Oil at 2016 high

Equities pulled back overnight after yesterday’s concerning Asian performance where early session gains were dramatically trimmed coming into the close.

Source: Bloomberg

Investors looked keen to take profits after a strong start to May, but it’s difficult to say at the moment whether this trend will compound into a more substantial selloff. Oil and the US dollar moved perfectly inverse overnight, as a surprise 3.4 million barrel decrease in US oil inventories helped push WTI up 3.5% to a six-month high. Although the oil price has begun pulling back sharply into the Asian open. We are heading into the US summer where there is usually increased seasonal demand as driving picks up. Inventory growth has also been steadily trending down since March. However, the output disruption caused by the Canadian wild fires may also have helped see a bigger inventory decline than would otherwise be expected.

WTI oil has rejected the US$47 level twice now, forming a double top formation, which is often a signal for a major reversal. Although it has been remarkably reluctant to break below the US$43 support level. Investors are waiting for oil to break out of trading within this tight range, and this means the moves either side could be quite sharp.

The DXY dollar index also failed to hold above the $94 level, and the big question for investors is whether the USD is about to collapse back to $92 again. Although the Atlanta Fed GDPNow estimate for 2Q has moved up to 2.2%, possibly pointing to further gains for the USD in the month.

Markets in Asia look set to open weaker. After the ASX failed to hold over 5400 yesterday, investors may be keen to start cashing out of stocks that have had impressive rallies of late. We’re calling the ASX to open 0.9% lower around 5335. Infant formula maker, Bellamy’s, has responded well to the weaker A$ and still has impressive short-term momentum after gaining 8% yesterday, it will be looking for a close above A$12.50 to keep upward momentum. The yen strengthened 0.7% overnight, which has set the Nikkei open up 0.8% lower – an almost perfect inverse correlation.

The solid performance in commodities overnight may help the materials and energy sectors today. But sentiment in Aussie financials looked to have peaked in yesterday’s session, and much sharper selling could be set to come in today. If we do see strong selling coming into the Australian banks, it will be very difficult for the index to stay in positive territory. The other question for the ASX is whether key beneficiaries of a lower Aussie dollar, such as healthcare and consumer focussed stocks, can hold onto their recent gains.

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