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Afternoon analysis 23.09.2016

, автор:

Bartosz Grejner

Oil prices are growing after a declaration from Saudi Arabia regarding the reduction of its mining if Iran freezes its production this year. Decisions from the central banks didn’t have a large impact on the markets.

Saudi Arabia declares a will to decrease oil mining

According to Reuters’ sources, Saudi Arabia offered a reduction in its oil mining to the levels from the beginning of the year, in exchange for freezing oil mining by Iran to the level of 3.6 million barrels per day. If the agreement with Iran is achieved, other OPEC countries would probably freeze their production level as well (including the United Arab Emirates, Qatar or Kuwait).

This would be a change in Saudi Arabia’s strategy. The country has been defending its contribution in the market since 2014 (especially from the American producers with higher mining costs), instead of its prices. In April, it was Iran that blocked the agreement. The country wanted to increase its production to approximately 4 million barrels per day.

The OPEC members and Russia will meet at the International Energy Agency forum between September 26th and 28th. The forum will probably bring the official decision regarding the above mentioned agreement. However, the market has relatively moderate expectations regarding the potential agreement, taking into consideration Iran’s intentions regarding an increase in mining, as well as a failed attempt of an agreement in April. Due to today’s information, oil increased approximately one dollar.

Central banks didn’t shock the markets

Highly anticipated meetings of the Federal Reserve (Fed), as well as the Bank of Japan (BoJ) took place this week. Even though both meetings caused an increased volatility in the behavior of currencies, indexes and bonds, these changes didn’t appear to be durable.

The majority of investors expected the Fed to leave interest rates unchanged. The decision caused a slight overvalue of the dollar, partially because of a relatively dovish message, as well as a reduction in the estimated amount of rate hikes (from three to two in 2017). However, there was an announcement regarding one hike this year (in December). Basically, the only hawkish element of this meeting was the fact that three FOMC members voted in favor of rate hikes. This is the largest difference within the Fed since December 2014.

On the other hand, the Japanese central bank implied many changes in its monetary policy. Most of all, it resigned from a specific level of increasing its monetary base (previously, it was growing at the pace of 80 trillion yens per year) in favor of two new assumptions. Primarily, making the yield curve of treasury bonds more steep is one assumption(as a result, profitability of 10-year bonds would near zero). Secondly, raising inflation above the 2% level is the other.

Even though the changes from the BoJ were significantly larger than in the case of the Federal Reserve, they didn’t have a significant impact on the markets. Taking into consideration the specific nature of these changes, we will have to wait longer for any results. Even though the Fed’s decision was expected, it was not favorable for the BoJ. This institution would rather that the yen be weaker in order to support the Japanese export (as well as the economy). The Japanese currency strengthened slightly against the dollar and neared the level of 100 yens per dollar. However, it didn’t go over this level, which was happening many times this year.

Pound is the weakest against zloty in over one month

After the information regarding possible changes in the Polish government this morning, the Polish currency lost against the main currencies. However, the zloty managed to work-off these losses in the second part of the day. It even strengthened against the pound to the highest level since August 19th. Recently, the zloty has been showing a relative strength against the majority of currencies. This trend was supported by the Fed’s decision. If it continues and the pound keeps depreciating, the GBP/PLN may test the 4.90 level.

Markets on Monday

We wrote about the dovish attitude of the Reserve Bank of New Zealand (RBNZ) and its decision regarding the lack of changes in interest rates in our Afternoon analysis yesterday. On Sunday night, we will know New Zealand’s trade-balance for August, as well as its particular components (including export and import).

The RBNZ has yet again claimed in its announcement that the current exchange rate of its local currency harms export and sectors, which compete with import. Therefore, there is a need to decrease it.

The market consensus estimates that export will be at the level of 3.57 billion New Zealand dollars. This would be the worst reading regarding export since August 2014. On the other hand, the trading balance has remained at a negative level since October 2014.

The New Zealand dollar (kiwi) was one of the weakest currencies today. This was most likely a result of the central bank’s announcement regarding monetary easing, which would decrease the kiwi’s exchange rate.

We will know important data for September from the Ifo institute one hour after the start of the European stock market session. This will regard the German economy, specifically the index of business sentiment, evaluation of its condition and the future business expectations.

The market is expecting each of these indexes to improve in the month on month relation. Therefore, weaker data may wear-off the euro. Investors will focus primarily on business expectations. Last month, this index was at the 100.1 level (the 100 level is the level of expectations from August 1st, 2005). This was its worst result since March. We are also near the level of 99. If it’s exceeded, this would mean that the index’s worst result in three-and-a-half years has been reached.

We will know the data regarding the sale of new houses in the USA for August on Monday at 16.00 (4.00 PM). The data was significantly higher than expected in July (654k vs 580k). This was its highest level in almost nine years. However, it’s still more than 700k (per month) away from its peaks from 2005.

Historically, there are large fluctuations in the sales of houses in the month on month relation. However, if the data is near the previous reading (or higher), it could improve the picture of the current state of the real estate market that the recent weak data has left.

 

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