Risk off reins

First, the US east and gulf ports went on a strike on Tuesday, as expected. It will cause supply disruptions and increase the price pressures before November presidential elections. And we know from the beginning that there won’t be a quick end to the negotiations because the Biden administration is not willing to intervene in the dispute.

Then, the geopolitical tensions in the Middle East intensified after Iran has reportedly fired about 200 missiles on Israel as response to Israeli attacks on Hezbollah in Lebanon. Israel said it will retaliate. The involvement of Iran could in fact lead to a wider and a more serious conflict across the region, and threaten oil supply. This is why, the barrel of US crude gained more than 3.50% yesterday but fell short of clearing offers above the $72pb level, the major 38.2% Fibonacci retracement on July – September retreat that should distinguish between the actual bearish trend and a medium-term bullish reversal.

Looking back, it’s been almost a year since the war in Gaza began. The first months of the war pushed oil prices higher, yet the conflict had little sustainable impact beyond April, when traders started giving more weight to the slowing Chinese and world economy than the supply disruptions – considering that the world was fed enough oil from the Middle East and elsewhere to worry about the Middle East disruptions. But if Iran – which produces around 3 mio barrels per day – gets seriously involved in the conflict, we could see the price of a barrel remain under positive pressure for a prolonged period.

This being said, the geopolitical tensions have a limited impact in the medium to long run price trends, and the gains on the back of tensions should be given back with de-escalation and/or as the market gets used to the headlines and divert focus to something else.

It’s in this tense and uncertain geopolitical and macroeconomic setup that OPEC leaders will announce their latest decision this week. They are not expected to make any changes to their previous stance. The cartel will probably start loosening its production restrictions in December and the latest reports suggest that Saudi Arabia will seek a wider market share rather than higher prices moving forward. As such, in the short-run, the level to watch is $72.85pb for WTI and $78pb for Brent crude. Rallies above these levels will be tactical opportunities to benefit from the geopolitical tensions. But limited escalation or de-escalation should keep the prices below the cited levels due to the prospects of higher supply from the beginning of next year. The only thing that could sustainably reverse the trend is.. China. And the improvement there is yet to be seen.

Risk off

Mounting tensions of the Middle East sent a wave of worry across the global markets yesterday. Besides oil, safe haven assets including US treasuries, gold and the US dollar gained as well.  Gold remains bid near its ATH levels, while the US 10-year yield tested the 3.70% to the downside. The dollar index jumped and the S&P500 retreated nearly 1% on the back of the risk-off investors. The VIX index spiked past 20. Technology and cryptocurrencies were the most hardly hit. There is no direct reason for that, besides the sharp decline in risk appetite, but Nasdaq 100 dropped nearly 1.50% yesterday, while Bitcoin tested the $60K support.

And economic data couldn’t cheer up the risk takers.

The data released yesterday in the US was mixed. The jolts data showed a surprise jump in job openings in August, but the ISM data suggested that the contraction in the manufacturing didn’t improve, prices shrank into the contraction territory and employment deteriorated faster than expected.

Due today, the ADP report is expected to print 124K new private job additions last month, slightly higher than the 99K printed a month earlier, but still lower than the past 12-month average. Activity on Fed funds futures currently assesses about 36% chance for a 50bp cut in FOMC’s November meeting – because Powell told investors earlier in the week that he sees two 25bp cuts for the remainder of the year rather than another jumbo cut. But any weakness in the US jobs report this week could flip that probability back in favour of a jumbo cut.

In Europe, the September update to the euro area’s CPI data suggested that inflation in Europe sank to 1.8% last month: that’s below the European Central Bank’s (ECB) 2% policy target and a strongly flashing green light for the ECB to deliver another 25bp cut in its October meeting. The EURUSD fell to 1.1045 yesterday and remains under pressure this morning. The pair has now cleared the minor 23.6% support on April to September rally, trend and momentum indicators remain comfortably negative and the RSI doesn’t warn of oversold conditions just yet. Therefore, if we don’t see a big surprise in the US jobs data, the EURUSD should continue to extend losses toward the 1.10, and to 1.0980, the major 38.2% Fibonacci retracement that should distinguish between the actual positive trend and a medium-term bearish reversal.