Wed, Dec 07, 2022 @ 14:17 GMT
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Big Cut from OPEC Could Backfire

Global equities, bonds, commodities and currencies rallied, as the US dollar eased further yesterday. Soft US JOLTS data, and softer-than-expected Reserve Bank of Australia (RBA) hike sent a wave of optimism across the global markets. But the downside risks persist with further US jobs data due today, and OPEC – which may announce a big cut in oil production.

First, the rally

The S&P500 rallied more than 3% and recorded its best two-day rally since the beginning of 2020 and jumped above a minor Fibonacci retracement of 23.6% on the latest selloff. Nasdaq gained 3.34% to finish a touch below the minor 23.6% Fibonacci level, as well.

A part of the rally was due to a short squeeze, as the most-shorted stocks were among the best performers of yesterday’s trading session. They rallied more than 5%.

Apple gained more than 2.50%, as Tesla recovered nearly 3% even though Elon Musk threw the towel in and announced that he would finally buy Twitter for the price he originally proposed, meaning for $54.20 a share.

It’s needless to say that Twitter was one of the best performers of yesterday trading. The stock jumped to $52 a share, just $2 below the bid price, as the Twitter saga is finally over! It is said that Elon Musk’s lawyers understood that the judges won’t rule in favour of them, so they just wanted to cut short, and avoid the heavy trial costs. That’s 1 for Twitter, 0 for Elon!

Winds of optimism

The US dollar index slid to 110 mark, the EURUSD advanced to parity, where it met the 50-DMA which has been acting as a solid resistance since more than a year now, and Cable advanced to 1.1490. The USDCAD fell to the 1.35 on the back of softer US dollar and firmer oil.

In commodities, gold tested the 50-DMA to the upside ($1730 per ounce,) while Bitcoin consolidated above the $20K mark.

The winds of optimism were triggered by a set of favourable factors.

First, the softer than expected RBA rate hike has been taken as a sign that the central banks may be slowing the pace of their rate hikes, to avoid sending the world economy into a deep recession without even being able to tame inflation as fast as they wish. (But Reserve Bank of New Zealand didn’t sing the same song, it hiked by 50bp as expected).

Second, the US JOLTS data smelled like a first victory for the Federal Reserve (Fed). US job openings plunged by 1 million in August, the largest drop since April 2020, the peak of pandemic lockdowns.

However, unfortunately for the Fed, not many people quit their jobs, or were laid off.

Hopefully for the Fed’, Amazon also announced to freeze corporate hiring, after Facebook’s Meta, Apple, Tesla, Ford, Google, and many other names in the last few months.

So, it is possible that the US jobs market cools down in the next few months. It’s yet to be seen how fast the job losses could help tame inflation in the US. We hope, fast enough!

Today, the ADP report is expected to print 200’000 new private job additions in the US. A soft figure is what every investor is secretly praying for. If the soft jobs data is what could stop the Fed from battering the world, well, then, soft data is what people want.

Further rally?

Soft US jobs data is good, strong US jobs data is bad.

Any strong figure could easily hammer the early optimism and send the stocks back to where they were … to the year lows.

Also, we shouldn’t forget that the big gains, like the ones we saw yesterday, aren’t stable, simply because they are ‘too big to be stable’.

In fact, a 3% jump in the S&P500 is almost as disquieting as a 3% fall, because it is sign of high volatility. And high volatility is a characteristic of bear market. The good news is, the VIX index eased below 30 yesterday. The bad news is, it’s still very close to the 30 level.

OPEC & Russia vs. the West

According to the latest reports, OPEC could announce cutting oil output by 2 million barrels today.

Oil gained more than 3.50% toward the $87, and consolidates near $86 per barrel this morning.

A big decline in OPEC supplies may not necessarily trigger a price rally, as no one is happy to see energy prices spike again.

Higher energy prices are bad for the central bank expectations as they fuel the inflation expectations.

The higher the energy prices, the sharper the central banks must kill demand to pull the prices lower.

Therefore, a big cut in OPEC production could well backfire, and trigger profit taking and fall in oil prices today.

Swissquote Bank SA
Swissquote Bank SA
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