Geopolitical uncertainty is certainly nothing new in the Middle East, however, even by recent standards, yesterday’s sharp rise in oil prices in the wake of the attack on Saudi Arabia’s production infrastructure was a historic move. The size of the move has raised concerns that if the sustained rise in prices could prompt further weakness in a global economy already vulnerable to concerns about slowing demand.
While the rise, back to levels last seen in May this year, is the biggest in history for crude oil prices, even of itself it doesn’t necessarily follow that it has the capacity to tip the global economy into recession.
There is a caveat, and that depends on whether we see further gains in the coming days, as investors look to possible retaliation, as well as the prospect that we could see further damage to output capacity. For now, a knee jerk reaction seems unlikely, given that Saudi Arabia has called in the UN, and while that remains the case prices could well start to slip back down again.
The loss of output, around 5% of global capacity prompted the US to open up the prospect of releasing some of its strategic petroleum reserves (SPR) if prices continued to move higher. However, this is still likely to be a high bar given that oil prices are still over 20% below their peaks from last year.
The rise in prices nonetheless prompted some profit-taking in equity markets which have enjoyed a decent rebound over the last three weeks, with both European and US markets finishing the day in negative territory.
The rise in oil prices is also likely to offer food for thought for central bankers at a time when inflationary pressures are stubbornly low, with the US Federal Reserve starting its two-day meeting later today, and expected to announce another 25bp rate cut when the meeting concludes tomorrow.
The cut, if it happens as is likely, is unlikely to be enough to please President Trump, who once again labeled the Federal Reserve clueless yesterday. However, the strength of the greenback has been one of the few factors that have helped keep a lid on prices in recent weeks.
The German economy will once again be in focus this morning with the latest ZEW economic sentiment survey for September due to being released. Last month the survey hit its lowest level since December 2011 at -44.1 and was likely to remain weak firmly in the negative territory later this morning.
The recent rebound in the DAX and the prospect of ECB easing this month is likely to see a rebound to -38. However, any improvement is likely to be tempered by the fact that the ECB overpromised and under-delivered last week. A cut in the deposit rate to -0.5% was less than markets had priced in, and the growing dissent on the governing council to further action means that any further action is likely to be fairly limited at best.
The pound came under a little bit of pressure yesterday after it became apparent that the EU and UK were as far apart as ever on coming to a Brexit agreement.
EUR/USD – has managed to find some support at the 1.0925 area but the current rebound needs to push up and through the 50-day MA now at 1.1130 to retarget the August peaks at 1.1250. Below 1.0920 targets the 1.0800 area.
GBP/USD – last week’s break above the 50-day MA at 1.2280 has the potential to open up further strong gains towards the 200-day MA at 1.2740, raising the prospect that the lows could well be in. As long we are able to hold above the 1.2280 area further gains towards 1.3000 seem increasingly likely.
EUR/GBP – five successive weeks of losses has seen the euro slide towards the 200-day MA at 0.8840. A breakthrough here opens up the prospect of further losses towards 0.8795 initially with the prospect of further losses towards 0.8720. While above 0.8840, the prospect for a pullback towards 0.8980 is a possibility.
USD/JPY – continued weakness in the yen has seen the US dollar move up towards the 108.20 area, but we have thus far been unable to maintain a foothold above it. A move through 108.30 opens up the possibility of a move towards 109.20. While below 108.30 the risk is for a drift back to the 107.50 area,
FTSE 100 is expected to open unchanged at 7,321
DAX is expected to open 15 points higher at 12,395
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