We are now clearly in event time. The Greek elections are on Sunday but the reactions started yesterday afternoon as rumors of coordinated global central bank action on liquidity sent the euro soaring, US dollar falling and most other risk asset markets surging higher. The rumors were never confirmed but the markets only retraced marginally from the highs of the liquidity movement and actually have firmed a bit more overnight. Yesterday's market move demonstrates how fragile and nervous the market is and how risk adverse most players are heading into the heart of the June events.
By law public polls 15 days prior to the Greek election are prohibited. However, a so called secret poll circulating around the world shows the pro bailout party has gained ground and may be leading. Just another of the many rumors and news snippets that are running havoc with all of the risk asset markets. I like most everyone else does not know what the outcome of the elections will be nor what the reaction will be in the global financial markets starting on Sunday night. In addition it is not know exactly what the global central bankers will do but if the financial markets start selling off strongly I would suspect a lot of announcements about liquidity infusions pretty quickly.
Many traders have balanced their books and will wait for the outcome. In addition to the Greek elections next week is filled with important meetings... FOMC and G20 which will impact market direction irrespective of the outcome of the Greek elections. I still think the Greek elections will result in the pro bailout party winning enough seats to form a government. That said I am heading into the weekend with a balanced book. The risk/reward of taking a definitive view of the outcome and how the market reacts to the outcome is biased to the risk side.
OPEC rolled over their existing agreement yesterday as expected. A rollover agreement means that the production ceiling remains well below the current production level. Does this mean that OPEC members...including Saudi Arabia are all of a sudden going to cut production and start to comply with a production ceiling they have not been complying to for months. Or does it mean that Saudi Arabia (largest overproducer versus the official production quota) is going to very quickly cut production and comply. I do not think so. Rather I believe the Saudi's will continue to overproduce at the current rate until they are convinced that the world does not need the oil and/or Iran and the West actually emerge with a concrete deal. Next week we will see if progress is made at the Moscow meetings. For now I do not expect any change in actual production levels out of Saudi Arabia or OPEC in general in the short term. The next month or so will provide OPEC counties with a lot more clarity as to how the global economy is likely to evolve for the rest of the year as well as to whether or not a diplomatic solution with Iran is actually possible. Until there is more clarity on both of those fronts I expect Saudi Arabia to continue to produce at or near current levels.
Global equity markets have continued to add some level gains for the week especially since the rumors starting to hit the media airwaves yesterday afternoon. The EMI Global Equity Index gained about 0.33% over the last twenty four hours as shown in the following table. The weekly gain widened to 1.6% resulting in the year to date loss narrowing to 0.2%. As with every other risk asset global equities will be strongly impacted one way or the other by the outcome of all of the events for the rest of the month and starting with the Sunday's elections in Greece.
For at least the next week or so event risk will be the main market driver and will trump fundamentals and technicals. I also believe that there will be plenty of time to take advantage of whatever the outcome turns out to be after some of the results of the June events are in the market. Just keep in mind that even if the Greek elections result in the pro bailout party actually winning and Greece eases to the background there are many headwinds that will still remain. The slowing of the global economy as well as evolving sovereign debt issues in Spain, Italy and elsewhere in Europe are all major market issues that will not be resolved based on the outcome of the Greek elections. The are many more risks out there right now that actually dwarf Greece. Don't let your guard down after Sunday.
I am still maintaining my oil view at neutral. I am still expecting the oil complex to settle into the $80 to $90/bbl trading range basis WTI and $95 to $105/bbl basis Brent. The outcome of all of the upcoming events I have been discussing in the newsletter over the last several weeks will determine whether or not oil prices move outside of the boundaries of the trading ranges.
I am keeping my view at neutral to see if Nat Gas is able to hold onto the developing trading range. The surplus is still narrowing in inventory versus both last year and the five year average but could lead to a premature filling of storage during the current injection season. However, I now believe that we may see other producers starting to signal a cut in production. We may still see lower prices (thus the basis for my bias) but I think the sellers are losing momentum.
Yesterday's story in Nat Gas is all about the weekly EIA injection report which came in below all of the market expectations today sending the market into an instant short covering rally that is still underway as of this writing. The inventory injection was below the market consensus as well as below last year and the five year average for the same week (see below for more details). So far the weekly injections have underperformed for the entire injection season so far. This pattern will have to continue to avoid storage from hitting maximum capacity limitations before the end of the injection season (normally around the end of November to early December). Keep in mind in the short term the market will have limited upside as rising prices will eliminate the economic advantage of Nat Gas over coal for power generation. This switching has contributed strongly to injections underperforming for the last three months. I still view this market as trading most of the time in the $2.25 to $2.50/mmbtu trading range.
Today's EIA report was bullish from the perspective that the injection was below the consensus level and bullish when compared to last year and the five year average injection level for the same week. The EIA injection was 7 BCF below the consensus (74 BCF) and below last year's injection and below the injection level for the five year average for the same week. The net injection of 67 BCF was less than my model forecast (70 BCF) this week and at the very low end of the range of market projections. The inventory surplus narrowed modestly versus both last year and the more normal five year average also. The current inventory level is now 666 BCF above the five year average.
Currently markets are higher as shown in the following table.
Dominick A. Chirichella
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