From The Floor: Brent/WTI Spread Narrows To $10/B
Saxo Bank | Mar 09, 2015 07:47AM ET
Tightened belts
From the floor can't help noticing that the Brent/WTI spread is once again back below the $10/barrel mark after stretching out to beyond $13/b in February.
"There is more downside pressure on Brent at the moment with both the supply disruptions in Libya and particularly Iraq easing," says Saxo Bank's head of commodities, Ole Hansen. "That brings the $58/b area into view with WTI support at the $49/b mark."
At 0755 GMT, Brent crude was at $59.59/b and WTI was at $49.61/b.
Brent faces further headwinds this Wednesday with the monthly options expiry. "There is huge interest around the $50/b strike and while I certainly don't see a $10/b selloff, we have support at $58/b and then at $55/b so let's see how the market reacts around those strikes."
Are we looking at a significant narrowing of the spread then? Brent's relative weakness might indicate so but Hansen does not necessarily see a major narrowing. "We continue to see inventory in the US rise but the slowdown in the rig count is not having any impact and that is disappointing for the longs."
Indeed, it is disappointment all around for the WTI longs, which seem to have collectively "thrown in the towel," he says. "Bearish bets on WTI rose to a high as bullish bets were significantly scaled back in the last week."
Stand and deliver
If Brent and WTI continue to flounder, it's a different story altogether in the European equities market, but with all the hype currently enveloping the sector, it is time to live up to that expectation, says Saxo Bank's head of equities Peter Garnry.
"There are a lot of expectations for European equities so we have to see them deliver now," says Garnry, pointing to a two-standard deviation in the STOXX 600 . "If we don't see that in the Q1s, then there will be huge disappointment."
Garnry is convinced, nevertheless, that the fundamentals are right and expects "the value of stocks at the moment to be confirmed, partly because of the lower euro."
Garnry also still favours that S&P 500 Put call for May 2015 as he fears "the stronger dollar will begin to squeeze the earnings of the major global corporations", citing the likes of Pfizer Inc (NYSE:PFE), McDonald's (NYSE:MCD), Mastercard Incorporated (NYSE:MA), and Hewlett-Packard Company (NYSE:HPQ) to name a few.
"We could see some negativity in Q1 results for the S&P 500 companies," he warns.
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Dollar primed
After that rather powerful message from the US economy via Friday's nonfarm payrolls print which witnessed a rise in jobs of 295,000 and a fall in the unemployment rate to 5.5%, the dollar performed well against most of its counterparts but still left significant room for improvement, says Saxo Bank's head of forex, John J Hardy.
"It's now a question of whether the dollar can break through and sail to new highs across the board," this week, he says. USD/JPY is particularly in focus after the pair broke through 120.50, but Hardy sees a potential barrier at the "121.85 level."
USD/JPY was at 120.82 at 0755 GMT.
The impact certainly reverberated through to FX Options as one-month USD/JPY at-the-money vols spiked to 9.5 after the break of 120.50. "If we close below that level, the upside trend might be reversed but most people now have their eye up towards the 122 level, the December highs," says the FX Option Desk's Dan Larsen.
"Volatility is still very cheap if only because we often see very large moves with this pair and it can move very fast," he says.
Elsewhere, EUR/USD one-month vols may also have seen a rise but not as much as anticipated, Larsen says.
Fed rate hike
The continued apparent underpinning of US economic strength in Friday's print has undoubtedly forced the focus once again on the possibility of a US Federal Reserve rate hike being brought forward.
"It's definitely increased the pressure on the Fed to do something," says Hardy, while the Fixed Income Desk's Michael Boye sees a June-September timeframe for a hike,at least if market chatter is to believed.
"The Fed still has the option to wait if it wants to though," adds Boye.
Certainly, it will have noted the impact on 10-year US Treasuries which spiked by 13 basis points to 2.2% and Boye adds that German bunds also got a boost rising to 16.40 for a 38 bps yield after the lows of last week.
With ECB bond buying starting today, it could be an interesting time for bonds, he adds.
Gold slump
And, perhaps not surprisingly, gold too is hitting the buffers, largely on the back of that US strength, says Hansen.
"There are more hawkish expectations surrounding the Fed now and gold took out $1,190/oz to bring $1,168/oz area into view," he says. A break of that could see gold head towards $1,150/oz, he adds.
Finally, he has a bitter warning on sugar."Shorts are at their highest on record so keep an eye on this as there are mean reversion opportunities here and sugar has fallen quite a lot."
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