Fibogroup Market Analysis 2017

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The oil price is treading water today, failing to find a direction with some analysts believing that the recent down trend will continue on the back of bigger output from the US.

Oil is now down 20 percent since the start of the year and not even extended production cuts agreed to by Opec, and Non Opec members such as Russia, to remove excess inventories from the market, has been enough to stop the slide.

An even bigger problem now is the amount of oil being produced in the US, which is growing by the day and according to some has not been fully priced into the market and poses a real danger to the oil price,

“The other factor underestimated by OPEC has been the rebound in U.S. production from both the Gulf of Mexico and the shale producers. We have only just begun to see the shale output hit the market from the attendant rise in the U.S. rig count. U.S. production could hit 10 million barrels per day by year-end, from 9.3 million”

Analysts at JP Morgan also believe the price is going lower as history shows that even though Opec agreed to production cuts, not all members will be willing to comply and will simply release more oil to the market,


"By early 2018, the combination of record U.S. production and deteriorating OPEC compliance probably returns average prices to the mid-to-low $40s," they said.


Also with new technology coming on board, the amount of money to produce a barrel of oil becomes lower which will also prove attractive to US drillers,


"Rising U.S. output continues to stress markets, with increasing evidence that improved efficiency and technology makes many of the shale plays profitable below $40 a barrel," said analysts at Cenkos Securities.

 

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The British pound is under pressure today as a British Prime Minister Theresa may attempts to strike a deal with the DUP party today in order to form a government, with some saying time is running out.

At 11am (GMT) the British currency was trading at 1.2728 against the US dollar, down from $1.2760 earlier in the trading session.

Depending on the outcome of the deal, the British pound could see a new yearly low if May is unable to attract the support needed as political instability is likely to spook investors.

"The UK’s post-election political uncertainty potentially comes to a head this week, with the parliamentary vote on the Queen’s speech, and therefore May’s ability to form a government, likely coming on Thursday. As the week goes on any signs as to whether or not the Prime Minister will be able to gather the required DUP votes to ensure she stays in power is going to be the main driver of trading for the Pound," noted Connor Campbell, an analyst withSpreadex.

On the other hand, if an agreement is brokered, we may see the pond reach a new yearly high as the market breathes a sigh of relief on the back of political stability which will allow the UK to get back to business as usual,

"Prime Minister Theresa May needs to strike a deal with the Democratic Unionist Party to prevent her government from falling apart” noted FXTM Chief Market Strategist Hussein Sayed


"I believe there’s a high chance that she will get a deal, but if she failed to do so, GBPUSD would likely experience another fall towards 1.25, however, if she were to be successful, l expect to see a further recovery towards 1.29” he added.

The durable goods figure from the US will hit the market in a few hours, which is bound to create some volatility in the pound against its US counterpart with a good figure once again bound to raise speculation about just when the next rate hike from the US Federal Reserve might be.

 

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The Australian dollar continues to rise today, racking up its 3rd straight day of gains against its US counterpart after disappointing data out of America and further gains in commodity prices.

At 12.55pm (GMT) the Aussie dollar was trading at US76.05c up from US75.80c in yesterday’s trading session.

The latest durable goods figure from the US hit the market at -1.1 percent against analysts’ expectations for a figure of -0.6 percent marking its lowest level in 18 months.

The news may hinder the US federal Reserve plan to further raise interest rates as consumer confidence wains in the world’s biggest economy.

The fed had been widely expected to lift rates at least 2 more times this year and they recently noted that the increases would be heavily dependent on strong economic data

“Durable goods orders were a disappointment today almost no matter how you slice it,” said Aaron Kohli, a fixed income-strategist for BMO Capital Markets,

“The data trajectory continues to be a boon for Treasury bulls.” He added.

Also, helping the Australian dollar is the continuing recovery in the iron ore price on the back of increased demand from China as new construction projects begin and are predicted to continue for some time,

“Those infrastructure projects have now been executed on and have built up a body of work which is viewed as sustainable for the next two to three years,” noted Daniel Morgan, an analyst from Investment bank UBS

“It’s not clear that this level of work is going to accelerate, but it is a big body of stable work.” He added.

 

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The oil price has continued its winning streak today, racking up its 6th straight day of gains with some analysts failing to understand the reasons behind the rally.

The jump in price over the last week may be attributed to extended cuts in oil production from Opec and Non Opec members, but according to some not all members are sticking to the deal and it’s only a matter of time when this is reflected in the price,

“Sentiment remains that the market is oversupplied with OPEC members reluctant to further curb production,” said Enrico Chiorando, a U.K.-based analyst at energy consultancy Love Energy.

“Having pledged to ‘do whatever it takes’ to support prices, OPEC still faces ever-rising stocks and a hesitancy from producers for deeper cuts.” He added.

After six straight days of gains, some predict that it may be time to get out and book in profits as the inevitable downturn in oil could come at any time now, and the reversal could be sharp and strong,

"There's a real problem out there in the crude oil market. You're going to get a rally and the market is rallying today. It's been rallying for the past 4 or 5 days. It is nothing but a dead cat bounce," noted commodities trader Dennis Gartman, the editor and publisher of The Gartman Letter.

Mr Gartman also said that he agreed with some of the world’s most knowledgeable figures on oil, who predict that within the next two decades other sources of energy will be mainstream and oil will be made redundant,

"I'll go with the Deputy Crown Prince of Saudi Arabia, Mohammed bin Salman, who has made it abundantly clear that he thinks crude oil over the course of the next 20, 30 years is going to be essentially worthless." He added.

 

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The British pound has climbed significantly higher in the last three trading sessions, helped along by comments from Bank of England governor Mark Carney and now the currency is pushing up against a critical support level with a number of other technical factors come into play.

During a meeting in Portugal governor Carney noted that if the economy continued to improve, monetary stimulus would be reduced or completely removed, which had investors predicting that a rate hike was coming in the nearest future.

“Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional,” Carney said at the Forum on Wednesday in Sintra, Portugal.

“When the MPC last met earlier this month, my view was that given the mixed signals on consumer spending and business investment, it was too early to judge with confidence how large and persistent the slowdown in growth would prove,” he said. “Moreover, with domestic inflationary pressures, particularly wages and unit labor costs, still subdued, it was appropriate to leave the policy stance unchanged at that time.” He added.

As we can see by the chart, the pound has come up against resistance at the $1.30 level in todays trading which it also encountered in May, and we may be seeing the formation of a double top, which is backed up by a retracement to the 100 Fibonacci level which is certainly in overbought territory.

A reversal may see a pull back to around the $128.80 level where the British currency may find some support at the 61 Fibonacci level. This was also a strong support level in the week of the 10th – 15th of May.

 

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The oil price is taking a breather today after racking up seven consecutive days of gains and some believe the rally is poised to continue as we enter the 2nd half of the year.

The first half of the year is a time that bullish oil traders would like to forget with the price putting in its worst fist six month start in nearly 20 years as the US ramped up production and countries such as Libya and Nigeria greatly increased output.

But now, with Opec and Non Opec members extending their oil cuts until March next year, the stage may be set for something big,

"The energy sector has been down but it is not out, the fundamentals are set up for a second-half comeback." noted Rob Thummel, managing director for Tortoise Capital Advisors,

"You are going to see crude oil inventories globally and domestically begin to decline month after month. That will support crude oil prices, boosting the entire sector," he added.

Oil may also receive a boost after news released showed a decline in U.S. drilling activity for the 2nd time this year which has raised speculation that an oil price around $45 is not profitable enough for more oil rigs to come on board in the US.

“The decline signals that U.S. oil supply struggles to remain profitable between $40 and $45 a barrel,” said Vivek Dhar, a commodities strategist at Commonwealth Bank of Australia.

 

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The Australian dollar has taken a tumble in today’s trading session after a less than enthusiastic speech from the RBA had investors predicting that an interest rate hike was now off the table.

The currency dived around 1 percent after comments from Reserve Bank of Australia governor Philip Lowe on the state of the Australian economy and the central banks outlook.

They noted that the Australian economy is expected to strengthen gradually over time, but inflation remains weak on the back of slow wage growth and an ever-growing number in household debt.

"I think those people in the market who are hoping or looking for the Reserve Bank to be a little more hawkish will probably be disappointed, and that's why we've seen the Aussie dollar come off," noted Gareth Aird, senior economist at Commonwealth Bank of Australia

"The central banks that have gone to a slightly more hawkish stance more recently, they're all at a different place than what the Reserve Bank is," he added.

After last week’s bullish speeches from Bank of England Mark Carney and ECB President Mario Draghi the market was expecting the same from the RBA on the back of improving employment figures and overall business confidence.

This may be now the start of a reversal in trend for the Australian dollar as some had been expecting a rate hike in the not too different future, but with the RBA still concerned about inflation this option might be off the table for the time being.

 

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The pound is down for a third consecutive day in a row in today’s trading as another round of disappointing data raised doubts over expectations that the Bank of England would raise interest rates in the nearest future.

The British currency is now down over US1c after the latest Markit's purchasing managers index (PMI) released earlier today slumped to 53.4 in June against analysts’ expectations for a figure of 53.5 and also lower than the figure recorded last month of 53.8

This follows on from disappointing construction PMI figures out yesterday as well as less than manufacturing data earlier in the week.

The news is bound to cause a headache for BOE governor Mark Carney who appeared to last week, begin preparing the market for an interest rate hike by noting that the central bank may soon begin removing their economic stimulus plan.

With an interest rate hike off the table, for the time being the pound may be in for further losses and especially if any more poor economic data hits the market,

“A slowing in services sector growth completes a triple-whammy of disappointing PMI survey readings. Although the three PMI surveys are running at levels that are historically consistent with GDP growing by around 0.4 per cent in the second quarter, it’s clear that the economy heads into the third quarter losing momentum," said Chris Williamson, chief business economist at IHS Markit.

“With business optimism having been hit by the intensification of political uncertainty following the general election and commencement of Brexit negotiations, at the same time that households are battling against rising inflation, the indications are that the economy’s resilience is being tested." he added.


Industrial production and manufacturing figures due out of the UK on Friday will be closely watched by investors and unless there is a rebound the pound looks to be headed for trouble.

 

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The physiological mood may be changing with the British pound as we can see on the chart as the retractions become smaller and the movements up become bigger. Over the last week, the stance from the bank of England has changed from bearish to bullish.

The market is now predicting we may see a rate hike in the nearest future on the back of a reduction in stimulus, which may be behind the positive sentiment.

The British government also now seems to be more willing to negotiate more on a better Brexit deal, which has also added to the increase in confidence.

We believe that the pound now has the momentum with the worst times behind and may be getting ready for strong movement upwards firmly above the $1.30 level but it may find some troubles around the strong resistance level of $1.305 on two previous occasions.

Until the currency finally breaks begins the solid uptrend there may be a few short term long trades to be had by entering around the $129.20 - $1.29.40 area and exiting as the trade approaches the $1.320 mark which is before the strong resistance level.

 

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The gold price is heading down towards the $1,200 mark in today’s trading and some analysts are saying now is the time to get into the precious metal.

The price has now fallen around $100 over the last month as investors piled into the US dollar in anticipation of higher interest rates which makes gold a less attractive investment.

The amount of rate rises from the US Federal Reserve remain questionable and the market is beginning to believe there won’t be as many as earlier expected,

"The pullback in gold has coincided with the rise in U.S real yields to the year's highs as well as the sharp increase in real yields in Europe to the highest levels in more than a year," UBS analysts said in a note.

"Gold should recover from this latest pullback as the move higher in real rates is unlikely to be sustained and we see longer-term value around these levels." They added.


It seems also that investors have overlooked the political tensions going on around the world at the moment such as North Korea, Syria and Iran and should any of these come to the forefront, gold is likely to to push significantly higher,

"Gold still remains a very good hedge towards event risks and with key events like the escalation of tensions in the Middle East, or the sabre rattling between the U.S. and North Korea, we think that gold has potential to spike upwards should any of these tail events come to the fore," noted Nitesh Shah, commodities strategist at ETF Securities