Eyes on Yellen (and global macro)

As we are getting close to the FOMC statement release, we were reading some articles over the past couple of days to understand the recent spike in volatility. Whether it is coming from a ‘Brexit’ fear scenario, widening spreads between core and peripheral countries in the Eurozone (German 10Y Bund now trading negative at -0.5bps), disappointing news coming from US policymakers this evening or more probably from something that we don’t know, we came across some interesting data.

First of all, we would like to introduce an indicator that is getting more and more popular these days: Goldman’s Current Activity Indicator (CAI). This indicator gives a more accurate reflection of the nation’s GDP and can be used in near real-time due to its intra-month updates. It incorporates 56 indicators, and showed a 1-percent drop in May to 1.2% due to poor figures in the labor market and ISM manufacturing data (see chart below).

Chart 1. Goldman CAI (Source: Bloomberg)

The implied probability of a rate hike tonight is less than 2% according to the CME Group FedWatch, and stands only at 22.5% for the July meeting. If we have a look at the Fed Dot Plot’s function in Bloomberg, we can see that the implied FF rates curve has decreased (purple line) compare to where it was after the last FOMC meeting (red line), meaning that the market is very reluctant to a rate hike in the US.

Chart 2. US Feds Dot Plot vs. Implied FF rates (Source: Bloomberg)

June hike, why not?

Many people have tried to convince me of a ‘no June hike’ scenario, however we try to understand why it isn’t a good moment for Yellen to tighten. Oil (WTI CL1) recovered sharply from its mid-February lows ($26/bbl) and now trades slightly below $48 (decreasing the default rate of the US high-yield companies), the US Dollar has been very quiet over the past 18 months (therefore not hurting the US companies’ earnings), the SP500 index is still trading above 2000, the unemployment rate stands at 4.7% (at Full employment) and the Core CPI index came in at 2.1% YoY in April.

However, it seems that US policymakers may have some other issues in mind: is it Eurozone and its collapsing banking sector, Brexit fear (i.e. no action until the referendum is released), CNY series of devaluation or Japanese sluggish market (i.e. JPY strength)?

The negative yield storm

According to a Fitch analysis, the amount of global sovereign debt trading with negative yields surpassed 10tr USD in May, with now the German 10Y Bund trading at -0.5%bps. According to DB research (see chart below), the German 10Y yield is the ‘simple indicator of a broken financial system’ and joins the pessimism in the banks’ strategy department. It seems that there has never been so much pessimism concerning the market’s outlook (12 months) coming from the sell-side research; do the sell-side firms now agree with the smart money managers (Carl Icahn, Stan Druckenmiller, Geroge Soros..)?

Chart 3. German 10Y Bund yield (Source: DB)

10Y bund DB.jpg

ECB Bazooka

In addition, thanks to the ECB’s QE (and CSPP program), there are 16% of Europe’s IG Corporate Bonds’ yield trading in negative territory, which represents roughly 440bn Euros out of the outstanding 2.8tr Euros according to Tradeweb data. If this situation remains, sovereign bonds will trade even more negative in the coming months, bringing more investors in the US where the 10Y stands at 1.61% and the 30Y at 2.40%. If we look at the yield curve, we can see that the curve flattened over the past year can investors could expect potentially LT US rates to decrease to lower levels if the extreme MP divergence continues, which can increase the value of Gold to 1,300 USD per ounce.

Chart 4. US Yield Curve (Flattened over the past year)

USIYC.png

(Source: Bloomberg)

Poor European equities (and Banks)

However, it seems that the situation is still very poor for European equities, Eurostoxx 50 is down almost 10% since the beginning of June, led by the big banks trading at record lows (Deutsche Bank at €13.3 a share, Credit Suisse at €11.70 a share). The situation is clearly concerning when it comes to banks in Europe, and until we haven’t restructured and/or deleveraged these banks, systemic risk will endure, leaving equities flat (despite 80bn Euros of money printing each month). Maybe Yellen is concerned about the European banks?

Brexit?

Another issue that could explain a status quo tonight could be the rising fear of a Brexit scenario. According to the Brexit poll tracker, leave has gained ground over the closing stages, (with 47% of polls for ‘Brexit’ vs. 44% for ‘Bremain’). This new development sent back the pound to 1.41 against the US Dollar, and we could potentially see further Cable weakness toward 1.40 in the coming days ahead of the results. Many people see a Brexit scenario very probable, raising the financial and contagions risks and the longer-term impact on global growth. It didn’t stop the 10Y UK Gilt yield to crater (now trading at 1.12%, vs. 1.6% in May), however a Brexit surprise could continue to send the 5Y CDS to new highs (see below).

Figure 1.  FT’s Brexit poll tracker (Source: Financial Times)

Brexit.JPG

Chart 5. UK 5Y CDS (Source: Bloomberg)

5YCDSUK.JPG

CNY devaluation: a problem for US policymakers?

Eventually, another problem is the CNY devaluation we saw since the beginning of April. The Chinese Yuan now stands now at its highest level since February 2011 against the greenback (USDCNY trading at around 6.60). we are sure the Fed won’t mention it in its FOMC statement, but this could also be a reason for not tightening tonight.

Conclusion: a rate hike is still possible tonight

To conclude, we are a bit skeptical why the market is so reluctant for a rate hike this evening, and we still think there is a chance of a 25bps hike based on the current market situation. We don’t believe that a the terrible NFP print (38K in May) could change the US policymakers’ decision. Moreover, even though we saw a bit of volatility in the past week (VIX spiked to 22 yesterday), equities are still trading well above 2,000 (SP500 trading at 2,082 at the moment) and the market may not be in the same situation in July or September.

Reviewing Market Carnage 2.0

Back in the middle of October last year, I wrote an article to summarize and explain the Market Carnage. It was never published on my blog, therefore I added it in the Appendix section. This morning, it seems that we experienced another ‘Black Monday’, triggered by some disappointing news coming from China. The PBoC surprised the market with no RRR cut (while a 50-100 bps cut was ‘expected’ by the participants), and then followed a market collapse with the Shanghai composite down as much as 9% at one point (the most since 1996). US Equities were down as well, trading below 1,900 as you can see it on the chart below, while USD/CHF (blue line) is down 5 figures in one week flirting with the 0.9300 level when I was writing the article.

USDCHF

(Source: FXCM)

I personally believe that you can learn a lot from a trading session like today, that tells you that the market can go anywhere. While the sell-side research was telling me that EURUSD has nowhere to go but down and that US 10Y rate will never go back below the 2% level and that it could be interesting to start buying oil at $40, last week’s session and today in particular prove you that you can have it all wrong. One thing that I am ‘happy’ to see is that the Swissie has really acted as a safe haven currency, something that I understood after the SNB removed the EURUSD floor on January 15th (and consider it as a historical event).

Volatility was considered so high that the NYSE invoked ruled 48 to avoid a panic selling at the US Opening. The rule, approved by the SEC on December 6 2007, says that market makers ‘will not have to disseminate price indications before the bell, making it easier and faster to open stocks’.

Insane moves were seen on the currency market, to begin with NZDJPY that totally collapsed from 81.50 to 72.50 earlier today (that’s a 11-percent move in a single day!). USDJPY registered a 6-figure move down to 116 (mid-January lows), and EURUSD went North breaking the 1.17 level and gaining 300 pips in hours with a huge lack of liquidity (See Chart 1).

Reaction is expected now from China in order to calm down investors, and hopefully bring the situation back to normal. I am sort of convinced that the situation will stabilize within the next couple of days, however those market flash crashes kinda worry me about the global macro situation in most of the countries. As I mentioned it in some of my previous articles, I am persuaded that the Fed is not comfortable with those types of trading sessions. Coming now to the September hike, it is much less obvious that US policymakers will start a tightening policy based on the market’s attitude on trading days like today.

The question now is: ‘What sort of tools has China got in its advantage to calm this ‘panic’ (and the BoJ and SNB) in the coming week?’ I am currently working on a article about China’s economic and financial situation and its relation to the commodity market that I will try to publish soon.

In my current FX positioning, I am long USDCHF at 0.93 and short EURUSD at 1.1665 as a believe we will see a calmer afternoon.

Chart 1 (EURUSD)

EURUSD

(Source: FXCM)

Appendix: 

For the past few years that I have been trading, I believe Wednesday was by far the most volatile and swingy session of all. It first started very quietly in the UK morning session, and then it really went out of control before the US opened. I don’t even know where to begin…

Equities continue their correction: Eurostoxx 50 index is down more than 12% (French and German market are off 12.5% and 13.5% respectively), the Footsie and the S&P 500 both down by 9.5% since the highs reached on September 19th.

If we have a look at the chart below, we can see that the VIX, which measures the 30-day volatility implied by the ATM S&P500 options prices, surged and breached the 30 level and is now trading back to November 2011 levels, taking the equity (S&P) down with him. There is clearly more room for further correction, no buy-the-dip scenario this time unfortunately.

SPVIX(Source: Reuters)

One currency that continues to strengthen in reaction to the risk-off sentiment (a real one this time) is the Japanese Yen. After the nice August/September momentum, USDJPY, which reached its peak of 110.08 on October 1st, was sold to 105.21 in the early afternoon before recovering back to 106.00. Our favourite [carry trade] pair keeps tumbling and is now trading at a 7-month low slightly below the 93.00 level. As I usually say ‘it is all about the Yen’, you better watch carefully where the currency is going at the moment [more strength!] as it will give you an idea of the overall market.

Another big ‘surprise’ was of course the 10-year US yield (blue line) that tumbled below the 2% level down to 1.86% approximately (May 2013 levels), before ‘recovering’ to 2.1%. I always ask myself ‘where does the market like to see the 10-year yield?’ Obviously not too high, but below 2% clearly means that the market participants are not confident [at all]. On the other hand, Gold (yellow bars) continued its rally, up to 1,250 before edging lower to 1,240. The 10-minute-period chart below (USDJPY in red bars) shows you that asset classes moves clearly ‘together’ under a ‘stressed market’.

GOldYenYields(Source: Reuters)

End of POMO, what to expect from the next FOMC meeting (October 28th)?

While we are ‘kindly’ approaching the last days of QE with the Fed stepping out of the bonds market at the end of this month (October 28th, see chart in appendix), I think we may have a couple of dovish FOMC meetings concerning the central bank’s ST monetary policy. To me, it looks like the US policymakers have made a ‘mistake’ by expressing themselves on that point [rate hike] as they should have let the market swallow a period without QE. True, Fed officials are willing to start tightening. For instance, we heard San Fran Williams (one of the most dovish and apparently seen as a good ‘barometer of the views of Yellen’) saying that he would hope the Fed can tighten, mentioning 9 months to see the first hike. However, it looks to me that the higher rates world is just an illusion…

In order to avoid the ON/OFF calls that we have seen since the beginning of the year (RBNZ, BoE and now the Fed), there need to be a sort of global monetary policy coordination. Otherwise, we are going to see other sharp fluctuations and especially in the FX market (remember, nobody wants a high exchange rate, not even the US, aka the Fed).

On the top of that, oil is plunging; coincidence? WTI November 2014 futures contract is now down more than 20pts since June trading slightly above 80 (as Zero Hedge mentions: ‘if Oil plunge continues, now may be a time to panic for US shale companies’). As I believe that Oil prices and the equity market are the Fed’s two most important components, I don’t only see cheap oil prices only as a benefit (stimulus) for consumers, therefore adding pressure on Yellen’s [and Co.] team.

My view goes for a Dollar pause, and I will carefully wait for the October (28th) FOMC meeting to see how US policymakers are going to deal with the current situation. An important figure to watch will be the Inflation report next Wednesday. US CPI is expected to remain steady at 1.7% YoY in September, however I think we could see some disappointment…

Appendix:
Unknown(Source: NY Fed)

Yemen conflicts, on the edge of a civil war…

For the past few of months, conflicts in Yemen have been making the headlines of the daily news as the situation seems to worsen continuously. In this article, I gathered some information from different sources to help me understand the actual situation in Yemen, its origin and why it matters to so many countries.

Yemen is one of the poorest countries in the Middle East with very limited natural ressources, with a GDP of roughly 36bn USD according to the World Bank (vs. Saudi Arabia is 750bn USD). Its inhabitants (24.4 million) are divided into two principal Islamic religious groups: 55 – 55 % Sunni (predominantly present in South and South East) and 42 – 47% Shia (North and NorthWest). Therefore, Yemen contains a high ratio of Shia Muslims compare to its neighbour Saudi Arabia as you can see it on the picture below.

 MiMS

(Source: Financial Times)

Quick recap: When did the schism begin?

It all started when the Prophet Muhammad died in 632 AD. As he left no designated male heir, disagreements over the succession to Muhammad as a caliph of the Islamic community started to rise, leading to two opposition groups:

  • Shia, the minority accounting for 10 – 15% of the World’s Muslims
  • Sunni, the majority accounting for 85 – 90%

Over the centuries, Shia-Sunni relations have marked by both cooperation and conflict, which brings us today to the Yemen crisis. In recent months, Yemen has descended into conflicts between several different groups, pushing the country into the ‘edge of a civil war’.

Given the complexities of the conflict in Sa’dah, I will try to define which groups are present in Yemen and which country is related to that conflict. Sa’dah conflict, Yemen’s government against the Zaidis, originated in Northern Yemen in June 2004 and has been running since then. Sa’dah region (see appendix), once the seat of power of Yemen, has often been the centre of battles for political power in the country.

Houthis’ origin

A single state within the borders of what is now the Republic of Yemen had never existed before 1990. In past centuries, a variety of states existed covering different part of the country. On September 26, 1962, the last imam of Yemen, Muhammad al-Badr, was overthrown by Abdullah al-Sallal, founder and President of the Yemen Arab Republic (YAR, Red part in the map below).

Yemen

For the next six years, Badr and his alliance of northern tribesmen fought a guerilla war in the mountainous highlands against Egyptian soldiers who arrived in support of the Yemen Arab Republic. One of the leaders of the northern tribal alliance (Badr allies) was indeed the elder Sheikh Hassan al-Houthi. At that time, the northern tribesmen were getting support from Israel in their fight against Egypt (which was then Israel’s principal enemy). In 1966, Israeli assistance to Yemen tribesmen ended (increasing concerns for safety) and Badr eventually lost the civil war in 1968. Badr and his tribesmen (including Houthis) joined the YAR in 1970.

In addition to the political divergence, religion divides Yemen’s inhabitants. The Houthi are followers of Zaydism (Zaydi Islam), a Yemeni Shia where its adherent are known as Fivers for their recognition of Zayd ibn Ali as the fifth Imam. Zaydi Muslims represent 40% of Yemen’s population (total of 23 million roughly), and the remaining majority belongs to the Shafi’i branch of Sunni Islam. Prior to Yemeni unification in 1990 (YAR and South Yemen), the northern half of majority Zaydis and the southern half majority Shaffi’is have remained as two separate regions.

Despite Western papers linking Iranian-Saudi tensions over Yemen as yet another example of a Shia-Sunni conflict, the Houthi movement is not a manifestation of an international religious conflict. Big supporters of the 2011 Arab Spring uprising against then President Saleh, the Houthis are fighting for a more transparent government and there were clearly not satisfied by the new President Hadi. As a reminder, Yemen’s poverty rate reached 54.5% in 2012 (World Bank); the country is victim of water scarcity, low industrial potential. In addition, the Yemeni government is the 10th most corrupt in the world according to Transparency International. Even though the war has been active for almost 11 years now, tensions have risen drastically since summer last year (series of demonstrations in August last year in the capital Sana’a against increased fuel prices up to 90%).

Who is involved?

Even though the country is poor in resources, there are a lot of countries involved behind Yemen. This map from news network Aljazeera summarizes the current situation pretty well. Therefore, you can see that the major developed economies are involved into that conflict, putting US-backed middle countries (Saudi Arabia…) against the classic Iran/Russia/China.

WhosFor

(Source: Aljazeera)

What are the consequences for oil?

As of January 2014, Yemen had proved reserves of oil totalling 3 billion barrels (far from the Saudi 270bn barrels proven reserves) according to EIA. It has two primary crude streams: the light and sweet Marib stream and the medium-gravity/more sulfur-rich Masila stream. Masila Basin located in the southeast holds more than 80% of the country’s total reserves.

However, its production has decreased massively since 2001 from 450,000 barrels per day to 100,000 bbls today mainly due to the country’s aging fields and frequent attacks on its oil infrastructure (see pipeline system, 10 to 20 yearly attacks over the past ten years).

EIAYemen

(Source: EIA)

Clearly, a cut in oil production from Yemen won’t affect oil prices, however here is a reason that could potentially boost the prices. Roughly half of the world’s oil production is moved by tankers on fixed maritime routes, and a couple of oil transit chokepoints are located in the Middle East close the countries currently ‘under fire’. As you can see it on the chart below, the first one is the Strait of Hormuz located in the Persian Gulf (Iran is the border there), which sees 17 million barrels of oil moved per day (EIA, 2013). The second one is Bab El-Mandab located in the Red Sea (between Yemen and Djibouti) and sees 3.8 million barrels of oil moved per day. As these chokepoints are crucial to global energy security, the blockage of one of them can lead to substantial increases in energy costs.

ChokeYemen

(Source: Reuters)

The ‘Chinese Octopus’

Even though the US are still the major consumers of Oil in the world (20 million barrels a day, roughly 21% of global production), China surpassed the as the world’s largest net importer of oil (6.7ml b/d vs 5.1ml b/d for the US). As you can see it in the map below, China relies heavily on imports from the Middle East and therefore must closely follow the situation there. According to EIA, the main crude oil imports for China in 2011 were split between Saudi Arabia (20%), Angola (12.3%), Iran (11%), Russia (7.8%) and Oman 7.2%). This is what I call the ‘Chinese Octopus’ and why I think that Middle East concerns clearly matter for China.

ChineseOctopus

(Source: EIA)

Latest News

Tensions are intensifying, since Saudi Arabia launched the air campaign on March 26 to try to contain the Houthis and restore President Hadi, who has fled Aden for refuge in Riyadh (Saudi Arabia). The Houthis now control the capital Sana’a and have advanced on the southern city of Aden. According to the World Heath Organisation, 550 people have been killed and 1,800 injuries since March 19. See chart below for Houthis’ progress in Yemen.

HouthisP

(Source: American Enterprise Institute’s Critical Threats Project)

As you can see it in the map below, another opposing group is AQAP (Al-Qaeda in the Arabian Peninsula) which opposes both the Houthis and President Hadi.
ISIS is also present there, though still small, and opposes the government, the Houthis and AQAP.

AvY

(Source: American Enterprise Institute)

References:

Helen Lackner (2014), Why Yemen Matters.

Peter Salisbury (Feb 2015), Yemen and the Saudi-Iranian ‘Cold War’

The Fed’s 2015 dilemma: Equity market VS Oil prices

Even though the FX market is usually considered as an esoteric asset class, it happens that a lot of opportunities were in currencies last year. I mainly think about the Yen and the Euro, but the chart shows the main currency performances against the Dollar.

CurrenciesvsUSD

(Source: Hard Assets Investors)

We saw a couple of weeks ago that the economy increased at an annual rate of 5 percent according to the third estimates, the highest print since Q3 2003 when GDP rose by an outstanding 6.9.%. In addition, we saw in October that the final numbers for FY2014 federal deficit was $486bn (or 2.8% as a share of GDP), $197bn lower than the $680bn recorded in FY2013 and the lowest deficit since 2008 as you can see it on the chart below.

USDef

(Source: CBO)

On the top of that, the unemployment rate stands at a multi-year low of 5.8%, down 2.1% over the past couple of year. The only scary figures is US debt [like any other country], which now stands at a record high of 18tr+ USD, up 70% under Obama (10.6tr USD back in January 2009).

Another Good Year for equities…

I have to admit that with the Fed’s exit at the end of October, I was a bit anxious on the consequences it could have on the equity market, especially after the several ‘swings’ we saw (January, October). In my article Could we survive without QE (Part II with US yields), I added a chart (S&P 500) where you can see the impact on the equities each time the Fed stepped out of the bond market. Clearly not good.

But it didn’t. And after the 2013 thirty-percent rally, the S&P500 increased by another 11 percent in 2014 [and closed at records 53 times].

It looks to me that there are a lot of positive facts and the Fed can eventually start its tightening cycle. However, the collapse in oil prices will weigh on US policymakers’ decision in my opinion.

I think the question now is: which one will weigh more on US policymakers’ decision to tighten (or not)?

I strongly believe that the two main indicators the central bank is watching are the equity market and oil prices. An increasing equity market tends to have a positive effect on consumer spending (through the wealth effect). As a reminder, consumer spending represents 60 to 70 percent of GDP for most of the well-developed economies.

However, falling oil prices, with now Crude Oil WTI Feb15 Futures trading at $51.80 per barrel, is problematic. First of all, problematic for oil exporters’ countries (i.e. Chart of the Day: Oil Breakeven prices). We saw lately that Saudi Arabia announced that it will face a deficit of $38.6bn in FY2015, its first one since 2011 and the largest in its history (no projected oil price was included in the 2015 budget, but some analysts estimated that the Kingdom is projecting a price of $55-$60 per barrel).

I am just back from Kuwait City where I met a few investors there with a friend of mine (Business Developer in the Middle East), and most of them agreed that there were comfortable with a barrel at $60.

To me, falling oil prices reflect the weakening global demand and real economy effects. With the Chinese economy slowing down (GDP growth rate of 7.3% in Q3 is the slowest in five years), major economies back into recession (Triple-dip recession for Italy and Japan) and rising geopolitical instability, forecasts are constantly reviewed lower and problematic for debt stability [and sustainability]. I like the chart below (Source: ZeroHedge) which clearly explains that oil prices and global demand are moving together. In fact, lower growth projections combined with low oil prices and [scary] low yields are problematic for the Fed.

GlobalChart

(Source: ZeroHedge)

Moreover, falling oil prices is problematic as it will drive US [and global] inflation lower. The inflation rate is slowing in most of the developed economies: in November, UK inflation fell to a 12-year low of 1% in November, EZ policymakers are still working on how to counter rising deflation threat (prices eased to a 5-year low of 0.3%) and US CPI fell at the steepest rate in almost six years to 1.3%. Most of the countries whose central banks target inflation are below their target.

2015: New Board, new doves…

In addition, as you can see it below, the ‘hawks’ members – Fisher and Plosser – are out this year and this could change the tenor of debate within US central bank’s policy-setting committee.

FedBoard

(Source: Deutsche Bank)

Quick thoughts ahead of the Fed’s minutes…

Last month (October 8th), while many investors were quite confident on the US Dollar strength momentum, the minutes of the FOMC’s September 16-17 policy meeting clearly showed us a message from US policymakers.

If you ask me if we see a stronger dollar in the LT against most of the currencies, we would answer yes and without any doubt. we think the Fed is comfortable with a Dollar appreciation, however we strongly believe they want the process to be slow and gradual. Despite strong recent fundamentals (another NFP above the 200K level in October for the 9th consecutive time, an annual 3.5% first Q3 GDP estimate, ISM Manufacturing PMI still above 50, Housing Start fluctuating around 1mio for the past year…), global economic issues will weigh on US policymakers this time.

Let’s start with the first issue: the decline in oil prices. December Crude Oil WTI futures contract (CLZ14) is down $30 since end-of-June’s high, now trading below the $75 level. While we mentioned in one of our previous article that the decline in oil prices will be problematic for a lot of OPEC countries (see article Oil Breakeven Prices), it is now entering into critical levels even for the US. We heard and read that low oil prices could be seen as a stimulus for consumers, however it is now at levels hurting US shale production. According to some experts, most shale oil fields breakeven is seen between $70 and $75 per barrel (see chart below from Barclays Research).

ShaleBreakeven

(Source: Barclays)

 As a reminder, the US, now producing around 8.5 million barrels per day (8.65mio in August 2014 according to the Energy Information Administration), was expected to surpass Russia within the next 10 years and grow its production by 35% to approximately 11.5mio barrels per day (see chart below from the Wall Street Journal).

OilProduction

(Source: Wall Street Journal)

Therefore, if prices continue to fell, the party could end earlier than expected. In addition, lower oil prices will add pressure on inflation expectations and the 2-percent target that the Fed is watching desperately. Important figure to watch tomorrow, CPI inflation is expected to remain steady at 1.7% in November. Any print below that would create a bit of US Dollar weakness as traders will start to lose credibility on the quantitative definition of ‘considerable time’.

Speaking of disinflationary pressures, let me go to the second issue: Dollar strength. Back in the minutes, Fed officials mentioned that they saw ‘rising dollar as a risk to exports and growth’. At that time, the USD index was trading at a 4-year high above the 86 level, and up 8.5% approximately since July low of 79.78. Today, the index is trading at even higher levels (87.60), thanks to the BoJ and the Yen development and EM meltdown. We saw that September US trade balance printed its biggest deficit since April at $43bn (vs. $40.2bn consensus), up from $40bn the previous month, due to a decline in exports (down 1.5%). In our opinion, ‘Dollar strength’ will be one of the topics tonight, therefore we could see some dollar weakness after the release. In addition, Dollar strength will also weigh on inflation expectations in the US (we don’t think the inflation effect of dollar appreciation is negligible, especially couple with lower oil prices).

Therefore, we see a bit of disappointment this evening, and we will encourage some of the US Dollar bulls to cut some of their long positions. The Euro and especially the British pound could recover from their recent losses, technical resistances are seen at 1.2670 and 1.5800 respectively.

Chart of the day: Oil Breakeven prices

After Saudi Arabia’s quiet talk on the fact that the country is comfortable with lower oil prices for an extended period of time, some countries are trying to find out some ‘measures’ to push up prices to ‘decent levels’. Brent November (2014) futures contract (COX4 Comdty)  is now down more than 25% since the end of June levels ($113 per barrel), trading slightly below $85.

We read that the Oil Storm is posing (and will pose) a problem for Russia (in addition to all the sanctions) and other OPEC countries. Therefore, we added today this chart (Source: DB) that shows you the Breakeven prices of all the big oil ‘players’.

For instance, Venezuela – OPEC member where oil revenues account for 95% of export earnings – called for an emergency OPEC meeting (next one stands on Nov. 27th) as current oil prices will hit its currency reserves. According to the chart below, the country needs a barrel at $120 to be breakeven (aka pay for its imports).

Let’s see what is the other countries’ breakeven…

OPEC-Chart(1)