US Yields Remain In Focus As Oil Traders Await The OPEC Meeting

Okay, very good morning folks, it's Thursday the 4th of March. Hope everyone's doing well. I'm just going to get up to speed on what to look out for the day ahead. Should be another interesting session. We're awaiting the OPEC+ meeting outcome, which is not completely assured at this point, and we'll look at a way to interpret that when it comes out in a moment. We've We've also got Jerome Powell giving his speech later on today at 5 PM at a Wall Street Journal webinar. We've also got US jobless claims, US factory orders, and still a very much close focus on yield movement of late, particularly yesterday where that did again weigh on US equities, which resulted in a lower close on Wall Street. So going to really start there and then look at the charts overall at the European Open. So on Wall Street, we closed down 1.1%. S&P, around a quarter percent in the Dow. But the tech sector again was a big underperformer. And this is a familiar sight now on the, uh, heat map of the S&P 500, which is large mega-cap tech down. And just given their proportionate size as a collective weighing on these indices, so Amazon, Apple down, Microsoft around the 2.5 to 3% region, Tesla down again. Around 5%. So quite familiar patterns that we've been seeing of late, as the 5-year breakeven rate in fixed income markets, which is the measure of investors' medium-term inflation expectations, actually rose yesterday to hit 2.5%. And that's the first time that's happened since 2008. So those ever-increasing kind of growth outlook emerging at the moment, causing these heightened inflation expectations and resulting in this higher yield, is having this impact on the tech stocks whose valuations have been underpinned by this low-rate environment. So further reversal there, and the beneficiaries of this of course being, uh, quite familiar things like the banking stocks. But then energy also has been moving higher because if we are talking about a more constructive outlook generally for global growth, well then that generally is supportive of energy prices going forward. And WTI crude futures trading just short of the $62 handle this morning. As we await that OPEC meeting. Um, an interesting thing that I was looking at yesterday, um, at this time when I was delivering the briefing on Wednesday, was the relative tight range we had been in, in US 10-year yields of around 1.4% to 1.44% after the quite quick rapid rise that we saw that really jolted markets last week. And yesterday we broke out of that near-term range of the week and we moved up in toward then kind close proximity to 1.5% as well. So yields definitely did awaken a little bit yesterday. And obviously we had a few more data points and headlines coming out. The week really does start to pick up from Wednesday through now till Friday. Of course, we've got payrolls as well tomorrow to keep an eye on. So overall in these US indices, we've seen Asia overnight kind of follow on from the weak handover from the US, the MSI, Asia-Pac gauge suffered its worst loss this week, China feeling the brunt of those losses. But since we've gone into this European Open, futures have seen a slight recovery to come up. So, you know, looking at near-term price action, uh, we'd just be keeping an eye here on the NASDAQ 100 back up to the 12,666 level, which was that low that we printed back on the 26th. It would have been the back end of, of last week on Friday amid that sell-off that we saw in the on Thursday, Friday. As we come back up there, that was an area we retested and held as resistance near term in the NASDAQ future. So just keeping an eye there as we go into the European session. On the daily charts, perhaps it looks even more compelling as what— there's two charts I want to look at here on the daily, which is the NASDAQ and the S&P, and both are at quite critical levels from a support point of view. And these are important levels to have a lookout for because it's where the market has bounced in the overnight session. 12 461 here in the daily NASDAQ 100 futures. And that starts to then look back to September all-time high, the previous retest we had on the back of the Pfizer positive vaccine news at that time, and then what acted as a good area of support as well for price going forward therefore into 2021. So that is a key area, and if that breaks, then we could quite quickly see rundowns to 12,234, which would bring in the lows that we saw around mid-DEC and was the previous high in October, would be the next key area to have a lookout for. So yeah, at the moment it's— that level's looking good to hold. We've seen a dramatic bounce off that, but obviously the way that these candlesticks have been moving to the downside has been quite severe, and technical breaches of long-term significance like this can lead and result into quite heavy selling selling pressure exacerbated by short-term fast money kind of momentum moves as well. So definitely be keeping an eye on that. The triggers, of course, would be, uh, the continuation of the move higher in US yields. Would probably want to see a break over 1.5% in the US 10s, getting back up to the highs of last week, to really put further downward pressure on those tech stocks in particular. For the S&P on the daily, it's a fairly similar setup. Perhaps then slightly less kind of severe on the technicals if it did break down. But tech has been more wild in its price swings on a daily basis. But the S&P has had a bounce off an area of previous resistance and support going back to January of this year around 3776.75. So that's an important level to watch. I did— price did bounce off that this morning. Any breakdown of that, then again it could then open the door to generally a spill down to around the 3700 handle, and a key level lower there would be 3656 at that point, which would obviously be interesting from a slightly medium-term perspective for— do you get the dip buyers then come in as you kind of take some of the froth off the market at these all-time high levels? Of course, elsewhere, quickly before we delve into the news, just want to have a look at gold. I was watching gold very closely actually yesterday with some interest because it was kind of tapping away, I would say, at this very important level, which is the 1704 spot. We momentarily broke through there to trade down at 1700 basically, but it failed to sustain. We saw quite a strong response back after that breach, which was very temporary, and we've come and had another look at it in the Asia-Pacific session. But as we've come in to test this key level, the, the, the bounces off that are getting more shallow, as you can see. So bounce 1 came up to effectively what was the, uh, 618 fib retracement of the initial weekly high to low. And then the, the, the retracement then back on the bounce of the, the test we had yesterday afternoon came up to around those previous highs that we saw in the late European morning and the 382 fib. And then this bounce here has come— what is the near-term, uh, quite important area of resistance at 17, 18.5, encapsulating here some of the last Friday through this week, an interesting kind of pivot for price to move above and below. At the moment we are below it, sitting around the pivot level. So it'd be interesting to see because if that does break, obviously that does open up the prospect of a run on 1,700 down to more key zone of support not seen then until around 1,280 or 1,284, which is that consolidation phase that we saw after the initial move up in prices on the onset of the pandemic in March of last year. So definitely gold, what it's watching again, trigger points would be that yield move and subsequent dollar appreciation to really weigh on those precious metals again. But let's get stuck into a couple of things. Just want to talk about the OPEC meeting very briefly, and rather than get too bogged down in the semantics, um, whenever there's a, uh, an event like this, of course with OPEC there's a million and one different scenarios that they could do. But I think much like our approach that we normally have with, say, a central bank decision, is it's always about really eliminating the noise locking it down to as most binary a fashion as possible. Because when you're an intraday participant, you've got to be very reactive, and speed is king in that type of environment if you're going to be more assertive or aggressive and trading at market price. And so in a general summary, there's two main scenarios we're looking out for here. Um, the overall consensus here is about this idea of, um, 1.5 million barrels per day increase in the supply, um, from OPEC+ in April. Uh, that was slightly tempered yesterday by sources stating that they could roll over on that, and that did actually act as a supportive factor to lift price. So the idea that they might not be adding more supply to the market, so keeping things relatively tight. Um, there's two kind of factors here. On the OPEC side, it's will the cartel proceed with a planned 500,000-barrel-per-day collective hike in April? That is the market consensus. Anything short of that would be bullish, but the market has already priced that in a little bit given the source comments from yesterday. But no doubt that if they did roll over, you probably would see another pop on the upside. And then secondly to that is how will Saudi Arabia phase out the extra cut of 1 million barrels per day that it's been making voluntarily? Now, do they just take off— do they just phase out the million straight? Do they do it in half clips? Do they do it over a period of time? They're the multiple kind of variables around that singular point that would be particularly key. Um, all right, the other thing as well on the energy front, I think, just to be aware of, according to Associated Press, Yemen's Houthi rebels said they struck a Saudi oil facility in the port city of Jeddah with a missile yesterday. For anyone new to markets, that might sound quite sensational and important, Um, it is to a certain degree, but it's not particularly unusual activity to happen in that, that particular region. The one thing that I would say to look out for is any further subsequent conflict, and particularly then any disruption or impact that it could have on Saudi infrastructure, and particularly in the south of the country. Anything like that could of course create a kind of type of supply shock scenario for, for Saudi Arabia. And then being such a big producer on the global level, that could be meaningful. So definitely warrants watching, but not so much, I'd say, as the factor that's really in play this morning with OPEC meeting looming. With Powell, just briefly, I did say he is going to be speaking later. It's one of the main events of today. It's going to be around 5 PM London time. Not really expecting too much other than him to largely reiterate really, um, the, the current Fed stance. We've had Brainard, Daly, others speak already, FOMC voters, kind of just making sure that the market understands that the Fed are just going to hold the line and not really react too much to this whole yield kind of semi-crisis at the moment that we're, we're observing. And so probably a reaffirmation of the Fed's determination to meet its revamped employment and inflation goals by keeping monetary policy loose is probably going to be the main thing that he'll say. So it is important. He is important. He has the, of course, potential to really move the markets. But will he do so by really altering his language? I actually don't think so. So, um, it'll be interesting to see how things unfold when he does speak, but not expecting too much, to be quite honest. From a Fed perspective, we did have Fed's Evans, a voter, last night who did speak and said he's not thinking about yield curve control as a policy proposal at the moment. And reiterated the Fed has the ability to change the pace or maturity of asset purchases, but because of fiscal support, this is not his expectation. Again, that changing of the maturity of asset purchases, you know, something often referred to as pivoting, then the average duration of bonds that they're holding from T-bills out into longer notes, or otherwise called Operation Twist. If some of those concepts are new to you just check out— I did share a good Bloomberg article talking about if the Fed in the future do look to adopt a strategy change, it could come in alteration of language in forward guidance or this Operation Twist. And that article goes into what those things are in a bit more detail. So just go on to the Amplify Live, uh, Twitter handle if you want to have a look at that. And we did have the Fed's Beige Book last night. It's never really that interesting, but just in the context of things, the Beige Book said that economic activity expanded modestly from January to mid-February for most Fed Reserve districts, and that most businesses remain optimistic regarding the next 6 to 12 months as COVID-19 vaccines continue to be widely distributed. On the US front then, a few things I wanted to look at. Biden and the stimulus obviously is being heard in the Senate at the moment, but It hasn't been particularly smooth sailing. Biden's had to bow to demand to limit eligibility of stimulus checks, um, and that could have some repercussion then from the ability of stimulus checks, obviously being a key component of consumers and spending. We've seen that emerge in some of the US retail sales numbers, of course, but several moderate Democratic senators argued that the $1,400 payments should not go to higher earners. So they're talking about thresholds. I think it was like $80,000 for an individual or couples at a certain combined value income as a family should not be eligible for these types of payments. And so they're still kind of going over the fine details at the moment. And obviously the watering down effect, if any, could then have a proportional impact on markets going forward. But also the more haggling and time then it will probably take in order for the passage of this to go through the Senate. Few things then on the COVID side that I just wanted to mention. And the reason for this is because Angela Merkel, the German chancellor, yesterday said that German state leaders agreed to extend most lockdown curbs until March 28th amid stubbornly high infection rates, according to a person familiar with the discussion. And on that front, I just wanted to show the new daily confirmed COVID-19 cases per million people in some of these main European countries and comparative to, say, the UK and the US, for example. So still very much painting that divergence picture. Uh, numbers in the UK continue to come down very aggressively, whereas Italy is probably looking the most worrying at this point in time. Um, actually, new COVID cases probably haven't been higher than this all year at this point. Germany as well has found it really hard to just continue the decline that it was seeing through January, February, and actually we've been seeing a very marginal uptick, hence the rollover of their very stringent lockdown at the moment. If you start looking at the actual daily new COVID-19 vaccination doses administered per 100 people, um, you know, one thing that's really clear is the US are doing a really solid job at the moment of accelerating things. And as we saw Yesterday with the likes of some of the big pharmaceutical companies like Merck and J&J teaming up then to further enhance and speed up manufacturing, definitely that target that the US had being quite aggressive to look to administer doses nationwide by May definitely is, is a tangible possibility. The UK is still also quite high at the moment after that brief lull that we saw at the back end of February. But again, the pickup in Europe is now slightly heading in the right direction. But even if you look at the trajectory of vaccinations, it's still fairly shallow in the steepness of that curve. And also the divergence is still huge between what the UK-Europe scenario looks like comparative to Europe. So any of that yield movement seen at the moment for European bond markets definitely, I think, is a sympathy-based move with the global picture, definitely not underpinned by real fundamentals, given the story here that's emerging on this picture, which ultimately does have very clear, direct implications for economic activity in the eurozone being ultimately slower out of the, the recovery story comparative to the US and the UK. Um, so I've pretty much covered everything really for the calendar. Um, this morning you've got construction PMI coming out of the UK. That's not really a market move for sterling, so I wouldn't get too bogged down with that. Really, it's a US-centric session. US jobless claims, of course, to keep an eye on, and you've got US factory orders as well. And then Powell to finish things off with OPEC meeting. Again, the confirmation probably going to come later, but And there's going to be lots, of course, of rumors doing the rounds and things like that. So much to look out for and a lot of volatility to come today, I'm sure, for WTI prices. Um, but look, that's it. I'll leave it at that and let you guys get on with the session. So have a good day. Thanks very much.