Fibogroup Market Analysis 2017

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Brent oil is now sitting comfortably above the $60, making its highest level in more than 2 years on the back of a deal between Russia and Saudi Arabia to extend production cuts past March next year.


Up until now, the deal to reduce output between Opec members has run smoothly with most countries sticking to their agreed output but come March, things could change and not all may be on board for an extension of cuts.


Countries such as Libya and Nigeria are looking like the countries that may opt out of the next deal as they feel they need to make up for lost time due to supply disruptions for various reasons


It will become clear to the market over the next month or so who is in or who is out and depending on how many countries refrain from extending production cuts, the oil price could be in for a sharp reversal.


Another thing to watch are drillers from the USA who are currently ramping up production to take advantage of higher prices and if history is anything to go by, this will eventually lead to an oversupply of oil in the market which will also pressure the price.


US shale producers claim they were still profitable when oil was around $40 a barrel so the margin for a pullback is quite significant


“We could rapidly go from a predicted deficit of around 260,000 barrels to a surplus of close to 1.5 million barrels. Prices would undoubtedly collapse,” said Matt Stanley, a fuel broker at Freight Investor Services.

 

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The gold price is heading for a 2nd day of gains as the market awaits US president Donald Trump’s choice for the next candidate to run the US Federal Reserve.

Although the market is pretty certain on who Trump will pick, the expected behavior of Mr Powel remains uncertain and especially with regards to interest rate hikes and this has benefited gold

"A lot of the focus is on the Fed chair, and Trump's expected nomination of Jerome Powell," said OCBC analyst Barnabas Gan.

"The current movement in prices is not really about him Powell being hawkish or dovish, but more so about market uncertainty about what his nomination would mean."

From a technical point of view, the formation of a double bottom still looks in tact but it may take some time for gold to break out of its current tight trading range so we made need a strong break above the top resistance line around $1,280 before taking any long positions

 

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The British pound once again failed to break through a key resistance level in yesterday’s trading session after being sharply sold off over expectations that the rate hike delivered by the Bank of England yesterday may be the only one.

For weeks now the market has been speculating just how many times the BOE would raise rates with many predicting around 3 over the next year so investors were caught completely off guard.

The news has pushed the British currency down to a key support level and we are likely to see it travel down to the next resistance level around $1.2920.

A good reason for this is the release of the non-farm payrolls figure from the US which just came in at 266k and guarantees a rate hike from the US Federal Reserve next month

 

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The Euro is under further pressure today against its US counterpart after suffering heavy losses on Friday on the back of strong data from the US and the potential for further falls in the coming days and weeks remains strong.

The latest nonfarm payrolls figure from America hit the market on Friday at 261,000 while the unemployment rate hit 4.1 percent which continues the positive momentum of the employment market.

“The non-farm payrolls report for October provided further evidence that the US labour market remains healthy,” says Lee Hardman, a currency analyst at MUFG.

“Healthy employment growth is resulting in the labour market continuing to tighten as evident by the drop in the unemployment rate to a new cyclical low of just 4.1%.” he added.

The figure being passed around the market at the moment for the Euro/USD is around $1.13 as we head towards the end of the year, which was backed up by last week’s inflation figures from the Eurozone which once again fell short of expectations.

This will leave the ECB no choice but to leave rates on hold for the foreseeable future and unable to cut back on their bond buying program.

On the other hand, the market has priced in a more than 90 percent rate hike from the US Federal Reserve next month which is only going to add the attractiveness of the US dollar and leaving traders wondering where is the value in holding the Euro.

 

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The Australian dollar has pulled back in today’s trading, giving up the gains made yesterday on the back of neutral stance from the Reserve Bank of Australia on the state of the local economy.

In their latest interest rate meeting yesterday, the RBA kept rates on hold at 1.5 percent which was widely expected by the market but it was the following statement that sent mixed signals to investors that caused the Aussie dollar to climb on the statement, then retreat as the trading day unfolds today.

RBA Governor Philip Lowe noted that although the central bank expects GDP to pick up over the next year, inflation remains a concern and we may see a figure below the RBA’s target rate for quite some time,

“Inflation remains low, with both CPI and underlying inflation running a little below 2 per cent. In underlying terms, inflation is likely to remain low for some time, reflecting the slow growth in labour costs and increased competitive pressures, especially in retailing” Mr Lowe said.

Traders may have exited the Australian dollar today while awaiting a statement on Friday by the RBA when they present their outlook for the Australian economy with some predicting that it will be more bearish than yesterday’s forecast and especially regarding inflation.

"Friday’s RBA quarterly Statement on Monetary Policy can further weigh on Australian interest rate expectations and undermine the Australian dollar,” says Elias Haddad, a strategist at Commonwealth Bank of Australia.

“In the wake of both Q3 CPI measures undershooting RBA and market expectations there could be some modest trimming to the RBA’s near term underlying inflation forecasts in the SMP,” he added.

 

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The US dollar is under pressure against the major currencies today as fears grow over the possibility of tax reform as well as disastrous results for Trumps political party in the elections.

As with most of the US president’s policies, the tax reform bill has hit headwinds between political members in the US and it now seems that the tax reform in its current state will not pass.

The US dollar has made significant progress in the last week or so against the majors as analysts had been predicting there was main stream support to pass the tax legislation but now that it has become clear this is not the case, the US dollar is bound to give up some of its recent gains.

“The initial phases of discussions within the House have brought up a lot of divisions and problems, so the House version itself is going to change before we’ve even got wind of what the Senate version is going to be,” said MUFG’s European head of global markets research in London, Derek Halpenny.

Another factor hurting the green back today was the results of elections for governor in west Virginia and new Jersey where in both cases, democratic candidates won and were elected by wide margins which is seen as a rebuke of Donald Trump as the republican party had previously held both positions.

Although there was a good voter turnout in both elections, it seems that republicans changing parties was the turning point which is a scary thing for Trump who has only been president for one year

“I do believe that this is a referendum on this administration, democrats turned out tonight, but I’m pretty sure there were some Republicans who spoke loudly and clearly tonight as well.” Noted Representative Scott Taylor, a Republican from Virginia Beach

 

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The gold price has moved significantly higher over the last 4 trading sessions on the back of US president Donald Trump’s trip to Asia as well as political turmoil for the president back home.

Many believed that Trump would use a soft tone when addressing American allies in Asia about North Korea but instead he did completely the opposite, bringing the 2 sides closer to war which has seen investors fleeing to the safe haven of gold over the last week.

Trumps Republican Party was also trampled in local elections over the past few days and his tax reform is also on the rocks, threatening to fall apart.

All of these things combined should be positive for gold as we head into the New Year.

“I think 2018 is going to be a good year for gold, and it should shine bright in the New Year,” said Phil Flynn, senior analyst with Price Futures Group

“Yes, the Fed will have to raise rates, growth remains higher than trend, but this is becoming true elsewhere,” said analysts from Macquarie bank.

“Crucially we think the dollar is more likely to weaken than strengthen [and] pre-2014 levels are perfectly achievable. And political risk factors, an unpopular president unable to match up to his domestic promises and facing complex and potentially unsolvable foreign problems, are also be in gold’s favor.” They added

From a technical point of view gold also looks to be in good shape and as we reported last week, we believe that a double bottom has formed as is shown on the chart. Resistance may be found at the $1,290 level but is not expected to last.

 

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The gold price remains well supported today on the back of political uncertainty in the US and confusion about the new tax reforms that US President Donald Trump is trying to push through.

After Trumps republican party got hammered earlier in the week in local elections, rumors are spreading that some of the presidents proposed tax policies such as corporate tax cuts, will be delayed by a few years which left investors wondering will they happen at all and in turn headed for the safety of gold.

“Further political uncertainty in the US saw gold prices well supported. News that the Republican tax plan involved cuts being delayed until 2019 raised the ire of investors," noted analysts from ANZ.

The prosed tax plans from the US government is what has been underpinning the US dollar at the expense of gold for some time now, but with the legislation looking doubtful, we may see a sharp pullback in the Greenback with the beneficiary being gold,

“Although the buck has mustered an impressive counter-rally of nearly 5% over the last two months, it is unlikely that this upward momentum will be sustainable over the long term,” noted Victor Dergunov from Albright Investment Group

“Inflationary pressures are likely to be overpowering for the fragile currency, and are likely to push the buck back down going forward. This will undoubtedly serve as an additional favorable tailwind for the yellow metal” he added.

Mr Dergonov also seems to agree with our view which we mentioned in our last technical report that gold has found a solid base from which to push higher as the years comes to an end,

“We see a clear uptrend that materialized in late 2016, there is a series of higher highs and higher lows, and recently, we can see that GLD appears to have made a double bottom and now appears poised to move higher,” he said.

 

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The British pound has slumped in the European trading session today after reports over the weekend that British Prime Minister Theresa May’s time at downing st may be coming to an end.


According to a report from the Daily mail, Around 40 conservative MP’s from Mrs May’s conservative party are ready to vote for a no confidence motion which would see the collapse of the government which is exactly what the UK economy does not need right now as it comes to terms with Brexit.


Also adding to the woes was a letter sent to Mrs May from Foreign Secretary Boris Johnson and Environment Secretary Michael Gove who demanded that the prime minister come down hard on the EU and demand a strict deadline after Brexit for the whole thing to end.


“It coincided with the leak of the letter from Gove and Johnson to May apparently instructing her how to run the talks,” said Jane Foley, head of currency strategy in London at Rabobank.


“Both suggest further trouble in the cabinet and since this would have negative implications for Brexit talks, the political outlook currently appears very rocky for the pound again.” She added


With no Brexit deal in sight, representatives from the EU may be happy to let the situation drag out and wait for the inevitable collapse of May’s government and the political instability that will follow which many believe will give them the upper hand in negotiations and a better deal for breaking away from the UK.

 

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The Australian dollar has recovered in today’s trading after yesterday’s sell off on the back of strong local date which hit the market at its highest level in over 20 years.

At 3.16pm(AEDT) the Aussie dollar was trading at US76.32c after threatening to hit the US75c mark earlier in the trading session and up from US76.12 in yesterday’s trade.

The latest National Australia Business conditions survey from Australia released to the market earlier today came in at 21, well up from last month’s figure of 14 and justifies comments made by RBA governor Philip Lowe last week who gave an overall upbeat assessment of the economy.

Mr Lowe noted that although inflation was still below the central bank’s target rate and was expected to remain there for some time, overall the economy was moving forward and in general the business climate was looking healthy

“Results from the survey indicate that the business sector in Australia is very strong at present, which is having positive spill-overs into the labor market and, to some extent, investment,” Noted analysts from NAB

The Business survey offset disappointing data released from Australia’s biggest trading partner China with industrial production figures coming in at 6.2 percent while retails sales numbers hit the market at 10 percent which were both below expectations.

The fall in industrial production is attributed to the tightening of pollution laws which has seen many firms cut back on production as they scramble to come to terms with the new regulations by directing capital to upgrade machinery.