Equities
European markets traded higher on Wednesday. An OPEC deal to cut oil output lifted oil prices back above $50 per barrel, making the energy sector the top riser. A rise in bond yields coincided with the jump in the oil price. If the deal means oil has finally put in its bottom, it should help raise inflation expectations and eventually lead to higher interest rates.
On the FTSE 100, leaping shares of BP (LON:BP) and Royal Dutch Shell (LON:RDSa) on the basis of higher oil prices after an OPEC agreement trumped a fall in banking shares after RBS (LON:RBS) failed Bank of England stress tests.
Shares of RBS dropped after it was revealed it will take additional capital-raising measures in response to the BOE stress test. Shares bounced off the lows in acknowledgement that the stress tests were very stringent, with a steepening yield curve improving the scope for future profitability.
RBS was anticipated to have a tough time after it saw the third biggest fall in its capital ratio across 52 banks in European Banking Authority stress tests earlier this year. Still, with a fall in its common equity tier one ratio to below the BOE’s “hurdle rate”, let alone its “systemic reference point”- RBS seems to have missed even the most meagre expectations.
Higher prices amongst the other banking stocks reflected the performance in the stress tests. Shares of Barclays (LON:BARC) and Standard Chartered (LON:STAN) shares initially dropped after failing the tests, but by not as much as RBS since capital raising plans were thought to be enough to sufficiently improve the results. Shares of Lloyds (LON:LLOY) and HSBC drifted around breakeven after passing the stress tests but getting dragged down by sector pessimism.
Optimism that oil prices have likely bottomed after OPEC reached a deal to cut output saw US stocks open in the green, with the S&P 500 notching up a new record high.
FX
The US dollar firmed on Wednesday, rising against all major currencies barring the oil-sensitive Canadian dollar and Norwegian krone.
Bullish sentiment from ADP employment data for November showing a surprisingly strong 216k private sector jobs created was offset by a lower revision to 119k in October. Core PCE, the Fed’s favoured inflation gauge was as expected at 1.7% y/y while personal spending rose by 0.3% m/m, less than the 0.6% expected. All in all, there was nothing in Wednesday’s data to change the strong conviction that the Fed will raise rates in December.
Even with oil prices rising in excess of 7%, the currencies of big oil exporting nations only saw small gains in an environment of US dollar strength.
A decline in the euro on talk of a likely extension to the ECB QE program in December was tempered by inflation data showing core prices rising 0.8% y/y in the Eurozone.
The Japanese yen was the biggest faller, matching a rise in US treasury yields.
Commodities
The price of oil stormed higher by as much as 7% on Wednesday as OPEC agreed to cut output by 1.2m barrels per day. Oil built up some healthy gains even before the official announcement after confident statements from Saudi and Iranian oil ministers raised hopes OPEC will string together the deal agreed in principle at its last meeting in Algiers.
Cooperation does appear to have trumped competition, with even Iraq agreeing to cut output despite the difficulties the country faces in fighting ISIS.
The deal is contingent on non-OPEC members also slashing output by 600,000 barrels per day with Russia reportedly having already committed to cutting its own output by 300,000. The deal happened as Indonesia recused itself of its OPEC membership since it is now a net importer of oil.
"DISCLAIMER: CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed.
No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. "