Trade relief boosts European markets

Headlines released at around 10 am EST time (midnight AEST) indicated Saudi Arabia and Russia had agreed to a lower than expected 400kb monthly increase each month to December, for a total hike of 2mb sent crude oil prices $2.50 higher, to $76.22.

Only to see prices fall by over $1.50, following a last-minute objection from the UAE. Reportedly, the UAE would prefer a higher baseline from which their 2022 production cuts would be calculated (current baseline is 3.2 mb/d while expansion efforts may have increased maximum capacity closer to 4 mb/d).

With crude oil markets currently in deficit and the default for no agreement being a return to the current agreement of no more supply increases, oil then spring boarded higher again to close at $75.21.

Overall, developments today indicated a bullish outcome is likely versus consensus expectations leading into the meeting. However, the market will need to wait until the OPEC meeting reconvenes today at 10.30 am EST to confirm this.

If OPEC and the Joint Ministerial Monitoring Committee fail to make a concrete recommendation there are past examples this year of the group maintaining production discipline and even cutting further.

All of this against the backdrop of EIA and API data that showed US crude stockpiles fell much more than expected last week amid rising summer demand.

After closing above $75.00 for the first time since 2018, the next upside resistance for crude oil is at $76.90 coming from October 208 high. If crude oil was to break above $76.90 in the event of a “no-deal” then allow the rally to extend towards $80 and beyond that the mid $80s where a sequence of lows from 2012 and 2013 will provide resistance.

On the downside, there is short-term support at $72.00 and again at $70.00 before medium-term uptrend support near $68.00 which is my preferred level to look for basing in the event of a higher than expected OPEC production increase.

Source Tradingview. The figures stated areas of the 2nd of July 2021. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

The RBA has prepared the market for changes to its monetary policy settings tomorrow as it takes initial steps towards removing emergency stimulus measures. However, the overall tone is likely to remain dovish and more so in light of the uncertainty caused by a continued increase in new COVID19 cases and lockdowns in Sydney.

The three main points of interest will be as follows.

1. The RBA is not expected to extend its three-year “yield target bond” from the April 2024 bond to the November 2024 bond. A decision that is widely expected and will represent a gradual tightening of policy that seems appropriate following the rapid improvement in the economy.
   
   
2. Forward guidance will remain dovish. Specifically, the RBA will reiterate that the conditions to raise interest rates including inflation sustainably between the 2 to 3 per cent target rate is unlikely to be met until 2024 at the earliest.
   
   
3. QE is expected to continue after the current program of $100bn is complete in September, but potentially at a slower pace of $75bn per six months and with more flexibility.

The RBA’s framework including the stringent pre-conditions it has set, including reaching 3% wage growth, and inflation sustainably back to within its 2-3% target band is likely to keep the RBA at the back of the pack amongst developed market central banks to start hiking.

Music to the ears to the ASX200, after it completed Financial Year 2021 last week showing an index return of 27.8%, the strongest since Financial Year 2007.

In recent weeks consolidation has been noted as the ASX200 closed four of the past five weeks ~10 points either side of 7300. As such the view remains unchanged in that we hold a preference to buy weakness towards uptrend support in the 7100/7000 support area.

Source Tradingview. The figures stated areas of the 5th of July 2021. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation