Markets WRAP: Rand closes at R13.64 to the greenback

Oil rose to trade near $51 a barrel in New York, erasing an earlier loss, after a report that Russia accepts the need to cut production in conjunction with OPEC. All eyes are on this weekend’s G-20 summit in Argentina, where Russia’s Vladimir Putin and Saudi Arabia’s Mohammed bin Salman are likely to discuss how to coordinate oil policy.

The nations are in talks over the timing of any reduction in supply, Reuters reported Thursday, a week before producers are due to meet in Vienna to discuss the market and a possible cut in 2019.

“It’s all about bargaining, and producers aiming for the best deal possible,” said Giovanni Staunovo, a commodities analyst at UBS Group AG. “There are other producers more desperate than Russia for an agreement.”

West Texas Intermediate for January added as much as 2.4% in New York, and traded up 1.4% at $50.99 a barrel as of 08:58 local time. Prices earlier fell to the lowest since October 2017. Volumes were about double the 100-day average.

Brent for January settlement, which expires Friday, advanced 75 cents to $59.51 a barrel on London’s ICE Futures Europe exchange. The global benchmark traded at an $8.46 premium to WTI. The more-active February contract rose 78 cents to $59.87 a barrel.

Putin praised Saudi Crown Prince Mohammed on Wednesday and said Moscow is ready to cooperate further. He also said crude around $60 a barrel is “balanced and fair” and well above the level needed to keep his government’s budget in surplus. By contrast, Saudi Arabia needs oil at more than $80 a barrel to balance its budget.

In the US, crude stockpiles rose by 3.58 million barrels last week in the longest run of gains since November 2015, according to the Energy Information Administration. The increase was greater than the 1 million-barrel gain predicted in a Bloomberg survey, overshadowing a surprise draw in gasoline inventories. - Bloomberg

OVERVIEW: European stocks rose in volatile trading, with mining, technology and industrial shares leading the gains following a sharp rally on Wall Street sparked by dovish comments from Federal Reserve Chairman Jerome Powell. The Stoxx Europe 600 Index was up 0.3% as of 13:45 CET, bouncing back after erasing earlier gains.

Oil stocks surged on a report that Russia and Saudi Arabia are still in talks over a production cut, while autos turned positive after a report that the European Union denied that Commissioner Guenther Oettinger said US tariffs on cars might come before December 25.

The Stoxx 600 Real Estate Index was the worst performer, dragged down by Hammerson on negative read-across from the withdrawal of an acquisition of Intu Properties, which was down 35%. Investors will be looking for any hopeful signals on trade from a meeting between the US and Chinese presidents at the Group of 20 summit in Buenos Aires this weekend.

US equity traders rejoiced on Wednesday after the Fed Chairman Jerome Powell fueled speculation the central bank may pause on raising interest rates next year. “It’s somewhat ironic that the Fed Chair’s speech on financial stability would elicit a large financial market reaction, but investors heard exactly what they were hoping for,” said Brian Jacobsen, senior investment strategist at Wells Fargo Asset Management. “Growth is good and inflation is low, so they may as well take it slow.”

OVERVIEW: Benchmark Treasury yields briefly fell below 3% for the first time since September in the wake of the Fed’s dovish tilt, but a stock rally faded as US equity futures dropped and gains in Europe were muted. The dollar fluctuated. The 10-year Treasury yield extended its decline after Fed Chairman Jerome Powell fueled speculation the central bank may pause interest rate increases next year, while the greenback drifted in a tight range following Wednesday’s drop.

European bonds rose, though Italian notes fluctuated as demand for five-year debt at an auction fell to the lowest since June. The euro erased an earlier advance after a raft of weak economic data. As US equity futures pointed to a softer open the Stoxx Europe 600 Index advanced, led by tech and miners, following a mostly upbeat Asia session.

Deutsche Bank AG slid after prosecutors said its headquarters were being searched in a money laundering probe. Emerging market equities rose to the highest level since early October and developing nation currencies strengthened.

After Powell’s comment that interest rates are “just below” a range of estimates of the so-called neutral level, investors are now betting the Fed is nearing a pause. With Powell now out of the way, the market is looking for any hopeful signals on trade from a meeting between the US and Chinese presidents that will take place at the Group of 20 summit in Buenos Aires this weekend.

“The next catalyst will be the G-20 meeting between Trump and Xi; we believe risk assets will tactically trade in the green following a tariff cease-fire,” said Eleanor Creagh, a strategist at Saxo Capital Markets in Sydney.

“A tradable risk bounce on a paper deal at G-20 will be unlikely to reverse sentiment structurally as the underlying US-China relationship is still deteriorating.”

Elsewhere, West Texas oil tumbled below $50 a barrel for the first time in more than a year as Russia signaled little urgency to commit to supply cuts, while US crude stockpiles continue to grow. Gold jumped on the weaker dollar. - Bloomberg

Annual headline producer price inflation for final manufactured goods rose to 6.9% in October, Stats SA reported on Thursday. This is the highest annual increase since December 2016, when the rate rose by 7%.  

Annual headline PPI was 6.2% in September and 6.3% in August. 

The producer price index is a weighted index of prices that business charge at the wholesale or producer level for final manufactured goods. 

Andre Botha, Senior Currency Dealer at TreasuryONE said in a morning note to clients, “Again we had a day of sides yesterday, in relation to the rand, with the local unit trading in a very narrow band of 10 cents against the US dollar during South African trading hours.

"The real move happened after hours when the rand broke below the R13.80 level as the US Fed Chairman, Jerome Powell, came out a lot more dovish yesterday in comments he made. Gone was the bluster of a few months ago about four rate hikes and it has been replaced by more caution and a real possibility that interest rate hikes from the US will start to taper off in 2019.

"The rand enjoyed this bout of unexpected dovishness from Mr Powell and it is looking like the momentum is still with EM this morning. However, this might become a tug-of-war between Powell and Trump with President Trump still blowing the trade war horn, which could lead to a bit of to-ing an fro-ing in the rand which would lead to further range-bound trading.

"This evening we have the Fed minutes of the previous FOMC meeting, but we do not expect this to have the effect that it would have had due to comments of Mr Powell superseding the minutes. The main themes are still the G20 summit, but we have a new player in the US Fed dovishness.”

By 10:02, the rand was trading at R13.68 to the greenback.

The dollar edged lower and Treasury yields cooled, while an equity rally that spread into Asia from the US after a dovish tone from the Federal Reserve chairman lost some steam as investors turned their focus to a crucial meeting of the world’s largest economies that will tackle trade issues. Stocks from Sydney to Tokyo pared gains that were already more muted than the stellar rally in the S&P 500 Index, which surged the most since March.

Hong Kong and Chinese stocks erased advances as US futures slid. Emerging-market equities rose to the highest level since early October and developing-nation currencies strengthened. The 10-year Treasury yield drifted toward 3% after Fed Chairman Jerome Powell fueled speculation the central bank may pause lifting interest rates next year.

Powell’s comment that interest rates are “just below” a range of estimates of the so-called neutral level tempered remarks made last month that markets read as a signal of more aggressive monetary policy tightening. Investors are now betting the Fed is nearing a pause and euro dollar futures show the market pricing for just 25 basis points, the equivalent of one Fed increase, next year.

“If inflation stays benign, they are probably going to take a pause right after the December rate hike,” Randall Kroszner, professor of economics at Chicago Booth School of Business and a former Fed governor told Bloomberg TV. “Without a lot of inflation pressure, there are a lot of questions about how aggressive they need to be."

With Powell now out of the way, the market is looking for any hopeful signals on trade from a meeting between the US and Chinese presidents that will take place at the Group of 20 summit in Buenos Aires this weekend. US President Donald Trump has threatened tariffs on $200 billion of Chinese goods unless they can strike a deal on revised terms of trade.

Global economic growth may be slowing more than expected, the IMF warned. Recent data suggest the situation has only worsened since the fund trimmed its world GDP forecast last month, according to a report prepared for the G-20 meetings.

“The next catalyst will be the G-20 meeting between Trump and Xi; we believe risk assets will tactically trade in the green following a tariff cease-fire,” said Eleanor Creagh, a strategist at Saxo Capital Markets in Sydney. “A tradable risk bounce on a paper deal at G-20 will be unlikely to reverse sentiment structurally as the underlying US-China relationship is still deteriorating."

Elsewhere, Indonesia’s rupiah climbed as the nation’s central bank said it will provide room for the currency to keep strengthening in line with market mechanisms. Oil recovered some of its losses after an unexpectedly large increase in U.S. crude inventories spurred declines Wednesday. - Bloomberg