Mexican Standoff Ends With Underwhelming Agreement

The weekend’s major news was that after four days of haggling amongst the OPEC+ grouping and Mexico, and some arm twisting by the US President, an underwhelming 9.7-million-barrel production cut was agreed on Sunday. Elsewhere COVID-19 continues to rampage across the United States, although pleasingly, Spain and Italy’s infection and death rates appear to be continuing to improve. Holidays will continue to impact market liquidity today, with the Jewish Passover holiday continuing. Australia, New Zealand and Hong Kong closed for Easter Monday along with all of Europe and Canada, with regional holidays in India.

Turning back to the OPEC+ agreement, early futures trading on WTI has been remarkably sedate, with WTI futures almost flat. That may have more to do though, with the sheer volume of countries on holiday, rather than any OPEC+ congratulations. Looking into the nuts and bolts of the agreement, Mexico had refused to cut by more than 100,000 barrels a day – its target should have been around 350,000 – and had threatened to derail the entire agreement. Through some smoke and mirrors, with the United States taking part of Mexico’s “quota” through multi-million-barrel natural wastage in US production, the deal was hauled over the line with Mexico remaining at a cut of 100,000 bpd.

What the agreement didn’t get, was any commitment on paper from the US, Canada and Norway on actual cuts to production. Instead, nebulous commitments were made, in the form of a multi-million-barrel natural wastage from all three, over the remainder of the year. Furthermore, the 9.7 million per day cut will only last until the end of June, two whole months, when it tapers down to 8 million barrels per day. Further production tapers will follow as we move into 2021. OPEC+ appears to be, rather optimistically, pricing in a global recovery somewhere between a V and U-shape for 2021 from the COVID-19 pandemic.

With a demand shock estimated at between 15 to 30 million barrels of oil a day, depending on who you talk to, it is clear that the OPEC+ agreement contains more hope than reality. The entire construction is underwhelming, to say the least, and really relies on production collapsing in the US and Canada to deliver the level of cuts required. Or a V-shaped recovery from the COVID-19 pandemic. The agreement should be enough to stop oil from revisiting its March lows and staying there; it will not be enough to, in all likelihood, prevent oil sliding to a new lower equilibrium.

Elsewhere the volume of holidays globally means that the data calendar is thin today, with almost no Asian releases, and none of importance. Asia will be focused this week on China’s Balance of Trade tomorrow, and its Q1 GDP on Friday. Markets are looking for a bounce back in the BoT to $19 bio, a continuation of the improvements in China’s data as the country continues its post-COVID-19 reopening. GDP, though, is expected to shrink for the quarter by 6.2%. With so much hope hoisted onto China’s shoulders to lead the world out of the COVID-19 recession, both data points are likely to cause strong market reactions on a substantial positive or negative divergence from consensus.

Early trading points to a negative start for equities.

OPEC’s production cut has given no joy to Asian equity markets this morning, with the S&P 500 and Nasdaq futures down 1.0%, and the Nikkei 225 falling 1.40%. The South Korean Kospi is also lower by 0.70%.

Asian markets appear to be concentrating on the ongoing COVID-19 pandemic and its ongoing effect on the global economy, rather than any warm afterglow from the oil agreement. Asia didn’t have a good weekend on this front, with an increase in cases in Singapore, Japan and Indonesia, and stubborn resistance in South Korea and China. News that Disney will furlough 43,000 workers has added to the negative mood and highlights how far still, the US has to go in its pandemic fight.

Equities will likely remain heavy today, although the volume of holidays internationally will limit volumes and liquidity. Asia will likely continue to trade from the heavy side, although not aggressively, content to await the return of the US this evening for further direction.

Petro-currencies saved by the bell.

The OPEC+ agreement, imperfect though it is, has saved the MXN, CAD, RUB and NOK Petro-currency grouping from heavy selling pressure this morning. With Australia and New Zealand on holiday, early trading amongst the majors has been directionless, being almost unchanged from Friday’s close across the board.

The OPEC+ agreement will give some solace to both the MYR and IDR regionally today, with their recovery last week likely to continue, albeit in muted form, today. USD/CNY and USD/JPY remain anchored around 7.0550 and 108.50 respectively, with direction firmly anchored on developments on the virus front in both Europe and the US.

EUR/USD and GBP/USD have both made substantial recoveries over the past week but face stiff resistance from here as the week starts. EUR/USD has benefitted from the EU agreement on pandemic bonds but progressing past 1.1000 will require falls in COVID-19 cases across the continent. Similarly, GBP/USD has been capped at 1.2485 since mid-March. With no sign of the end in sight in its virus fight, further gains above 1.2500 will likely remain elusive this week.

Oil trading higher for now on thin volumes.

Oil had had a volatile start to the week, with both Brent crude and WTI both much higher from when I started writing this note, to my arrival at the oil section! Following the OPEC+ agreement late Sunday, WTI futures rose initially, only to turn slightly negative, but are presently sharply higher. Brent crude currently is 4.50% higher at $33.10 a barrel, and WTI has rallied by 7.0% to $24.30 a barrel.

My opinion of the substance of the weekend agreement has been made clear above. On that basis, oil rallies are there to be sold in all likelihood. The OPEC+ deal, although well-meaning in intent, wholeheartedly fail to address the supply/demand basis confronting the world. It can at best only put a floor under oil prices at their March lows. Rallies in Asia in holiday-thinned trading should be taken with a massive grain of salt.

Gold finds its feet at last.

Gold climbed an impressive 2.30% to $1683.50 an ounce on Thursday, still in thrall to movements in US equities, but showing welcome signs of finding its own voice again. The Federal reserve weighing in with another $2 billion of bond-buying seems to have finally spurred gold to move of its own volition, instead of in lockstep with equities.

Given the amount of central bank easing and fiscal stimulus in the world, with much more to come, gold’s fundamentals have probably never looked more positive on paper. However, financial markets, like life, are not a simple linear progression. Gold’s real test will come later today as New York returns to work. The question being, that if US equities fall heavily, can gold disengage and maintain it’s gains? The jury is out on that question, but should gold manage to achieve just that; the stage will be set for higher gold levels to come.

On the technical front, gold faces a substantial challenge at $1700.00 an ounce.

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