Oil Rally Sends Emerging Markets, Commodity Currencies To New Highs

Oil: The power of positive thinking

• The Aussie dollar gained 0.3% and moved up to US$0.7673
• ASX SPI futures are 7 points higher at 5502
• WTI oil gained 3.2% overnight on further OPEC speculation
• The Bloomberg Commodities Index gained 1.4%
• RBA Minutes released at 11:30 am
• Data: ANZ Roy Morgan Weekly Consumer Confidence 9:30 am, New Motor Vehicle Sales 11:30 am
• Earnings: BHP, Domino’s, Mirvac, InvoCare, Challenger, Shopping Centres Australia

Oil prices continued their three-day rally on Monday with WTI oil adding another 3.2% as speculation of some sort of OPEC deal escalated as Russia said it would work with Saudi Arabia to “achieve market stability”.

The levity seen in oil prices spread throughout the rest of the commodity complex, assisted by some US dollar weakness, with nickel bouncing from its lowest levels in a month. This broad-based rally in commodities helped spur risk-on sentiment in equity markets, pushing US markets to new all-time highs with the S&P 500 closing at 2190, edging ever nearer to 2200.

The chances of a deal actually occurring at next month’s OPEC meeting are minimal. The Saudis are happy to commit to some sort of OPEC-wide supply freeze deal so long as Iran is party to it. And Iran refuses to agree to any deal that will inhibit them from lifting their oil output to pre-sanctions levels, which, despite better than expected progress, they are still well away from. This is why no deal could be agreed on in the first half of the year.

Since that time, the more open-minded and long-serving Saudi oil minister Ali Al-Naimi has been replaced as part of Deputy Crown Prince Mohammad bin Salman's shake up of the Saudi cabinet. Since Al-Naimi’s removal, the tone towards working with Saudi Arabia’s main regional rival, Iran, has dramatically hardened, making a deal even less likely.

What we are seeing in the oil market is an effective jawboning by the Saudis, talking up the prospects of an OPEC deal to move the oil price up. And with any luck, the price will have rebounded to such a level that by the time it turns out that no deal will occur, the pullback won’t be that bad.

These commodity moves were hugely beneficial for emerging markets and commodity-related assets. The Aussie dollar gained 0.3%, as did other commodity currencies such as the South African rand, Brazilian real and Mexican peso.

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This also spilled over to emerging markets, with iShares MSCI Emerging Markets (NYSE:EEM), the main US-listed emerging markets ETF, gaining over 1% last night. But the rally in emerging markets and oil prices was most beneficial for Russian equities, as the MICEX broke to a new yearly high and the VanEck Vectors Russia (NYSE:RSX) ETF in the US gained 2.3% - its biggest one day gain in more than a month.

But the other main story at the moment is the resurgence being seen in greater China equities. Confidence seems to be firming that the government is going to keep the rate of credit growth and fiscal stimulus steady into the second half of the year. And while many global markets took the disappointing Chinese data on Friday as a reason to sell off, Chinese equities were encouraged by the prospect of further stimulus.

H-shares (Hang Seng China Enterprise Index) in Hong Kong are now up 8.4% in August, and these moves are starting to spill over into Mainland stocks, with the CSI 300 gaining over 3% yesterday. The main China ETF, Deutsche X-trackers Harvest CSI 300 China A-Shares (NYSE:ASHR), gained 4% in US trading.

The strong overnight moves look to push Asian markets higher today. All Mainland China and Hong Kong markets are set for a strong open, while the ASX and the Nikkei look set to edge slightly higher at the open. Both CBA and BHP’s ADRs performed well in US markets overnight. But the gains in commodities should see support for the ASX coming from the materials and energy sectors today.

Written By: IG