Oil drops lower on Saudi output hopes; USD pares earlier gains

Summary:

• Oil swoons on reports Saudi output back online in 2-3 weeks

• Indices recover from early weakness

• Kraft Heinz falls on 3G sale

• USD strength pared back

• UK PM awaits verdict on prorogation

There's been some sharp selling seen in the energy complex this afternoon with both Oil and Oil.WTI tumbling in recent trade. Two supporting stories have hit the wires that suggest the damage to Saudi Arabian output from the attacks over the weekend may not be as bad as first feared. According to a top Saudi source who has been briefed on the latest developments  “Saudi oil output will be fully back online in the next 2-3 weeks”. Oil is trading -3.8% and Oil.WTI -2.9% at the time of writing.

There was a little bit of softness around in equities ahead of the US session with red seen across the US indices and the German Dax falling to its lowest level of the week before the bell rang out on Wall St. However, the drop in Oil has been met with a move higher in stocks and the major benchmarks trade little changed on the European close. 

US stocks remain not too far from their record highs but have failed to close the gap lower from last week’s close at 3007. Price is once more approaching the 8 EMA.

There’s been some bad news for investors in Kraft Heinz this afternoon after reports that its second largest shareholder has sold a significant portion of its stake. Private equity firm 3G Capital Partners, a Brazilian firm founded by Jorge Paulo Lemann has disclosed that it sold 25.1 million shares at a price of $28.44. 3G are second only to Warren Buffet’s Berkshire Hathaway in terms of shareholdings and the legendary investor will not be too pleased and shares have fallen a little over 3% at the time of writing. 

USDZAR is one of the biggest movers this Tuesday earlier supported both by surging oil prices and USD demand before paring the gains as Oil fell back. A spike in short term US dollar market interest rates does not serve emerging markets while South Africa relies on oil imports – that’s the reason USDZAR is moving up by over 1%. Moreover, USD has been supported by strong report on industrial output (+0.6% m/m). The pair has rebounded from support of 14.55 and faces resistance around 15.10.

Boris Johnson has said that before deciding whether to recall parliament he will “see what the judges say” as the Supreme Court will hear appeals to determine whether the decision to suspend parliament for five weeks was against the law. So far London’s High Court has said it was not a matter for courts but north of the border Edinburgh’s Court of Session has stated its belief that the PM acted unlawfully. The legal situation here is getting complicated with a scant degree of precedent to go off and with the PM remaining coy there is a suggestion that he may not even abide by the ruling should it come out against him. 

After hitting its highest level against the US dollar since July yesterday, the pound pulled back a little during Monday’s trade but this was more due to a strengthening in the buck than any real pull back in sterling. The pound has been on a strong run in the past month, outperforming all its G10 peers with the currency buoyed by the belief that the prospects of a no-deal Brexit was once more receding into the realms of being highly unlikely. While the risk premium in the pound for a “hard Brexit” has significantly decreased in recent weeks, it can’t be completely eliminated until more is known on how far Boris Johnson is willing to push the legal limits, and as such, the upside in sterling may be capped for the time being.