Good morning.
Brent crude oil trades above $50 per barrel for the first time since November
Brent crude oil (the more global of the two major oil benchmarks) rallied above $50 per barrel for the first time in six months as data yesterday showed US energy reserves being drained at a faster rate than expected. This, compounded by the effect of supply disruption in Nigeria, Canada and Venezuela, has caused the price of crude oil to almost double since the beginning of the year. This rally has been supportive of emerging market and commodity-linked currencies such as the Indian Rupee, Australian dollar and Canadian dollar as their chief exports have become more valuable.
Despite the recent one-directional price action, oil markets commonly show whipsaw price action. As such, it would be unreasonable to expect that now prices are above $50, they’re likely to stay there. Additionally, if higher oil prices are sustained, this will act as a strong incentive for oil producers that had previously put output on hold to resume drilling, increase supply and place a cap on near-term prices.
Mudslinging in Brexit debate reaches fever pitch
The back-and-forth nature of the EU referendum tirelessly continued yesterday: a report by the independent think tank IFS (Institute for Fiscal Studies) outlined their expectations that a possible UK exit from the European Union would result in an additional two years of austerity, costing £20-40 billion per year. This runs contrary to the Vote Leave campaign’s claims of £18 billion in savings should the UK vote for a Brexit. Adding further numbers to the debate at this point in time seems somewhat of a lost cause, the widely diverging claims going either way seem to have had only one effect: it’s hard to see the wood for the trees.
UK business investment expected to have slumped in early 2016
On the UK calendar today, the second print of UK GDP is due at 09:30 UK time. While the headline growth figures are expected to be unchanged, this is the first glimpse we’ll get of some component data including total business investment for Q1 (a strong indicator for business risk appetite and sentiment). Rather unsurprisingly, this is expected to have contracted sharply and is seen falling to -0.1% from +3.0% a year earlier as businesses delay investment and capital expenditure decisions until after June 23rd, a trend that we expect persisted well into Q2.
Fed unlikely to comment on expectations of a June rate rise
Elsewhere on the tape today, Fed members Powell and Bullard are due to speak, where they’ll try to avoid giving further hints on the likelihood of a June rate hike from the Federal Reserve. Futures markets currently see a 58% chance of higher rates by the end of July and that 42% gap in expectations shows that the US dollar has a lot further to run should the Fed resume its tightening cycle. Weekly jobs data at 13:30 UK time may be the next flashpoint for USD activity, but the medium- to long-term trend is still focused on the Fed meetings in June and July.
Have a great day.