DCSIMG

High expectations will not be met – risk appetite and oil prices can come under pressure

Oil prices rose by more than USD 2/barrel Friday as Fed Chairman Ben Bernanke hinted at more action in his speech at the annual Jackson Hole Symposium Friday. Bernanke indicated that the Fed is ready to ease policy again, however, he did not provide any new information on the form or timing of any easing.

We expect the bar for a third round of quantitative easing (QE3) is high, and the Fed will instead extend its forward guidance of low rates from late 2014 to mid-2015 at the 12-13 September FOMC meeting. Friday’s employment report will give us a good indication of what may be expected at the next FOMC meeting, but if we are right the outcome of the FOMC meeting may have a bearish effect on oil prices as many players are expecting QE3 to be introduced. Bernanke’s message that the Fed keeps the door for further action managed to support the optimistic mood in the market and thereby oil prices.

Chinese manufacturing continued to show signs of weakness in August as the purchasing managers’ index (an indicator of industrial activity) fell to 49.2 in August from 50.1 the month before. (Values below 50 indicate contraction in the manufacturing sector).The sub-index for new orders dropped to 48.7 from 49 for the same period and the reading for export orders disappointed the most, remaining at 46.6 for the second month in a row.

Increasing oil demand from emerging economies, especially China, has been the growth engine for oil demand after the financial crisis and thus the slowdown in the manufacturing industry weakens the outlook for Chinese oil demand unless additional stimulus measure will be launched from Beijing. In our view, the weak manufacturing reading strengthened their expectations that additional stimulus measures will be launched shortly, which include at least one rate cut and approval of more infrastructure investments.

The oil market is eagerly awaiting the conclusions from the report by the International Atomic Energy Agency (IAEA) after talks between senior IAEA officials and Iranian delegates in Vienna 24 August. The talks tried to clarify the Agency’s concerns regarding Iran’s nuclear programme, focusing on its possible military dimension. According to the IAEA: “The discussions today were intensive, but important differences remain between Iran and the Agency that prevented agreement …” The lack of progress in the talks between the IAEA, the West and Iran has pushed up the political risk premium and thereby oil prices since the last meeting in Q2.

In addition to Friday’s employment report from the US, all eyes will be on the ECB meeting Thursday. Expectations are high and the ECB will probably only deliver partly in the sense that details will remain scarce. We expect the market will be slightly disappointed and risk appetite may see some pressure. This could ease the strong upward pressure on oil prices this week if no news reach the headlines on the political oil arena.

Today is Labor Holiday in the US and markets will be closed.

Keywords

,

Latest research

US: Core consumer prices rise less than expected

The overall trend of inflation remained subdued in June

Euro Rates Update

The latest Euro Rates Update is now available

Morning Briefing - Tuesday July 22

Japanese government cuts GDP forecast Pro-Russian separatists hand over black boxes to Malaysia

FI Eye-Opener: Searching for inflation

Core bond yields edge further down – geopolitical tensions continue to support bonds. Equity markets feeling pressure. More sanctions on Russia in the pipeline. US inflation pressures finally picking up? Belgium to sell longer bonds.

Morning Briefing - Monday July 21

Growing pressure for further sanctions against Russia Israel steps up ground offensive in Gaza

While you were busy...

If you are just back from holiday, here are a few bullets on what happened while you were busy…

Euro Rates Update

The latest Euro Rates Update is now available

FI Eye-Opener: Markets too upbeat on Europe?

Bond yields end a bit higher, but near-term upside still limited. US equities with a clear rebound – resistance in sight. Money market rates rise on higher LTRO repayments. More warnings on markets being too optimistic. US inflation numbers and Euro-zone PMIs ahead. Supply action easing – more coupon and redemption payments ahead.

FX: the EUR trap

Is Europe next Japan? Hopefully not. ECB and releveraging implications for EUR.

Week Ahead: 19 - 25 July 2014

US CPI inflation will be out on Tuesday . China and the Euro-zone will present PMI figures. On Friday the German Ifo indexes is released. The BoE will deliver minutes from the July meeting and UK GDP figures will be out on Friday

Swedish Morning Briefing - Friday 18 July

Passenger plane downed over eastern Ukraine Israel launches ground offensive in Gaza

FI Eye-Opener: Increasing tensions to push German yields to new lows

Bonds continue to rally – yields in several semi-core countries hit record lows. Equities suffer a beating. Chinese home prices continue to fall. Geopolitical concerns take centre stage ahead of the weekend. German 10-year yield about to fall to new lows. Mixed US data – Bullard sees early rate hikes. No ABS purchases from the ECB for a long while. US consumer confidence and euro debate ahead.

Bulgaria: Two bank runs and a bankruptcy

Bulgaria experienced a run on two of its biggest banks in late June, leading the central bank to close the fourth-largest bank in early July and start criminal investigations against several people. Moreover, the bank runs may have been the final push for the government to call early elections and have pushed the country into talks with the ECB to take over supervision of its banks and with the EBA to review the central bank’s banking supervision. Banking sector risks are obviously elevated!

Bonds: This bubble will keep growing

It seems everywhere you look nowadays, you see a bubble. That is not true of course, but based on many headlines, you could be fooled. The bond market is no exception, and it has received its fair share of bubble talk. If it is a bubble, it will keep growing in the near future.

Turkey: 50 bp cut this time

A 50 bp rate cut this time. More could come if risk sentiment remains decent and the TRY does not weaken further.

RUB: again under pressure after US and EU sanctions

RUB is again under pressure after US imposed sanctions on Russian companies.

Swedish Morning Briefing - Thursday 17 July

No new foreign policy chief after EU summit US and EU boost sanctions against Russia

FI Eye-Opener: Another round of sanctions

Bonds continue to see strong demand. Portuguese bonds rally hard. Core bonds to continue to perform today. European equities with considerable gains yesterday. Fresh sanctions on Russia taking a toll on already weak economies. EU leaders fail to agree on top posts. Final Euro-zone inflation and US construction data ahead. Spanish and French supply.

Sweden: Riksbank’s minutes soft as expected

Today’s minutes did not add much new information regarding the reasons for the rate decision. As indicated by the rate path, the discussion confirmed that 0.25 is not a floor for the repo rate.

China: Growth momentum picks up

Chinese GDP numbers were slightly better than expected at 7.5% y/y in Q2 (Nordea: 7.4%; consensus: 7.4%; previous: 7.4%). The batch of monthly numbers - investment, industrial output and retail sales - were also released this morning. Most were fairly close to expectations or slightly better. We could see slightly better numbers out of China in the coming months, but seen in a longer perspective, we still believe the Chinese economy is slowing and rebalancing gradually.