Oil prices and OPEC
Oil prices are very much in focus today, and bulls are certainly celebrating the news from OPEC, which played another proactive role in the market. The cartel announced another voluntary production cut yesterday. Saudi Arabia, which plays the most important role in the OPEC organisation, surprised the world yesterday by announcing a production cut of 1 million barrels and reducing its output from 10 million barrels per day to 9 million barrels per day. Basically, Saudi Arabia delivered on its promise that it was determined to keep prices stable. Only a few weeks ago, the Saudi oil minister warned speculators that they needed to play very carefully if they believed that they could get away with shorting oil prices. The oil nation will not allow another episode of a crash in oil prices, and yesterday they delivered on this.
There is one thing that is quite important to pay attention to here, and that is a weakness in oil demand. Oil traders have been thinking for some time that they will get to see a serious pick-up in oil demand as the world returns to normality after the COVID crisis. Oil bulls have been banking big time on Chinese demand, but in reality, we have not seen a serious strength in oil demand, and this indicates that the global economy is still suffering from a number of COVID shocks such as higher inflation and the threat of a serious slowdown in economic activity. On the supply side, Saudi Arabia is setting an example for all other OPEC nations that, in times of need, we need to do whatever it takes to keep oil prices stable. The fact that it is only Saudi Arabia that is cushioning all the supply cuts is a big deal, and it is more than likely that more future cuts may be announced by other OPEC nations as they have left the powder on the table.
Stock Futures Trade Mix
In the equity markets, traders are still very much digesting the big beat on the US NFP number released on Friday. One of the major hurdles that kept a large number of investors on edge is no longer there, which is the US debt ceiling drama, and this should encourage traders this week to take on more risk. The fact that the US labour market is so strong and can beat the forecast by such a large margin is kind of a big deal for the Fed, which has been thinking of another interest rate hike this month. This week, the Fed is going to get a number of more economic data sets, which could strengthen their stance towards increasing interest rates. For instance, if today’s ISM services PMI number comes in stronger than expected, we will see more strength coming in the dollar index, and this will be another indication that the Fed should not worry about their monetary policy.
One thing is pretty clear when we look at the overall posture of the US economic data, especially after the US labour market data, and it is this that suggests that the concerns that many had about the US economy falling into an economic recession may have been overblown. It is more than likely now that we will not see an economic recession take place in the US.
Economic Docket
In terms of the economic docket for this week, there are only a few firecrackers on the list. The RBA will release its rate statement tomorrow, and the Aussie dollar will be very much in focus. Remember, the bank paused the interest rate hike cycle for a very short period, then began to increase them again. This time, traders aren’t expecting any more rate hikes from the bank, and interest rates are expected to remain at 3.85%.
The BOC will also announce its monetary policy rate decision this week, and the announcement is due on Wednesday. It is widely anticipated that the bank will keep interest rates where they are.
