OPEC to Save Face with a Disappointing Deal

Wednesday November 30: Five things the markets are talking about

No more jawboning – is there a deal? Will they or won’t they announce a production cut? It’s all that dealers and investors want to hear from OPEC in Vienna this morning.

Should a barrel of crude be trading above +$50 or below +$40? Whatever the outcome, the move will be temporary at best, at least until the next production market share squabble over prices.

Both Fixed income and forex markets remain close to home on the final day of the month, waiting for direction from Austria as a potential decline in crude prices will likely put pressure on U.S. bond yields, and in turn, on the dollar, or visa versa on inflation expectations.

Stateside, the market will focus on today’s U.S ADP release (08:15am EST), as well as personal income and spending figures and the core-PCE price index (08:30am EST), the Fed’s preferred inflation measure. There are also three Fed officials speaking today – Kaplan, Powell and Mester.

Note: with a Dec rate hike priced in, U.S data is unlikely to offer much more upside.

1. Equities have a solid month

Global equities inched mostly higher overnight despite anxiety over commodity prices, and are on track to close out a solid month with gains.

Note: new worries associated with China’s efforts to support its own currency, the yuan, could potentially cause liquidity concerns and push up domestic borrowing costs and affect the speculative boon the market has experienced this month, particular in the commodity sector.

Overnight, Chinese indices were the worst performing stock market in the region with a drop of -1%. MSCI’s broadest index of Asia-Pacific shares ex-Japan traded up +0.2%, while Singapore’s benchmark climbed for a seventh day, rising +0.7%. Elsewhere, Aussies ASX 200 Index fell -0.3%, with sub-gauges of raw materials producers and energy stocks down at least -1.9%.

In Europe, equity indices are trading higher led by energy, commodity and mining stocks as optimism grows for an OPEC deal. Financial stocks are trading generally lower across the region after the U.K’s Financial Stability Report found RBS failed the BoE’s stress test (needs to add +$2.5B in capital), while Standard Chartered did not meet its Tier 1 minimum capital requirement.

U.S futures are set to open +0.1% higher.

Indices: Stoxx50 +0.4% at 3,047, FTSE +0.3% at 6,794, DAX +0.2% at 10,644, CAC-40 +0.3% at 4,567, IBEX-35 -0.2% at 8,650, FTSE MIB +0.8% at 16,697, SMI +0.2% at 7,860, S&P 500 Futures +0.1%

2. Crude price volatile, metals under pressure

OPEC is trying to work out the final terms for a potential production cut with Iran’s commitment remaining key.

This morning’s meeting in Austria is said to be leaning towards a six-month agreement on production cuts – this has Brent oil approaching +$50 barrel on optimism.

OPEC’s overall success really depends whether the Saudi’s are able to persuade Iran to make oil production cuts.

Elsewhere, metals prices continue to retreat from this month’s major rally. Ahead of the open stateside, copper prices have fallen -0.9% to +$5,689 a ton, while aluminum futures also declined following a selloff by Chinese investors.

Overnight, both steel and iron-ore prices fell sharply after China’s local exchanges lowered the daily trading limit and raised margin requirements in an effort to curb speculation.

Spot gold is under early pressure, sliding -0.1% to +$1,187.14 an ounce – it’s down -7% in Nov. And poised for its worst month in three-years.

3. Fixed income price in two Fed hikes

Finally, the sides are starting to come together.

Dealers are betting the Fed will increase rates at least twice by June. For years, markets have reflected investor scepticism that the Fed will be able to lift rates as fast as it wants to, and the Fed has consistently revised down its forecasts.

Currently, fed-fund futures imply a +56% chance that U.S policy makers would lift rates to at least +0.75-1% by mid-2017. The rate has been at +0.25-0.5% since December, though a +25bps increase is widely anticipated on Dec. 14.

U.S 10-year prices have rallied overnight, pushing yields down -1bps to +2.315% and off its 16-month high print of +2.417% touched last Thursday.

Elsewhere, yields on Aussie 10-year notes lost -1bps to +2.69%, while yields on similar maturity in Japan, New Zealand and Hong Kong were little changed.

4. Dollars month-end selling

Month-end flows are expected to result in some dollar selling which could temper this month rally.

Even higher oil prices on the prospect of an OPEC production cut deal could also weigh on the greenback late morning.

Ahead of the U.S open, the USD remains slightly higher with EUR/USD down -0.1% at €1.0643, USD/JPY is up +0.7% at ¥113.01 and GBP/USD flat at £1.2491.

Elsewhere, the NZD and the CNH each rose at least +0.3%, paring their declines in the month, while the ZAR fell -0.7%.

5. ECB to extend QE

German and Spanish inflation numbers released yesterday back expectations that the ECB will extend its asset-purchase program by another six-months beyond March 2017.

Germany’s annual HICP rate came in at +0.7% this month, unchanged from Oct. and slightly below forecasts. Spain’s annual HICP rate came in at +0.5%, unchanged m/m.

The market expects Draghi to make the announcement at next week’s ECB’s policy meeting on Dec. 8.

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