Oil respects key support after inventory build; USD at 2018 peak after ADP beat

Summary:

• Oil holds key support after smaller inventory build

• USD pushes to 2018 highs after ADP beat

• Stocks attempt to recover recent declines

• Euro continues lower after inflation data

• Big Thursday for GBP?

The weekly crude oil inventories has shown another build, but with the increase being smaller than both the prior week’s and the latest API it has actually caused a positive initial reaction in the market, with Oil up around 60 ticks in the hour since the release. A read in the headline number of 3.2M was pretty much bang inline with forecasts, and while it marks a 6th consecutive weekly build it is significantly lower than the 6.3M seen previously. Last night’s API rose by 5.7M barrels and also against this, today’s number doesn’t look quite so negative for the price of oil. Oil has had a bad month with heavy declines and fallen over $10 after hitting a 4-year high at the beginning of October at 86.73. The market does appear to be in a longer term uptrend still, with price remaining above the 200 day SMA and if near term support around 75.20 holds then double bottom will have formed.

The simultaneous release of North American data this afternoon has seen two positive readings both north and south of the border with the latest read on US employment and Canadian growth both beating expectations. The ADP employment change for October came in at 227k compared to a consensus forecast of 189k. The figure is the highest since the data for March and also the 3rd time in the past 4 releases this has beaten forecasts. The prior was revised lower to 218k from 230k previously but even with the slight blot it still stands comfortably above the 200k mark.

Headline inflation in the Eurozone accelerated to 2.2% in October in annual terms, up from 2.1% seen in September. According to Eurostat estimates core inflation rose to 1.1% from 0.9% suggesting that domestic-driven inflationary pressures are slightly building up. This seems to coincide with the latest wage data offered by the Eurostat as well - we touched on this topic last week in our recommendation regarding the EURUSD. The details presented today showed that energy prices rose probably 10.6% whereas services increased 1.5% in annual terms, the quickest pace of growth since May. We also got the data regarding the unemployment rate in the Eurozone which held at 8.1% in September.

Even after today’s gains global equity markets are left licking their wounds after a brutal month, with the MSCI world equity index still down over 8% for October and on track for its worst month since 2012. Ongoing US-Chinese trade tensions, slowing global growth and rising US interest rates all have contributed to the sell-off and the question going forward now is whether the worst of it is over or if there’s another wave of selling into year-end. The recent stabilisation is a pleasing development at least and with positive seasonality often seen in US stocks following the Midterms this latest rise could yet be more than a dead cat bounce and may well lead to a sustained recovery.    

The pound has been under a huge pressure during recent months for the one single reason – increased odds of leaving the EU without any deal and causing economic chaos. Let us recall – a 2 year period from triggering the Article 50 ends in March 2019 and the UK must leave the EU with or without agreement. For the business it’s imperative that it remains in some kind of a customs union to avoid a major break of economic ties. However, negotiations are stuck as the minority coalition partner, the DUP, rejects any hard border with Ireland whereas pro-Brexiters do not want to accept staying within the customs union for an unspecified amount of time. This uncertainty will not be resolved on Thursday, but the two events may help set direction for the pound.