The Market Today
Oil Jumps Most Since 1991 After Attack on Saudi Facilities
by Craig Dismuke, Dudley Carter
Quiet Calendar to Start FOMC Week – Empire Fed Index Drops but Still Positive: The New York Fed’s Empire Manufacturing Index pulled back slightly, from +4.8 to +2.0, on mixed underlying data. The new orders index dropped but remained positive. However, the number-of-employees index jumped 11.3 points to +9.7, its largest monthly increase since 2014.
OVERNIGHT TRADING ACTIVITY
Drone Strike In Saudi Arabia Sends Oil Prices Surging: Volatile oil markets are driving Monday’s market headlines after a drone strike over the weekend shutdown at least half of Saudi Arabia’s production, cutting off more than 5 million barrels a day from global supply. Despite reports from Saudi Arabia that it hoped to restore a third of the affected output by Monday, the attack sent futures sharply higher at the open of Asian trading. Brent crude surged as much as 19.5% at the open, its largest intraday gain since 1991, while U.S. WTI added as much a 15.5% jump.
Prices Pullback But Remain Notably Higher: In response to fears about an oil shortage, President Trump tweeted that he had authorized “the release of oil from the Strategic Petroleum Reserve, if needed, in a to-be-determined amount sufficient to keep the markets well-supplied.” The initial price gains have cooled somewhat, but both Brent and WTI remained up nearly 10% around 6:45 a.m. CT. Saudi’s Aramaco said Monday its efforts to get its operations back up and running may take longer than initially thought. OPEC and Russia have reportedly indicated they will wait before deciding whether to increase production to offset the loss of Saudi production.
Oil-Price Surge Sparks Bid For Safety: The move in crude initially had little impact across other asset classes, but has subsequently helped push Treasury yields and equity futures lower. While a negative oil supply shock could have inflationary effects if prolonged, fears about negative effects in an already-tenuous global growth environment and possible geopolitical conflict are winning out for now. President Trump also tweeted Sunday “There is reason to believe that we know the culprit” behind the attack in Saudi Arabia and “are locked and loaded depending on verification.” The 10-year Treasury yield dipped 6.0 bps just before 7 a.m. CT while the 2-year yield dropped 4.7 bps. S&P 500 futures were down 0.4%.
Hidden Behind The Oil Headlines: Hidden behind the oil headlines, China’s industrial production slowed again in August, unexpectedly and to a new 17-year low. Fixed investment and retail sales were also weaker than expected. In Europe, the U.K. parliament has been suspended but PM Johnson is meeting with the president of the European Commission in Luxembourg in an attempt to find somewhat of breaking the Brexit stalemate.
ICYMI – September 13, 2019 Weekly Market Recap: Building on upward momentum from the week before, Treasury yields rocketed higher last week in an unusually violent move to the upside, despite what appeared at first glance to be aggressive easing from the ECB. Yields came into the week on the heels of a newly-set trade meeting between the U.S. and China and stronger-than-expected U.S. data (ISM non-manufacturing index, average hourly earnings). That momentum carried yields higher through Tuesday. Before the ECB’s Thursday decision, China announced tariff exemptions for 16 U.S. product groups (~$1.7B) and President Trump delayed the October 1 tariff increase by two weeks as a “gesture of goodwill.”
Markets Reconsidered Initial Take On ECB’s Decision: The ECB’s announcement, aggressively dovish at first glance, disrupted the recent uptrend for yields, but only momentarily. Europe’s central bank cut its deposit rate by 0.10% to -0.50%, but introduced a tiered pricing system that shields a significant portion of reserves from the punitive negative rates. The forward guidance is no longer calendar-dependent, with future policy decisions now solely determined by underlying inflation. The TLTLRO III stimulus program was sweetened and the QE program was restarted at 20B euros per month on an open-ended basis. However, there is some concern a question, however, if the program will run into issuer limits that will handcuff the ECB’s ability to see it through.
Trade Developments, Data Added Pressure: Surrounding the ECB’s decision, core CPI hit its hottest YoY rate since 2008 and Bloomberg reported the White House was considering an “interim trade deal.” On Friday, China said it was removing recent tariffs increase on key U.S. agricultural products, and solid retail sales and consumer confidence readings showed the U.S. consumer remains stable. The S&P 500 closed up modestly on the week and just shy of its all-time high, but the real action was in the rates market. The 10-year yield rose 12.4 bps on Friday alone and added 34 bps for the week, the largest daily and weekly increases since the election. Over the last 8 sessions, the 10-year yield has added 44 bps. For the week, the 2-year yield added 26 bps, the most in a week since June 2009. Click here to view the full recap.