Some of US firms, in particular infrastructure-related, may increase in price after publication of details of the Trump plan for infrastructure spending. Close attention is likely to be on construction companies, manufacturers of building materials, trucks and transport companies. This could further compensate for the drop in the US market last week, caused by the bubble in the derivatives market for volatility (exchange notes on the VIX index). The sharp deterioration in expectations regarding central banks’ liquidity supply, and therefore stability in the stock market, caused capital outflows throughout the market. Investors preferred to wait out the storm in the most liquid asset – money.
A glance to CFTC
Investors refuse to increase long positions on the Dollar index, but they also shortened short positions showed the latest data of the CFTC. The decrease in net position amounted to 4 thousand contracts – from 47 thousand to 43 thousand. The net speculative position on the Euro jumped in early January and remains stable for several weeks. This indicates that investors have taken a wait-and-see position and are waiting for news on the macroeconomic front to confirm the intentions of the ECB and the Fed on the accelerated rate hikes and hindering further credit expansion.
Short run Dollar discipline
The Dollar index sits at 90.0, while the EUR/USD pair is trading in a limited range since the beginning of the session. The FED and the Payrolls report indicated an early end to the period of calm and low volatility in the market, but the wide room for maneuver left by the regulator, in the event of a worsening economic environment, keeps the next increase on a big question. Investors are waiting for data on US consumer inflation on Wednesday to be convinced of the elimination of the main constraining circumstance for the FED and begin to pawn the price of the Dollar in March rate hike. Nevertheless, the data weaker than the forecast or matching with the expectations will not resolve the uncertainty in the regulator’s policy, so investors will be patient with other important confirmations of the FED’s position, announced in January.
The oil market heals wounds after last week, marked by high turbulence, panic and loss of control. The prices grew by 1%, however, the rate of increase in American production hinders further strengthening of the market. The collapse of prices last week, after the publication of data on US production, became a vivid confirmation that the fundamental forces of the market (supply and demand) remain the main drivers of price changes, even though they worked with delay.
Production in the US exceeded 10 million barrels last week, the EIA showed, surpassing market forecasts. Now American firms produce in aggregate more than Saudi Arabia and have high chances to exceed the production rates of Russia, the leader in the oil market. Details of the EIA report showed that the lack of an agreed production policy among US firms forces them to compete with their production growth (using the chance to sell at an increased price), which logically leads to overproduction, pushing the market back into an oversupply of supply. As the signals for further output growth, we could also consider the growth of rig count by 26 units last week to 791 wells, the strongest growth since April 2015. But the market punished the similar behavior of American companies last week, showing that the OPEC campaign to cut production is not the most reliable support for market rally, and it is not worth pinning big hopes on them. Also, the strengthening of the market at the beginning of the week is likely to provide temporary relief and further price cuts are necessary for American production to come up with the idea of agreeing on the volumes of extraction if they are ready for this.