Renewed OPEC Hopes and Month End Featured

Yesterday’s pessimism about a potential deal at today’s oil producers’
meeting in Vienna has been replaced by
optimism and that crude oil around 5%. 
   Supportive comment
by Iranian officials about there being
acceptable proposals on the table and
intimations that Russia may also participate in cuts fanned the newfound hopes.  

Still, there is some moving parts.  Iran has continued
to indicate that freezing its own output is not on the agenda.  It is
not clear that that would satisfy the Saudis.  Over the past year, the
dispute between Saudi Arabia and Iran has been a major stumbling block
preventing agreement.  

The sharp rise in oil prices is helping lift some oil-sensitive currencies,
like the Russian ruble, the strongest of the emerging market currencies
The Mexican and Colombian pesos may also be supported.  Among the majors, the surge
in oil is giving the Norwegian krone a fillip;
may be helping Canadian dollar hold on to yesterday’s gains. 
The US dollar is holding just above CAD1.34.  It has not been below CAD1.3380 since the US election.  

Against most of the major currencies, the US dollar is little changed.   The greenback is
strongest against the yen, gaining nearly 0.5%.  It held JPY112.00 in
early Asia and poked through JPY113 in the European morning, which appears to
have largely exhausted the technical scope. The euro is holding on to the bulk
of yesterday’s gains; finding support near $1.0620, but unable to make much
headway toward Monday’s high near $1.0680.  Sterling looks a bit heavier
than the euro, but support near $1.2450 remains intact.   The results
of the BOE stress test showed only one bank having to bolster its capital plans
and two other banks slight inadequate results. This
have weighed on the financials, but has prevented a broader equity
advance in the UK, led by energy and consumer staples.   

The Australian dollar stalled in front of $0.7500.  It has been
stymied by this cap this week as the rebound from $0.7300 on November 21
stalled.  The precipitating cause today may have been the unexpectedly sharp drop in building approvals.  The 12.6% drop contrasts with
expectations for around a 2% gain, which was to follow an 8.7% decline in
September.  The September series was revised to show a 9.3% decline. It is
the third consecutive decline, a streak not seen since Q4 13.  Some
pressure on the Australian dollar may also be
coming from month-end flows and the profit-taking in some of the industrial metals.  In particular, coking
coal, iron ore, and steel were limit down
in China on Wednesday, according to reports.  

The nearly 5% rally in oil prices is commanding attention and is
helping lift many of the oil-sensitive currencies.
  Higher energy prices may be exerting upward
pressure on yields, while the energy sector is underpinning equity
markets.  MSCI Asia-Pacific Index eked
out a small gain, its fourth rise in five sessions.  The Topix’s 12-day advance was snapped yesterday, but perhaps a new streak
began today.  Month-end pressures were
evident in China, where equities eased,
and the overnight repo rate soared to over 9%.  

The Dow Jones
Stoxx 600 is up about 0.4% in the European morning, helped by a 2.4% rally in
the energy sector.
  Of note, Italian
assets continue to fare well despite the uncertainty about the fallout from
this weekend’s referendum.  Italian
shares are leading the major markets with a nearly 1% gain, though bank shares
are flat after yesterday’s 4% advance.  Italian bonds are flat, while Spain and Portuguese
yields are firmer.
  US 10-year
yields are four basis points higher at 2.33%.  
The US dollar is mostly heavier, leaving the weakness of the yen and the
Australian dollar as exceptions.


There were three more economic reports of note.  First, 
Japan’s October industrial output was in line with expectations.  It rose
0.1% on the month, the third consecutive gain.  However, the
year-over-year rate slumped back into negative territory./  The 1.3% fall
snaps the two months it has been positive.  The sentiment is positive for November output, where the
government’s survey suggests expectations for a strong rise (~4.5%) before
falling again in December.  Japan’s industrial shipments rose 2.2% in
October, while inventories fell 2.1%.    The Japanese economy
appears to be finding some traction, helped by rising exports and somewhat
better domestic consumption figures.  

Second, France reported a flat November CPI, which due to the base
effect, was sufficient to lift the year-over-year rate to 0.7% (from
As recently as April it stood at minus 0.1%.  The
0.7% rise is the largest in two and a half years.  Despite the slight
disappointment with yesterday’s German report (0.7% year-over-year rise in CPI
rather than 0.8%), the aggregate for the eurozone
CPI rose 0.6% year-over-year, in line with expectations, while the core was
flat at 0.8%.  The flat core suggests that the rise in the headline is
stemming from food and energy.  

Note that energy prices in France have been edging higher as several
nuclear plants have been undergoing safety checks. 
Reports indicate that due to some damaged cables, the UK-French electricity
connection may only be at half capacity for a few months. 
Typically, the UK takes electricity from France, but recently it has been the another way around. 

Third, Germany’s November employment report was in line with expectations
(6.0% unemployment rates and a 5k decline in the number of unemployed).
However, where Germany shoppers surprised by
being particularly active in October.
  Retail sales jumped 2.4% on
the month, more than twice what was expected
and more than offsetting the 1.5% decline in September.   

As the North American session gets underway, there are three developments
that will vie for attention.
  First, the sound bites from the OPEC
meeting may still pose headline risks.  We suspect there is still scope
for disappointment, even if some agreement on paper materializes. 
Enforcing the cuts, and the rise of Libyan supplies
and non-OPEC producers may deter a sustained rally.  Second,
President-elect Trump may formally announce Ross as Commerce Secretary and
Mnuchin as Treasury Secretary.  Third
is the US economic data.  The ADP jobs report may be the most important,
but the October personal consumption and Chicago PMI will also attract
attention.  Later the Beige Book will be released ahead of the
mid-December FOMC meeting. 



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