Jones is called 48 points firmer at $21’060 at the US market open. The S&P500 could be tempted to renew record.


Are euro-bulls too greedy?

EURUSD recovered to 1.1250 on broad based USD weakness. The daily MACD (Moving Average Convergence Divergence) is positive and the relative strength index is just below the overbought area. Positive trend and momentum indicators suggest that the EURUSD could make another attempt to the 1.1300, the Trump Election Day high. Top sellers could step in by 1.1300, as the European Central Bank (ECB) maintains its supportive tone unchanged, versus the Fed, preparing to raise rates in June for the third time since the Trump election.

The US-German yield spread stands near six month highs. The widening yield spread could be partially explained by higher capital flows into the German bonds amid failed Greek bailout talks.

On the other hand, the US, French, Italian, Spanish, Portuguese and Greek 10-year yields stand below their three month average, only the German 10-year is above. A normalisation toward the three month average could temper the euro appetite against the greenback.


Chinese stocks swing between hope and despair

The improved risk appetite kept most of the Asian shares in demand. Moody’s rating cuts on Chinese and Hong Kong debt weighed on the sentiment in the morning, yet buyers joined in during the afternoon session.

Shanghai’s Composite swung between gains and losses as investors first seemed undecided on China’s mainland stocks after Moody’s cut the Chinese debt rating to A1 from Aa3. Shanghai stocks rallied 1.43% into the session close

Hang Seng gained up to 1.00%, although Moody’s downgraded Hong Kong’s local and foreign currency rating by a notch to Aa2 from Aa1. The downgrade was justified by Hong Kong’s rising debt, slow economic reforms and high Chinese exposure.

Nikkei (+0.36%) and Topix (+0.21%) traded in the positive territory, as the USDJPY traded above the 200-day moving average (111.32) in Tokyo. Softer US yields could encourage minor selling pressures in the USDJPY. Light option barriers are eyed at 112.00 at today’s expiry. Dip-buyers are expected to deliver support pre-111.15/111.00 (50-day moving average / optionality) and 110.52/110.23 (major 61.8% retrace on April – May rise / May 17 dip).

Australia’s ASX advanced 0.36% on the back of gains in energy and mining stocks. The AUDUSD failed to fight back the 200-day moving average (0.7522) and has been aggressively sold off to 0.7465 in Europe.