Energy stocks lead markets higher on OPEC surprise deal; Commodity currencies surged

September 29, 2016

When most traders thought an agreement to cut production was a mission impossible, OPEC surprised on Wednesday by announcing a preliminary deal to reduce output by about 700,000 barrels a day.

Battered finances of major oil producing countries forced the leaders to put their differences on one side and end a 2-years unofficial war on shale. Crude prices surged by 6% on the news yesterday and sent Asian equities higher with energy stocks leading the rally.

Such a deal should have had a stronger impact on oil, I would say at least a 10-15% rally, but the limited details of the agreement put a limit on the upside and we have to wait until Nov 30 to see whether the agreement will translate into actions, and whether non-OPEC oil producers will follow suit.

Commodity currencies surged on the news with the Canadian dollar and Norwegian crown benefiting the most. USDCAD fell below 1.31 from a high of 1.3269 earlier Wednesday and now the 1.3 psychological support seems to be the target, meanwhile USDNOK is trading at 5-month low of 8.014.

Risk appetite also pushed the Yen lower against all of its major peers falling by 0.7% against the dollar in Asia trade. Data from Japan showed consumers are still reluctant to spend with retail sales dropping for the sixth straight month, the longest streak since the global financial crisis. Retail trade dropped by 1.1% m-o-m in August sending the yearly decline to -2.1%, this is just another indication that Bank of Japan’s stimulus policy is not doing enough to send Japanese consumers into shopping malls.

European markets are set to open higher today with futures indicating a 1% rise in FTSE 100, and U.S. stocks likely to resume yesterday’s rally.

On the European data front, German annual consumer prices are forecasted to resume its recovery reaching 0.5% in September from 0.3% in the prior month. If oil prices continued to surge, this will translate into higher inflation expectations and put limits on further monetary easing.   

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