INSIGHTS

Duncan Donald

Mon, Sep 16


Oil surges after drone attack on in Saudi Arabia

Following what looks like a premeditated tactical drone strike at one of Saudi Arabia’s key Oil refineries over the weekend Oil prices have soared just below 15% at the market open.  This unprecedented move comes as the incident has such magnitude that it could cause Saudi Arabi to cut oil output by 50%.  As one of the world’s largest distributors of oil, the knock-on effects to world oil prices will be significant as the immediate price action is showing.  The stem in the pipeline could quickly have nations running and using up spare capacity and new delivery channels are sought.  

Naturally, West Texas Oil (WTI) saw the largest gain as the Saudi stock market, so oil-dependent tumbled at the open. There have also been significant moves in Gold, Japanese Yen and Swiss as the market races into safe haven mode in fear of an escalation of global conflicts. As we await a response from the Saudi Kingdom, US President Donald Trump wasted no time in pointing the finger of accusation towards Iran, he declared the US are “Locked and Loaded” to support the Saudis when they have ascertained the cause and decided upon action.

 

In the UK Parliament is now prorogued, but MP’s are far from inactive. With Brexit clock ticking UK Prime Minister Boris Johnson will meet with the European Union’s Jean-Claude Junker tomorrow.  Over the weekend Johnson gave an interview with the Mail on Sunday where he stated he still believe a deal can be reached with the EU. He stated that he believed that progress could be made in this week’s discussion and he believes he can finalise a deal in the deadline talks on 17-19th October.  Comments from Junker from the weekend showed far less optimism as he questioned whether Johnson will be presenting any tangible solution for the contentious Irish border issue.

 

More worryingly for UK politics was Johnson's obvious defiance of new legislation formed to force the PM into requesting an extension of Article 50 at the EU summit on the 17-19th if no agreement had been found. This legislation was put in place to block the PM’s ability to force through a hard Brexit, however, he has clearly stated he will not request an extension and defy parliament to negotiate Brexit on his terms. This will of course anger MP’s across all parties including his own, and be met with fresh legal challenges. Johnson’s do or die mentality he wishes to convey to the EU could well be his undoing domestically.

 

The British Pound remains well supported as it continues to show resilience touching the 1.2500 level against the US Dollar last week as the markets remain open to the concept of no “Hard Brexit” despite the PM’s position and actions.

 

In the Eurozone, last week we saw the European Central Bank (ECB) cut interest rates by 0.1% to -0.5% and more significantly reengage a fresh round of Quantitative easing. With the markets expecting these actions, holding only the slightest of doubts that outgoing ECB head Mario Draghi may await the arrival of Christine Lagarde before unleashing the necessary stimulus, the initial market reaction was lower for the Euro as it fell from 1.1070 to 1.0930 against the US Dollar with Draghi’s promise of unlimited resources, however, very quickly there were reports circulating questioning their ability to buy limitless bonds in certain EU countries which brought a complete reversal of the moves seen. 

Donald Trump was one of the first to react to the ECB’s actions, as he chastised his own Monetary Policy Committee the Federal Reserve for the pace of their rate-cutting. The President has been incredibly critical of the Fed’s actions in the year to date, but on Wednesday night we have the long-awaited rate decision and statement from Head, Jerome Powell.  The question being will they be swayed by the pressure of the President or continue to focus on the strength of the hard data. Following poor ISM Manufacturing data a few weeks ago it was thought there could be a case for more drastic cuts, but the Employment and Retail sectors remain strong and trade negotiation risk seem to be lessening. The expectation is that we see a cut from 2.25% to 2% with the forward guidance delivered for future rate movement for the US. 

 

The Week Ahead

 

Monday:

  •         Industrial Output – China 
  •         CPI – Italy 
  •         NY Fed Manufacturing – USA 

 

Tuesday:

  •         ZEW Economic Sentiment – Germany 
  •         Manufacturing Sales – Canada 
  •         Home Price Index – Australia 
  •         China Price Index – China 
  •         Industrial Production – USA 

 

Wednesday: 

  •         CPI – UK 
  •         Build Permits – USA 
  •         Trade Balance – Japan 
  •         Industrial Orders/Sales – Italy 
  •         PPI Output – UK 
  •         HICP – Eurozone 
  •         CPI – Canada 
  •         House Starts - USA 
  •         US Interest Rate Decision 

 

Thursday: 

  •         Employment – Australia 
  •         Retail Sales – UK 
  •         BOE Bank Rate – UK 
  •         Initial Jobless Claims – USA 
  •         Existing Homes Sales – USA 

 

Friday: 

  •         Retail Sales ex-Autos – Canada 
  •         Core CPI – Japan 
  •         Producers Price – Germany 
  •         Consumer Confidence Index Flash - Eurozone 

 


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