A monster drawdown in gasoline inventories drive the global financial markets

Oil has once again established itself as the central thematic behind the world’s financial markets and the fact we saw such a powerful reversal at the trend low, despite USD strength, has driven a slight uplift in sentiment.

  • The overnight leads are generally bullish, although we’ve only seen modest gains at an index level, with the S&P 500 +0.2%.
  • The USD has found support rallying 0.5%, although stopped just shy of the prior June to July trading range.
  • AUD/USD traded in a narrow range on the day of $0.7616 to $0.7568. AUD/NZD is the big mover.
  • US data largely upbeat with the ADP private payrolls detailing 179,000 jobs were created in July, while the services ISM report printed a respectable 55.5.
  • Oil was the big mover (again), with a strong bullish reversal, helped by a monster 3.26 million barrel drawdown in gasoline inventories.
  • After a recent worrying trend for equity bulls high yield (HYG ETF) performed admirably, giving backbone to the improved sentiment.
  • The S&P 500 energy sector gained 1.8%, providing strong upside risks for the ASX 200 energy space today.
  • The ASX 200 likely to test 5500 on open, with energy and material names at the heart of the move.
  • BHP ADR +3.1%. RIO 1H result held few surprises, with the stock largely expected to outperform the 0.8% fall seen on its London listing.
  • Event risk for the day centres on earnings from Downer, Suncorp and Tabcorp. Australia June retail sales (+0.3% expected), China Q2 balance of payments and Bank of England policy decision.

Today’s session will be key, because while price in US crude traded below Tuesday’s low and closed firmly above the high, we now need to see follow through buying (a higher high if you will) to suggest the recent move lower in the barrel is over and consolidation is likely.

Corporate credit has performed well, which will always inspire the equity bulls at a time when the S&P 500 has looked precariously like it wanted to roll over. Many have been eyeing a break through the April uptrend at 2137, suggesting this would have been further fuel to the fire for the bears. For now, that support is still one to watch and the bulls will have a 3.26 million barrel drawdown in gasoline inventories (the largest since April) to thank. Clearly this has been the key inspiration behind the moves in energy.

US data was largely upbeat, with the ADP private payrolls providing some belief that Friday’s non-farm payrolls will not be a repeat of the woeful print we saw in May. We can focus on the key components of the services ISM report and see expansion in the employment sub-index (at 51.4), while the important new orders component pushed up to 60.3. All eyes, however, turn to Friday’s payrolls now and specifically I am most interested to see price action in the USD. Price is at a key juncture here and a rejection of the former trading range today could suggest we see a move back into the June lows.

Locally, the ASX 200 is likely to test the 5500 level on open, with banks expected to open on a modestly firmer footing with good buying in energy and materials. I don’t expect the June retail sales print to promote too much volatility in the AUD and the equity market will likely shrug off the details. Earnings from Downer, Suncorp and Tabcorp will digested by shareholders, with RIO also being a focal point after a fairly uneventful 1H16 report after market. According to most sell-side analysts, the view that ’boring is good in this environment’ has been noted.

For FX traders, the major event is the Bank of England’s policy announcement at 21:00 AEST. Given the market has a 25 basis point cut priced at 100% one would expect a huge spike in GBP/USD if they fail to ease, but the real issue is whether they cut by 50 basis points and give a strong indication of Quantitative Easing (QE) in the September meeting.

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