Equities markets have indeed shown a positive response to the weekend’s events, making new highs from last week on the SP500 - even though little detail has been released concerning the US-China talks. In fact, we could say that the markets are strengthening on relief that things didn’t get worse rather than that they got any better.
Mr Trump postponed the imposition of further tariffs and offered some slight relief on sanctions against Huawei. But whereas he also said that China has promised to buy additional US agricultural products, China¨s version is that Mr Trump hopes that China will do so (!?)
But there was no news about when talks might resume and the real hard core issues such as intellectual rights, technology handovers, currency manipulation, rights to impose future tariffs etc are a long way from any agreement.
New data released in the Far East showed further weakening in the economies there and that places even greater emphasis on the NFP release in the US on Friday this week.
The western currency pairs, USD, GBP and EUR are relatively unchanged and in the lower half of last week’s ranges. The Euro is still watching the power changes in the top EU jobs, whilst the GBP is still staring at the Conservative leadership battle and the forever repainting Brexit deadline. The USD is more concerned with the upbeat news on domestic economic prospects and the resultant diminishing likelihood of a 0.5% cut if Fed interest rates - maybe now only 0,25%.
But a word of WARNING here - the NFP on Friday is likely to have a greater than usual impact on markets, but prior to that the markets in the US are closed on Thursday, July 4, for Independence Day. Therefore, markets are likely to be muted on Wednesday. And since today is likely to be spent digesting the weekend’s news, that only leaves tomorrow as a “normal” trading day! So whilst we may see some erratic movements, I am not so sure we will see any great trend developments ahead of Friday’s release.
The oil markets prices, as anticipated, have only recovered the weak close from Friday and are back around the high levels of last week, but have not made any great moves higher. The OPEC (only) meeting is today and the OPEC+ (incl the Russian-led non-OPEC parties to the production cuts agreement) meets tomorrow. But there appears to be little room for any surprises here since both Russia and the OPEC main parties, Saudi Arabia and Iraq, have already confirmed that the existing agreement will be extended for another 6-9 months.
Therefore, on balance, if OPEC+ is continuing to keep a restraint on production and there is hope of a gradual return to normal global economic growth and oil demand, then there is reason to believe that prices will continue to be supported - especially if this week’s inventory data from API and EIA (Tues and Weds) confirm further drawdowns. The main cap on prices is still the record output from the US shale regions.
Iran is still a very big “unknown”. Recent data shows that oil exports from Iran have slumped as a result of the US sanctions - which are also biting in other, non-oil, areas as well. Since oil revenues form the major part of the Iranian state income, this situation is not sustainable at all. And" something" is going to break here soon. Iran has already warned that it is enriching its uranium at a far greater rate and that stocks will exceed those levels permitted under the terms of the Nuclear Accord already during this week. The remaining 5 parties to the accord have not shown signs of reaching any solutions with Iran about this, nor have these parties or the US (which pulled out of the accord) signalled what their response will be to this breach when it occurs.
My key watchtower topics this week:
Details of the resumption of US-China negotiations
Oil inventories data
US Independence Day
Iranian breach of the Nuclear Accord terms