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Market Update

By David Morrison  |  08/01/2019 16:02
”US

The euro slips after grim German data while oil extends its gains and gold pulls back from recent highs. Trump to deliver prime time address to the nation tonight
 
EURUSD

The EURUSD slipped back in early trade on Tuesday. The single currency lost ground after an unexpectedly large decline in German Industrial Production. This fell 1.9% in November, well below the 0.3% increase anticipated, and weaker than October’s decline of 0.8%. The euro had been recovering after testing support at 1.1300 last week. The pair has now made back all the losses it suffered on the 2nd January when the dollar soared against everything except the Japanese yen where it suffered a panicked ‘flash crash’ on thin volumes and a slump in global equities. For now the EURUSD looks range-bound with 1.1300 still support and intermediate resistance around  1.1450 where the 100-day simple moving average comes in. A break above here opens up the possibility of a retest of resistance at 1.1500 – the top of the current range.

Crude oil

Crude oil continues to push higher and recover from the oversold conditions seen at the end of last year. A ‘risk-on’ rally together with optimism over US-China trade talks (which have been extended for an extra day and will continue on Wednesday) have helped push WTI back up towards $50 per barrel, a level it broke below in mid-December on its way to hitting its lowest price since June 2017. While overdue a bounce, traders seem reluctant to build up too much long-side exposure given concerns over global economic growth. Last week both China’s official and Caixin Manufacturing PMIs registered contraction. In addition, US ISM Manufacturing and Non-Manufacturing PMIs have also disappointed while a slew of data releases (not least today’s Industrial Production numbers from Germany) suggest that countries in the Euro zone are facing headwinds. Meanwhile, the oil market remains oversupplied. Global inventories remain near record levels while the OPEC+ agreement to cut output by 1.2 million barrels per day (chiefly Saudi Arabia and Russia) not only disappointed a market looking for something bigger, but is proving slow to implement. Adding to confusion is contradictory news and forecasts concerning US production. Some analysts predict that US oil output will hit a fresh record of over 12 million barrels per day this month. However, there’s evidence that shale companies cut back production sharply in December. Shale is much more sensitive to price moves than traditional production methods. Shale output increases as oil prices rise, and decreases when they fall. US shale production is a relatively new phenomenon in the dynamics of the oil market, and it’s increasingly apparent that it can be both a brake on higher prices through increased production and an inhibitor of falling prices as production declines. If so, this could mean that in future crude trades in a relatively narrow range thanks to US swing production which can be switched on or off relatively quickly. It could be that we see WTI oscillating between $50 and $70 with occasional breaks to $40 or $80 as markets adjust.

Gold

Gold was weaker in early trade this morning, struggling to build on last week’s gains. The US dollar was a touch firmer and this weighed on the gold price, as did the ongoing improvement in investor sentiment. This comes on the back of hopes that the US and China are making substantive progress in their trade talks which began yesterday and have now been extended to tomorrow. Optimists feel this extension is a good sign as it shows the two sides are anxious to reach accomodation and deliver some market-calming news. However, it could also be that there is too much separating the US and China for any positive announcement to be made. In the meantime, investors will focus on tonight’s planned television appearance from US President Donald Trump. Mr Trump will address the issue of the ongoing government shutdown (now in its 18th day) which has resulted from the deadlocked talks between him and the Democrats over budget proposals and the funding of a wall between the US and Mexico. There are reports that the President may declare a national emergency in order to drive through spending for the wall. Gold’s fall today was contained by the news that China has restarted their gold purchases following a two-year break. At the end of last week gold pushed up towards $1,300 to trade at its highest level since last June. In the short term support comes in around $1,275-1,280 and below there sellers will target $1,250 or even $1,240. There’s some solid resistance around $1,295-1,300 but this could be broken if we see another big risk-off move. In addition to Trump’s address this evening and the ongoing US-China trade talks, the minutes of the last Fed meeting are released tomorrow evening. Then Fed Chairman Jerome Powell is due to speak on Thursday and the US Consumer Price Index will be released on Friday.
 
 
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