Numerous Crosscurrents Are Coming To A Head: OPEC

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Includes: BNO, DBO, DNO, DRIP, DTO, FXC, GUSH, IEO, NDP, OIL, OILK, OILX, OLEM, OLO, PXE, SCO, SZO, UCO, UDN, USDU, USL, USO, UUP, XOP
by: Dean Popplewell

By Stephen Innes

Markets

With US markets reopening Thursday, attention will fall first on delayed USD data releases, including ADP and ISM services. My view is the USD will be incredibly sensitive to all levels of economic data due to the Fed's definite shift to data dependency.

After the initial gap lower on the SPX, which is in holiday catch-up mode as the Global markets traded lower on Wednesday, on the back of investors fretting about an economic slowdown in the US as implied by the flattening US yield curve. At least for today, I was expecting the "Sell All" cry which has been echoing on the trading floor for a maddening 48-hour to abate after traders have been left battered and bruised.

But we are closely watching the developments in Asia after reports that Canada has arrested Huawei's CFO facing US extradition for allegedly violating Iran sanctions. This headline is quite significant as the US government is attempting to persuade allies to stop using Huawei equipment due to security fears, and this headline could weigh negatively on tech stocks. Recall that over 100 Chinese companies trade limit down when news broke the US urged allies to blacklist Huawei.

Indeed, this breach of Iran sanctions opens the door to further compliance from US allies even more so where the US operates key military bases.

As for the rest, numerous crosscurrents are coming to a head and none less significant than the OPEC announcement which will have far-reaching influence across all asset classes.

Big day for oil markets: Decision time for OPEC

The session also brings the much-awaited OPEC outcome, and according to the latest headlines, it suggests OPEC and Russia are closer to agreeing to production cuts. "All of us including Russia agreed there is a need for a reduction," Oman's Oil Minister Mohammed bin Hamad Al-Rumhy told reporters after a ministerial committee that groups Saudi Arabia, Russia and several other producers met on Wednesday. This lean despite President Trump's fixed position for lower Oil price.

So, the possibility that OPEC may follow through with a production cut is helping oil prices stabilise, but of course, the big question remains by how much and how quick. Given the OPEC situation is self-inflicted, in a sense, OPEC's rise in production since May has been the most critical factor behind the market surplus, which has occurred, despite declines in Iran and Venezuela so one would assume it's easily reversible. But nothing comes easy in the oil market these days as the colossal producers' heads of state in Moscow, Riyadh and Washington jockey for more significant influence over the price of oil

But assuming the G-20 handshake between President Vladimir Putin and Crown Prince Mohammed bin Salmans sealed the deal, what levels are we looking at that may influence the market?

An unlikely cut above 1.5 million barrels per day would be hugely bullish while the OPEC Economic Commission Board, which recently estimated the necessary reduction to balance the market at 1.3 mmb/d, so anything towards 1 mmb/d would suggest Brent Oil prices will continually trade below the $65-66 mark

On a no deal proposal with Russia backing down Brent capitulates to $55 triggering an immediate currency reaction where the market will sell CADJPY and or Buy USDNOK.

Gold Markets

Gold prices continue to fare well on trade war fears, and despite pulling back from yesterday's highs, price action remains resounding bid with familiar points of irritation, Trade, Fed, Brexit, Italy, global growth coming to a head. The US dollar is looking increasingly trapped by crosscurrents. While the USD's safe haven appeal endures, the subtle dovish pivot from the Feds does suggest the dollar could slide into year-end. But the USD remains data-dependent binary trade

Currency Markets

Bank of Canada: "That's me in the corner, that's me in the spotlight."

USDCAD has traded sharply higher - from 1.3280 towards 1.3400 - as it delivered on dovish expectations. The bank left rates as expected but the statement emphasised uncertainty ahead. Taking their cue from depressed oil prices with Western Canadian Select trading at a $30 discount to its southern neighbour WTI, the signals were flashing for a dovish retort as the BoC was backed into a corner. Not to mention looking at the global economic data in the wake of the horrendous Q3 Australia GDP coupled with no purposeful rebound in Eurozone data.

This suggests we're in a definitive global growth slowdown and hardly the environment for countries who depend on the worldwide supply chain and or are reliant on commodity export to be raising interest rates. However, with currency traders' propensity to book quick profits these days, the USD CAD has fallen towards 1.3360 as profit-taking set in ahead of a probable OPEC production cut. Still, I think the Bay Street bears are controlling the landscape on this trade

Outside of haven appeal, the USD dollar is a complete data-dependent binary trade.

As for the rest of G-10, we're eyeing the data over the next few days. Confidence and sentiment data remain strong, bolstered by the substantial labour market. While the Fed has dialed back, the markets misinterpreted hawkish inferences from October given we're most likely at the end of this monetary policy cycle while factoring global growth slowdown. And despite the market exhibiting extended periods of mental fatigue after getting bushwhacked by President Trump's Twitter account.

And while headlines are causing investors to get overly focused on the US yield curve inversion, given the current state of the US economic data, it doesn't suggest the economy is about to tank anytime soon. While I'm not overly bullish equities due to a high probability of trade war intensifying, the Fed shift is in no way foreshadowing the impending US or global doom for that matter.

But naturally, with the holiday season around the corner, traders are keeping exposure tight while keeping directional risk to a minimum.

The Malaysian Ringgit

The Ringgit will trade in a tight range today as local traders will be held hostage to OPEC shenanigans and ultimately the expected production supply cut.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.