The Hottest Day of the Markets

Daily Analysis - 14/02/2018

Valentine’s Day Markets

Valentine’s Day could make or break gains in the Markets. Stocks post 3-day winning streak as comeback continues while US inflation Data are the main focus of today’s economic docket. Oil is steady while the Japanese Yen strengthens to 15-month high against the greenback.

US Inflation Data

Wednesday’s highly anticipated inflation data could either upset the equity market's fragile recovery or clear the way for additional gains. Investors now await U.S. January Consumer Price Index and Retail Sales due at 13:30 GMT, which will be the most closely watched in recent memory, with investors seeking to understand the recent drops in stocks and bonds.

Last week, Wall Street shares slumped from record highs scaled late in January after Treasury yields rose to four-year highs, largely because of inflation worries.

Nervous financial markets could shake on any sign that inflation is exceeding expectations at a rate that may spur the Federal Reserve to quicken its plans for tightening. The threat of higher interest rates after strong job and wage figures on February 2^nd sent Treasury yields spiking and started a rout in equities that pushed them into the first correction in two years, accounted for 10% drop.

Core CPI, which excludes food and energy, rose 1.7 percent in January from a year earlier, compared with 1.8 percent in December, according to the median projection of economists ahead of the Labor Department data.

The Japanese Yen Strengthens

On Wednesday, the US Dollar dropped down to a 15-month low against the Japanese Yen as investors remain on edge ahead of key U.S. inflation numbers later in the day, underscoring fragile risk sentiment following last week’s sell-off in equity markets.

Japan on Tuesday reported an 8^th straight quarter of growth, its longest continuous expansion since the 1980s bubble economy, and the Yen experienced 0.8% gains against the US Dollar this morning. It reached a bottom at 106.825, US Dollar’s weakest level since November 2016. A drop in Japanese shares increased demand for the yen which is often the case in times of market turmoil.

The dollar had enjoyed a brief relief against its Japanese peer overnight as U.S. shares managed to gain for the third successive session on Tuesday following last week's sharp downturn. But it began to wobble again as Japan's Nikkei surrendered early gains and fell to four-month lows on Wednesday.

Near-term focus was on how far the dollar would slide against the yen after falling below 107.300, which was seen as a strong technical support, with the market paying little heed to jawboning by Japanese officials.

Japan's Chief Cabinet Secretary Yoshihide Suga warned on Wednesday concerned that recent yen gains could undermine a strengthening economic recovery.

The dollar index against a group of six major currencies was down 0.3 percent at 89.446 after dropping nearly 0.6 percent overnight.

Oil Stable on Weak Dollar

The Saudi energy ministry said on Wednesday that Saudi Aramco’s crude output in March will be 100,000 barrels per day below its February level while exports would be kept below 7 million bpd. According to traders, the weakness in the U.S. dollar as well as economic growth were also supporting oil markets.

The American Petroleum Institute said on Tuesday that U.S. crude inventories rose by 3.9 million barrels in the week to Feb. 9, to 422.4 million.

That was largely due to rising U.S. crude production, which has jumped by over 20% since mid-2016 to more than 10 million bpd. It surpassed the production of top exporter Saudi Arabia and coming within reach of Russia, the world’s biggest producer.

The surge in U.S. supplies means oil may be in oversupply again soon, reversing the 2017 deficit induced by supply restraint led by the Organization of the Petroleum Exporting Countries (OPEC) and Russia.

Meanwhile, the International Energy Agency expressed expectations regarding the demand for oil to grow by 1.4 million bpd in 2018, but adding that output growth could outpace demand.

Citi said it expected 2018 oil markets to be balanced or in slight oversupply, forecasting a “market surplus of 0 to 0.2 million bpd.”

Despite the warning lights from within oil markets, economic fundamentals remain healthy.