Morning Briefing - 12th September

Very good morning, Wednesday, 12th of September. Hope everyone is well. Briefing today, gonna talk quite a bit about oil. We've got the API crude oil entries from last night to review. Also got some information about the developing Hurricane Florence in the US due to make landfall late Thursday evening and how these situations are helping support crude oil prices at the moment. So looking at the charts here at the bottom, WTI crude already up about $0.54, but carrying on the trend higher that we saw through the kind of second half of yesterday's session. Otherwise, a quick look at the, the broader kind of context, and we're basically flat in the major FX pairs. I think that's probably quite telling on a broader macro perspective, say on the bigger issues, things like trade war, for example. There's not really been any new developments on that side. So the dollar index is, is pretty flat for the moment. Obviously, the pound, we continue to remain vigilant for what has been a highly volatile price movement over the course of the last 2 weeks or so, mainly based upon the, mainly based upon the political side and Brexit. Sorry, someone was, someone was just threatening the coffee machine there, hence the Slight pause. Don't worry, I'm watching them. But just having a look elsewhere, gold, not too much interest this morning. We're down about $2.50. We're sitting still tight around that kind of psychological $1,200 level pivot. That hasn't really been a great level of late. I mean, a little bit of a test first thing this morning and briefly overnight, but It's a little bit choppy going further before that. So let's get straight into it and let's talk about the news, because otherwise, aside from the oil move, things are relatively quiet. One thing is overnight in Asia, there's been no real improvement. Things still remain decidedly negative. This is just a statistic for the morning where the MSCI base index when we're looking at the Asia-Pacific one-day price change, we've had 9 consecutive days now of closing lower. So this does match then longest losing streak in 4 years. You can see you've got to go all the way back onto the left-hand side of the chart the last time there was this consecutive daily loss. To a certain degree, it does feel like the market has priced this in. Although equities continue to remain lower, it hasn't really fed through and spilled over into a kind of elevation in risk-off sentiment. So I think it still warrants monitoring things like what we were discussing yesterday, the performance of some of these key Chinese indices like the Shanghai Comp in the mainland and the Hang Seng in Hong Kong for some technical points of support of great interest. If they were to breach, likelihood is we'd push lower again. and then that could well fuel another push toward, you know, some concern on the EMs. But all remaining fairly equal for the moment. And as I said, if you look at the equity market this morning, European equities, uh, seen slightly higher, uh, does come after some stabilization in the US equity market. Here's the S&P, and really we did weaken first thing in the morning, but then as soon as Wall Street opened, we just reversed the entire move. And so just looking back on the daily continuation to put into context, this is kind of the year-to-date move. We are still not that far off these record all-time highs really. And then if we start looking, you know, interesting points, what areas would be, you know, if we were to get down— if I just zoom this in a little bit, that kind of area is quite interesting should we come back down to around these points at all in the near future, uh, just given that this kind of trend line, some of the previous resistance and support points, and also that previous all-time high that we printed right back at the beginning of the year. So it's quite an interesting area here where I think all things being equal, and again without any further escalation on the trade side, which has been fairly quiet for the moment at least, then I'd still be looking for that these areas to hold for now, and the price movement, if not to consolidate still within this price band around the 2900 mark, if not a retest at some point on the, the all-time highs. Okay, let's look at crude oil then. And one thing is, if we look at the chart first, there was a really nice move to the upside yesterday, and it's really started to materialize through the US session. So from 3 o'clock onwards, we broke then technically the prior day's highs, and that helps just push the market higher. Well, this is actually the beginning of the week. And then last night we had the API crude oil inventories, of course, and that was the candlestick price action that we had. So we just added to the move higher that was already materializing. We, we kind of put an additional $0.50 on the move. Asia came in and they kind of reacted in a similar way. I saw another slight lift and that's where we've eked out this new high at 70.15. Has had a bit of a pullback since UK and European participants have come in the market, but the net result is we are still higher by really a good— I mean, we were, look, we were trading around a 67. $75 mark. So it's a good $2 move higher that we've had in the last 12 hours or so. So interested to see if crude just holds up at this point. The prepositioning ahead of the data, of course, to see then whether that can live up to the hype. And the hype being that the fact that the headline draw in crude was a drawdown of 8.636 million. That's way bigger drawdown than markets were anticipating. In fact, From a statistical point of view, it's the biggest drawdown in the headline crude figure since July of 2018, and so hence the, the additional pop higher seen in the overnight trade. However, it is worth keeping in mind that Cushing was a build, and in fact the biggest build since March 2018. Gasoline was a really large build, the biggest since DEC 2017 at 5.821 million. Distillates was a draw of 1.165 million. So Yes, from a, I guess, a deviation point of view, this really sticks out, and hence consequently oil moved higher. But just when the data comes out, do keep in mind that it, you know, even though it's crude and directly oil then that will see the most impact, that does start to see how, you know, how broad or long-lasting that reaction can last is really dependent on how these other numbers do come out as well. If, say, Cushing is even bigger than that, gasoline goes up to around a +8, then that can often mitigate these kinds of numbers. So plenty to think about. We'll recap this later on. And the other thing, of course, a couple of other points of interest. Well, let's just start off with Florence because this is something that people are looking at. So Florence is expanding on its relentless advance towards North Carolina, with heavy rainfall potentially imperiling major fuel pipelines, including the Colonial Pipeline, the largest move of oil products from the Gulf Coast to the eastern US. So first, first things first, the hurricane expected to strengthen, make landfall kind of late Thursday, Friday. It's set to be the most powerful storm to threaten the Carolinas i.e., north and south, in almost 3 decades. So what normally happens here is a storm like this typically causes an increase in fuel purchases as people basically stock up, so you get a big ramp-up in demand in the very short term. One of the things here though I wanted to quickly look at was really the impact of this, and then to give you a brief explanation of what exactly is the Colonial Pipeline, because Those of you who are new to the market might not know the kind of infrastructure of how crude is really moved across the US. Now, in terms of the impact of Florence, most likely impacts of prolonged power outages across utility footprints, disruptions in natural gas production and transportation, delays in pipeline construction schedules, and potential reductions in refined product supply to the Northeast. Now let me just show you a graphic here. This is kind of encompassing— here you can see the Colonial Pipeline running from kind of south to north along the coast. Well, it's not particularly near the coast, but along the coastal states, let's call it. And in here you can see the projected path of the hurricane when and where it's due to hit, with some of the subsequent Elba Islands and Cove Point, the LNG terminals. And some of the other key areas outside the pipeline going into this area to the north. Now, one of the things was the Colonial Pipeline. Here's probably the most clearest graphic I could find to give you an idea of its significance. So, you know, just looking beyond the stats here, which obviously show the importance of the network, Most of the crude oil then is situated on the Gulf of Mexico on this coastal line. So obviously Texas is the state and Houston one of the key hubs here. And the pipeline basically runs from here going from— going east and north up to feed then into New York. So you can see in terms of a lot of this, the populous areas of the US and very pivotal over this 2,500-mile stretch. With various terminals to the east and southeast that it kind of drops into on the way, feeding into then the state of New York and the city in itself. No actual U.S. off or onshore oil production facilities or oil refineries are currently in the path of Florence. Florence is due to kind of hit— if I was to mark it out with the mouse here, it's around this kind of area right in between the two Carolinas. But as I said, the Northeast is heavily dependent up here on the Colonial Pipeline and Plantation Pipeline for refined product supplies, both of which run through the Carolinas. And Colonial's 2.5 million barrel per day system extending from here, and this actually all goes all the way up to New Jersey as its endpoint. The pipelines were operating normally yesterday. Their operators though were said to be closely monitoring the system for So any headlines you hear about any shutdowns to the system could be something very interesting if you're looking at the energy products today. As far as natural gas is concerned, Florence could result up to 2 billion cubic feet a day of lost Northeast production, according to some estimates from the likes of Platts Analytics, who are kind of the main guys who look at the, the kind of granular level of these details. So again, could also be another factor to have a look at, because I know people like Dara, you, you look at that gas in the futures market. So yeah, energy, worth keeping an eye on this as it develops. But oil's had a meaningful move higher overnight, kind of a combination really of some, some pricing in of what is an intensifying weather system and its potential disruption, particularly on the, the infrastructure side. on the transportation of crude in the Northeast, and then also with the large drawdown you had last night. And also not forgetting, if we go back to, you know, some of these other factors here, there are other fundamentals to support crude prices at the, at the moment. One of those other ones was that the EIA, which is the Energy Information Administration, they said yesterday that they see US crude output averaging 10.66 million barrels a day. This is lower than their previous estimates. They basically downgraded their forecast for crude output, so less supply. Consequently, that's also another, another positive as well. And then you've got other things that are ongoing in regards to Iran and Libya where there's been disruptions, also in Iraq. So, you know, plenty to help support this oil extension, and hence consequently we're up at these price level. So now that we started to consolidate, I don't think it would be too surprising for us to sit within this band of $69.75 to potentially $70, which was the morning's high when Europe came in, or potentially the overnight high of $70.15 and waiting for that data to hit. Question mark then is, you know, can the oil inventories from the Department of Energy live up to the expectations defined by the APIs last tonight and the extension of that move. Okay, quick look at other charts. I'm just looking at cable. It's already seemingly jumping about. Let me just quickly check the headlines since I've been speaking. Uh, EU's Juncker welcomes UK PM's May's close partnership proposal and agrees with Czechoslovakia's proposal to start a close partnership on trade. So let's just have a look at cable on a 1-minute. Well, there you go. So that comment came out at 38, and there's your move. So this is the world, the new world of sterling currency. So you've just had a positive comment from the EU again, talking about a close partnership, agreeing with the Chequers proposal, and we've just seen the price action here while I've been talking shoot up from really 1.3012 up to quickly 1.3040. Just to put this in a bit of context, I'm— I need to update my chart already this morning. So that's that last little pop that we've just seen there. And obviously this came after yesterday we saw the 6 to 8 week optimism reversed by the EU then warning the UK's got too much optimism. And now they're saying that we want a close partnership and we agree to the Chequers deal. I think the one thing that might start to materialize here if you are trading the pound and you are trading these kind of short, sharp movements, is I— at some point, I think the market's going to start going— it's almost like the boy who cried wolf. And the return of price movement, i.e., the size of reaction in the market, I think unless it's crystal clear deal done and agreed, then I think the reaction effect might get increasingly smaller because I think people are a little bit reticent to commit to these moves knowing now this distinct pattern that we've been going through. What is obvious here is that both Theresa May, at least, and her Chequers plan, and Europe want to push things forward. There's just complication on how exactly that could be done. And then as a footnote, you've also got then the ERG and Jacob Rees-Mogg and Boris Johnson all on the sidelines looking to disrupt things. So it looks like there's a bit of coordinated effort between the two, the EU and UK's existing government at least, and its proposal. But they just can't seem to get concrete agreement on some of the finite points, particularly around the customs union and the issue on the Northern Ireland border. So, you know, it's still remaining fairly buoyant. And if we look at cable, we are, you know, if you X out all of this movement that we've had, we are net-net We've gone from around a 128 handle up to the kind of midpoint of a 130 handle. So worth keeping an eye on this, and certainly it's going to continue to remain, I would say, equally choppy going forward. But my kind of thoughts are that the market might get a little bit of fatigue on these headlines, uh, and start to— you might start to see that equating to a lesser reaction as the headlines hit hit. Let's see. One thing though, some positive EU comments have been translating into what ultimately is quite a positive read across for short-term market sentiment. So EU's Juncker here has just said, ready to work day and night to reach a Brexit deal. You know, that's pretty bold comments in a positive fashion. So we are seeing the DAX and European and US equity futures rise actually. If I put this down on a minute profile, uh, yeah, certainly since these comments hit, just helping lift a little bit. And we have seen this, uh, in terms of an equity reaction. Positive developments have been greeted quite favorably by the equity markets. So we just tested up at the highs both from this morning and what would have been yesterday's session. So just keeping on the DAX here, back to the weekly high. We're not too far off that at the moment. A few other things though to be aware of on this side. A headline this morning: UK and European Union are preparing for a special summit to sign the Brexit deal in November, and the meeting could be announced within days according to people familiar with the matter. So again, this is positive kind of noises which would fit in step with the Juncker comment we've just seen come out on the wires and, and just prop the market up here. However, on the sidelines, there is also still this going on— lots of murmuring about potential leadership challenges of Theresa May. For me, this isn't really particularly market-moving because Theresa May's leadership has been under, you know, under fire ever since day one she walked into the job. And the point being here, when you read these articles, is that there's about 50 members of the European research group, the ERG, openly discussed on how best to game the leadership election rules and so they could force her to stand down as the Prime Minister. The point being though is that none of them see right now as the most opportune time. What they probably want to do is, in terms of going forward, uh, and one of the ideas presented by one MP, undisclosed, was that the group considered possible scenarios over autumn depending on the deal the Prime Minister did or didn't get with the EU. So they're banking on the fact that this, this, um, Cheka's proposal is not up to the job. Therefore, she won't be able to obtain a solid enough deal, as far as they see it, to fulfill the criteria of, you know, firm Brexit, as she had kind of initially promised. And then, then that could be the opportune time to strike. As a technicality, just so you're aware, and as a refresher, the Conservative leadership contest can be triggered either if the leader resigns, which I think is unlikely. If that was going to happen, she would have already done so. And so therefore, a call or vote of no confidence would require 15% of Tory MPs. So that number would be 48 MPs to write to the chairman of the Backbench 1922 Committee demanding a vote of no confidence. Uh, the BBC political editor, and I do absolutely follow her closely because she is the most informed, I would say, on the situation. That's Laura Koonsberg. She said the group were not likely to trigger any leadership contest before they could be sure a, a candidate that they would back could win. And at this point, I don't think that there is a clear candidate that they could back and win. And she said that the ERG voices would probably basically push down any leadership challenge if it came right at this present point in time. That then, one would imagine, including that of Boris Johnson. So I think Theresa May is fine for now. I think the game plan here is to see what she can do, banking on the fact that she won't be able to secure a decent enough deal, and then you can readdress it when the pressure's really on come the autumn after what has been tabled Europe have been trying to aim for is this kind of October-November timeline. Obviously, a risk being what if Theresa comes home and secures a good deal and Europe make significant concessions, as what they've been kind of intonating, well then this strategy by Rees-Mogg and crew might backfire. So, you know, plenty to go at from the political political side of things. As a footnote, obviously you saw the headline yesterday, uh, Mark Carney extends Bank of England stay again to lead the economy through Brexit. So I think he's extended it for 7 months, is the kind of extension to take us through. He'll remain in office until the end of January of 2020, roughly halfway through a period intended to smooth the UK's withdrawal from the European Union, because remember the transition deal ends uh, December of 2020. So he's going to stick around for a little longer. This is absolutely as I would have expected because there is no credible alternative. So has this moved the market? I don't think so. I think this is what everyone else in the market thought would be the case. I don't think it's particularly that surprising. So it's been confirmed and then we move on. On that point. Otherwise, quick look at the calendar just to wrap things up. We have today coming out in the morning, it is relatively quiet. You have European industrial production at 10 o'clock. That's seldom market moving. So really we look to the US afternoon for the PPI numbers, uh, and then of course the Department of Energy's oil inventories, which we'll go over in greater detail as we get towards the release. Speaker-wise, Fed spin on the afternoon. Bullard speaks on the US economy and monetary policy. You guys know Bullard well, fairly opinionated, so worth keeping an eye on even irrespective of the fact that he's a non-voter. He definitely isn't shy of putting forward an opinion. And then Brainard is speaking, who is a voter and a leading dove, speaking at a separate event but also on the economy and monetary policy. So that's probably the most interesting of the two speakers by far. So that's the calendar and that's how things sit at the moment. So pretty quiet. There's been further deterioration overnight in the Asian equities, but quite frankly, the market seems to be taking that in its stride this morning. So if anything, we've had a moderate turn toward more positive sentiment just on the back of some more favorable Brexit comments and and headlines coming out from the EU about welcoming and agreeing potentially a close partnership with the Chequers proposal. And that's just helped lift the pound here and subsequently some of the European equity market as well. So that's it. I will— if there's any good technical setups, I'll let Sam post some things in the chat room. Otherwise, I'll see you guys on Trading Live and have a good day. Thank you very much.