The consensus was that we would get some sort of loose agreement from the collective that kept oil supported, but left the market asking many more questions. What we have seen, however, has been real meat on the bone, not just from gaining an understanding around production cut allocations from the more tricky OPEC members, including Iran and Iraq, but it seems Russia was so enthused by what they heard that they have increased their own production cut levels from 200,000 to 250,000 to 300,000 a day through the first half in 2017. Most oil strategists had merely expected a freeze here. There will be a meeting between non-OPEC members on 9 December which will be attended by Algeria, Venezuela, and Kuwait which should clear up some of the finer details.
We saw front-month US crude hit a high of $49.90 and Brent $52.37. The volumes going through both the futures and options market have been staggering, with a record level of options traded on the CME. Of course, when you see these sort of moves you will get a boost to inflation expectations and we can see this with five-year inflation swaps pushing up six basis points (bp). There has been a fairly strong sell-off in longer-term interest rates, with the US ten-year treasury gaining 6bp, steepening the yield curve and this in turn has seen the S&P financial sector rally close to 1.3%. The S&P energy sector has naturally been the star of the show though, gaining close to 5%. We can expect a similar sort of gain here in Australia and Asia.
If we throw in solid economic data in the US in the form of ADP private payrolls (216,000 jobs) and personal income (+0.6%), we can once again see the USD is the place to be. The USD has gained 0.6% against a wider basket of currencies, but the moves against the JPY and AUD have been most pronounced. USD/JPY has broken out of the recent highs and could even break through ¥115.00 if we get a strong read in tonight’s US ISM manufacturing report (2am AEDT). The market expects improvement in this key data release, with the economists’ consensus at 52.5.
With iron ore spot and futures falling 6.8% and 1.9% respectively, the materials sector faces headwinds, although BHP’s ADR is unchanged and hardly indicative of a strong sell-off. One suspects this won’t be the case for less diversified stocks that don’t have an oil exposure to, and while we saw stocks like FMG fall 5.3% yesterday, we could see another weaker open here. Aussie banks should open about 0.5% higher and will likely put in the bulk of the index points for the ASX 200.
The highlight of today’s session is the Australian Q3 CAPEX data which could have big implications for those trading AUD/USD. We also get Chinese manufacturing and service data, but I don’t expect these to promote a strong market reaction.
The Q3 Australian business investment plans are expected to fall 3% which could have implications for next week’s Q3 GDP print, but one should also look out for the fourth estimate of business investment plans for 2016/17. The consensus is that we could see the Q2 estimate (in investment intentions) being revised 5% higher to $110 billion. Without looking at the sector specific details, I would expect the AUD/USD to recoup some of the lost ground (seen overnight) if we see this estimate being revised up north of $115 billion. Of course, any number below $105 billion married with renewed weakness in bulk commodities could see AUD/USD heading into the 21 November low of $0.7311.