Can OPEC Live Up to its Promise?

Daily Analysis - 29/09/2016

OPEC Announces Surprise Output Deal


OPEC announced a surprise deal to cap output, causing crude prices rally the most in months. At an informal gathering of the oil cartel in Algeria, the 14-member bloc agreed to slash production for the first time since 2008. The agreement proposed a new output ceiling of 32.5 million barrels a day, a 700,000 barrel cut from the August levels of 33.24 million barrels.

Marathon Talks Result in Agreement

After agreeing to cut production by a significant amount following round-the-clock talks, the initial optimism proved immense, with oil prices rallying on the announcement. Oil prices continued to climb in early Asian trade, but as traders digested the news, those gains were pared. Market participants became increasingly cautious about the details of the deal and the extent to which it would be imposed, given the history of OPEC flouting its own production quotas. With no enforcement mechanism in place, it will be hard to prevent cheating. Furthermore, the deal has not been ratified yet and will not be approved until the November OPEC meeting, meaning that oversupply will persist over the near-term. Considering Iraq is already questioning how OPEC is calculating output and gaps between members remain, the deal still has ample room to fall apart.


US Markets Lock Gains

Equity indices rallied on Wednesday, with the Dow Jones Industrial Average surging 0.60%, driven primarily by gains in integrated oil and gas giant ExxonMobil. The S&P 500 gained 0.50% followed by the Nasdaq Composite which ended the session 0.20% higher. The rally was primarily driven by optimism surrounding the OPEC deal and dovish comments from key members of the US Federal Reserve. Minneapolis Fed President Neel Kashkari contended the central bank could continue keeping interest rates low as inflationary pressures were still not visible. Meanwhile, Chicago Fed President Charles Evans, speaking at another event, said hiking rates out of concern for financial stability could leave the Fed less equipped to hit its target inflation. The final revision of the second quarter GDP figure is due later in the session, with any upgrade potentially paving the way for more hawkishness at upcoming FOMC meetings.


No Fixed Time Table for Interest Rate Hike

The US Federal Reserve is not following a "fixed timetable" to alter its current accommodative monetary policy according to Chairwoman Janet Yellen during remarks before Congress yesterday. Yellen's testimony comes close on the heels of the Fed’s decision to hold the Federal Funds rate steady at 0.25% to 0.50%. Yellen forecast that eventually, if job creation continued at the pace it is growing, the economy would overheat, which is when she expects the Central Bank to intervene. Recent comments from Donald Trump of a politicized Central Bank saw lawmakers grill Yellen on potential conflicts of interest. Yellen briefly clarified during her remarks on Wednesday that she was not aware of any contact between Democratic presidential nominee Hillary Clinton and Fed Governor Lael Brainard. Investors closely watching Yellen's last night’s comments for any fresh clues about timing of the next rate hike were unfortunately disappointed.


Japan Retail Sales Dip for Sixth Straight Month

Retail sales in Japan fell more than expected last month, recording their sixth consecutive month of annual declines amid a drop in demand for clothes and home appliances. Data reported by the Ministry of Trade, and Industry showed that retail sales slid at a -2.10% annualized pace during August, missing expectations of a -1.80% drop. The weak reading highlights the relative frailty in the domestic economy, where tepid wage growth and low consumer confidence is taking its toll on household spending. Although the Bank of Japan revamped its policy stance last week to shift the focus to controlling rates after the past three years of aggressive money printing failed to stimulate inflation, results remain elusive, raising speculation that further rate cuts may be in the Central Bank’s imminent future.


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