The main topics that the markets will be focusing on to start this holiday-shortened trading week:
1. Stock Markets are on the move
European markets are modestly down (after big jumps yesterday) and Chinese markets remain strong (Shanghai +3.3%). Why? Chinese markets opened yesterday without a massive decline following a week of holiday, Japanese stocks soared yesterday on weak economic data and a fall in the yen, and the U.S. dollar (and all dollars really) took back the leadership position.
Many have been arguing that the massive unwind of the “carry” trade (short funding currencies, especially yen, long equities) was partly to blame for the massive stock market dislocations of the past few weeks. Mind you Sovereign Wealth Funds, selling largely from energy countries, has also managed to pressure global bourses. Will the subsiding of market panic allow for a significant bounce in equities?
2. Oil Deal
How will the price of oil react to a Venezuelan, Russian and Saudi agreement to limit this month’s crude production to January’s output numbers?
Note, Iran is not apart of the agreement and remains a market obstacle. In the near term it’s expected to go up, but not dramatically (WTI still below $30) but the contango is very steep ($10 from now to November 2016) suggesting near term action reflects the fundamentals of a supply glut. Traders will be disappointed that there was not a production cut – however, limiting output somewhat should be considered as a first positive step for crude bulls.
3. Gold “Bull” or “Bear”
The market will also be eyeing what Gold will be doing ($1,215 +0.47%). It has been on a wild ride over the past 10-days, climbing as high as $1,260 an ounce last Thursday before falling to an overnight low during this morning European session to $1,191 an ounce. The market is wondering if we are entering a multi-year “bull” market? The naysayers believe that there is nothing fundamentally to support the move higher rather than ‘fear’ itself.
Some technical analysts suggest that an intermediate-term price peak in the ‘yellow metal’ appears to be developing. If so, this may imply perhaps raising risk control levels on outright, and gold to equity positions.Between gold and oil, expect commodity currencies (CAD, AUD, NOK and RUB etc.) to be very active.
Higher oil prices this morning briefly helped the commodity-related currency pairs (CAD$1.3725) to benefit on hopes that OPEC and Non-OPEC might come to some agreement to resolve the vast overhang of oil inventories.
4. German investor morale slips in February
German February ZEW Survey missed -(current situation survey: 52.3 vs. 55.0e)-the first decline in three-months.
Falling stock markets, a stronger EUR and more general concerns about the global growth outlook have clearly dented optimism about Germany economy’s economic growth.
Investors will now be looking to the ECB for possible new measures next month. Draghi and company cannot rely on the Fed to do its work for them. Yesterday, Draghi commented “early 2016 had shown significant challenges with increasing concern over global economy.” He again reiterated that the ECB was “ready to do its part” to boost the Euro-Zone. The central bank will reconsider its monetary policy stance in March.
5. Empire State Manufacturing Index
In January the index fell to -19.4, the worst reading in seven years. This morning, the general business conditions index of the Empire State survey inched up to -16.6 in February, the second-worst reading since March 2009.
While today’s report was certainly better than what was released in January, this morning’s dismal improvement would suggest that something is array in the national manufacturing index. The market will have to wait to see how the other regional measures perform this month.