Oil rallies, Bitcoin slumps

Oil prices rallied after news that OPEC+, led by Saudi Arabia, will reduce oil output. Equity, bond and currency markets were largely unchanged as traders look ahead to next week’s Federal Reserve meeting and the outlook for interest rates. Economic data indicated economic growth, but a slower pace. US/China tensions continue to rise over Taiwan and remain an uncertain wild card for markets. Crypto stocks were slammed as the SEC sued exchange operator Binance.

TODAY’S MAJOR NEWS

Oil supply cuts boost crude price

Higher crude oil prices look likely following deep oil output cuts agreed by OPEC+, accounting for roughly 40% of the world’s crude oil, according to the head of the International Energy Agency (IEA) speaking on Sunday. Saudi Arabia indicated that it will make a deep cut to its output next month, on top of a broader deal by the cartel to limit supplies into next year to support prices. OPEC+ agreed to extend its current cuts of 3.66 million barrels per day, in addition to reducing overall production targets from January 2024 by another 1.4 million bpd, bringing its combined output to 40.46 million bpd.

OPEC+ cited concerns about China’s sluggish economic recovery in making its decision, along with geopolitical risks, the US banking crisis risks and risks of a global recession. Saudi Arabia indicated that it will start things off with a 1 million barrels per day (bpd) cut next month, dropping its output to 9 million bpd, although it could add that production back to the supply in August, unless market conditions justify extending the cuts. Russia is expected to produce roughly 9.5 million bpd through the end of the year, dropping to 9.3 million bpd next year. Meanwhile, US production is expected to rise 5.1% to 12.53 million bpd this year, adding another 1.3% to 12.69 million bpd next year.

More US-China tensions over Taiwan

Geopolitical risks continue to rise between the US and China, adding another dimension to financial market risk. A near collision between a Chinese warship and an American destroyer in the South China Sea near Taiwan over the weekend illustrates the risks of an “accidental” war in the region, even as tensions continue to rise between the two countries. Beijing claimed that its warship was conducting a lawful warning against North American provocations, while the US stated that the actions of the warship were unsafe and that they violated the maritime “Rules of the Road” of safe passage in international waters. The incident took place coincidentally during the international defense summit in Singapore, where China had declined the US invitation to participate.

SEC sues Binance

In the first major legal action since the collapse of crypto exchange FTX, the SEC today sued the world's largest crypto exchange Binance Holdings and its founder Changpeng Zhao, alleging violations of US securities law. Binance's native BNB token fell close to 10% to $275 per coin. Binance failed to register as a national securities exchange, broker-dealer, and clearing agency, according to the SEC suit, and misled investors on its controls over manipulative trading and market surveillance. “We allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law,” said SEC Chair Gary Gensler. The case could open a wider clampdown on crypto trading.

Bottom line – risk-hold?

Financial markets appear to be on risk-hold today after last week’s debt ceiling bounce, but risk-off looks possible ahead of next week’s fed decision on interest rates.

TODAY’S MAJOR MARKETS

Equity markets

• The Nasdaq 100 and S&P 500 were unchanged today, with the more broadly based Russell 2000 giving up recent gains and down 1.4%. Apple touched record highs this morning
• Crypto stocks sold off, with Bitcoin off 6.3% at $25,506, after the SEC unveiled charges against leading exchange operator and crypto platform Binance
• The FTSE 100 was unchanged, but the DAX fell 0.5%
• The VIX, Wall Street’s fear index, fell below 15 until midday but rose in the afternoon

Currencies and Bonds

• The dollar index was unchanged against a basket of currencies this morning, after advancing when the debt ceiling deal was completed
• Yields on 2-year and 10-year Treasuries fell to 4.49% and 3.69% respectively

Commodities

• Crude oil prices have now risen by 6% to $72.0 per barrel in the past five trading sessions
• Gold prices bounced back to $1,978 per ounce

Weaker economic data, but still showing growth

• The final PMI composite final index for May came in at 54.3, below an expected 54.5, but still indicating growth
• The PMI services index came in at 54.9, below an expected 55.1
• The ISM Services index came in at 50.3 for May, below an expected 52.0, indicating incremental growth
• For both surveys, a number above 50 still indicates month-on-month growth.
• Factory orders grew 0.4% month-on-month in April, half the expected 0.8% growth rate

Analysis by Arlan Suderman, Chief Commodities Economist: [email protected]

Market outlook by Paul Walton, Financial Writer: [email protected]