Summary
Brent crude oil resurgence took it to new three-year highs, incrementally above the day before as traders sought new factors to buy in Donald Trump’s decision to end U.S. participation in the Iran nuclear deal after a long lead-up.
This was trickier than appeared on the surface. The President left several doors open for continued dialogue between the U.S. and Iran. Room for co-signatories to the Joint Comprehensive Plan of Action to continue discussions with Iran and around their own compliance with new sanctions was also apparent. Trump and his administration took pains to stress openness to a new deal. That was another way of saying that much was still unclear. Initially, amid this lack of clarity, oil prices slipped further, before Brent crude rebounded to a new cycle of $77.20/bbl., 86 cents higher than the one a day before.
Technical details were few and focused around the timing and range of sanctions, lacking much information on scope and enforcement. The U.S. Treasury Department stated that some sanctions would take effect after a 90-day 'wind-down' period ending 6th August. The remainder would be effective after a 180-day period ending 4th November. The rationale is to allow firms time to complete outstanding business. The only explicit restriction on non-U.S. firms though referenced foreign financial institutions. Like those in the U.S., they’re restricted from transactions with Iran's central bank, and other Iranian financial institutions.
Clear new restrictions on trade in goods and services with Iran by joint signatories to the original deal Germany France, China and Russia, were conspicuous by their absence. All made opposition to the U.S.’s withdrawal abundantly clear beforehand and said in a joint statement last night the news was cause for 'regret and concern'. Whilst Iranian oil exports will almost inevitably decline by means of compromise, the extent of compliance is unknowable, particularly in the case of China, the biggest single buyer of Iranian oil. Together with other Asian nations, China makes up the largest single consuming region of Iran’s petroleum. All three of the original deal’s other non-U.S. powers are likely to continue buying some Iranian oil in the medium term in the hope of a resolution of the impasse
Therefore, the impact on oil prices going forward is expected to be far from direct, though uncertainty, combined with speculation—ideal states for the market’s fall-back term, ‘momentum’—seem capable of taking prices even higher in the near-term. The watch is likely to keep dominating market attention for the remainder of the week at least. Over that time, probabilities will continue to point Brent crude oil futures to the next most magnetic price, $80. Although major technical chart impediments do not appear before $88-$89/bbl., common sense and oscillators that theoretically gauge when an asset is ‘overbought’, strongly advise against attempts to chase oil above to $80 in a straight line.
FX
A resilient dollar—together with a brief return to 3% by benchmark Treasury yields—also factored in the oil price trajectory. The euro remained unsettled by Italy’s political snarl-up, having seen the $1.18 handle, the second-straight lower big figure in two overnight sessions.
Sterling pushed to a new four-month low $1.3485 overnight low. The pound was eyeing the Bank of England’s almost inevitable decision to stand pat on policy on Thursday. The biggest uncertainties are now about whether the Bank’s inflation and growth forecasts will flow with or against a stream of weakening economic indicators.
Commodity related currencies, like the Aussie dollar, continued to look spooked by the pace of oil’s ascendance, with AUD barely 5 pips up from an 11-month low of $0.7434 at the time of writing. USD/JPY continued to grind up to the peak of its late-March-early-May up leg at 110, some 25 sen away at last look.
Upside surprises in U.S. producer price inflation measures out on Wednesday afternoon are the next likely source of impetus that could buoy the greenback.
European markets
The FTSE 100 had further cause to extend its recent outperformance of many global equity gauges given weight of oil majors BP (LON:BP) and Shell (LON:RDSa) enabling the UK benchmark to nudge 0.4% higher compared with a 0.2% rise on Europe’s broad STOXX, despite help from the latter’s own huge E&P groups. The FTSE was also buffed by Imperial Brands (LON:IMB) which emerged from a robust first half with a major divestment programme brewing, and Vodafone (LON:VOD), doing the opposite, with further progress in the grinding process of consolidating assets with Liberty Global (NASDAQ:LBTYA), this time in eastern Europe. A modest 1.4% stock price rise by the world’s second-largest telecom operator partly reflected complex financing for the deal, including cash, debt and convertible debt, making for a tricky assessment of returns and synergies. VOD pegged NPV of synergies at €1.5bn.
Germany's DAX also only managed a 0.2% uptick despite big help from Siemens, which rose 4.5%. The conglomerate upgraded guidance for annual profit after besting net earnings expectations. Most of the boost was from transferring a technology stake into its pension fund though, so investors were likely cheering the reduced liability burden. Orders from key segments showed no let-up in several-years long decline.
U.S. markets
U.S. stock index futures projected a fair step higher from Tuesday night’s flat close by the S&P 500 and, reflecting a mixture of expected benefit for huge oil shares like Exxon (NYSE:XOM) together with the fact that overnight news lacked the element of surprise. There were also signs that investors sitting on the side-lines during the market’s recent consolidation were growing impatient to jump back in—total U.S. stock exchange volume on Tuesday was 6.9 billion shares compared with a 20-day daily average of 6.5 billion. After Walt Disney’s (NYSE:DIS) sound (but not much more) earnings overnight, some focus is likely to fall on the group at heart of Disney’s consolidation efforts, Twenty-First Century Fox (NASDAQ:FOX), reporting on Wednesday evening. The reporting the schedule lacks heavyweights before Wal-Mart’s quarterly report next week.
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