The main in the overnight session was oil's sudden slide below $45 a barrel for the first time since OPEC agreed to cut output in November. As noted earlier, in less than 10 minutes on Friday, U.S. futures slumped more than $1 amid a surge in volume, launching a modest scramble into safe haven assets such as Treasurys, yen and gold. They have collapsed 8.6 percent this week, erasing all gains since the Organization of Petroleum Exporting Countries signed a six-month deal in November to curb production and ease a global glut.
Things only began to stabilize when Saudi Arabia's OPEC chief did the usual jawboning routine, hitting the wires in European hours and saying there was a growing consensus among oil pumping countries that they needed to continue to “rebalance” the market. Specifically, the Saudi OPEC governor's comments that: “A six-month extension (to production cuts) may be needed to rebalance the market, but the length of the extension is not firm yet.” Which while nothing new, provided a floor to the overnight dump and a signal to BTD.
As a result of the plunge, which has since mostly recovered, the Bloomberg Commodity Index slumped to lowest in a year, weighed by oil and iron ore. “Markets are losing faith that the global inventory glut will disappear on OPEC's cuts,” said Michael Poulsen, an analyst at Global Risk Management Ltd.
Following the unexpected snap, stocks flinched both in Asia and Europe, catching investors that had been expecting to spend the day mostly looking ahead to U.S. jobs data and Sunday's French elections, on the back foot. “The whole commodity complex has been affected by this and it could have some pretty big implications if it continues for much longer,” said Saxo bank's head of FX strategy John Hardy. “If you look at global risk appetite, equities have been pretty quiet and that feeds into FX as well if carries on and there is a risk switch.”
As Reuters adds, oil wasn't the only commodity that suffered, with Chinese iron ore futures falling almost 7% in Shanghai after tumbling 8% on Thursday. The Canadian dollar, the Australian dollar and Russia's rouble – the world's commodity- sensitive currencies – were all sent spinning, falling respectively to 14-month, four-month and seven-week lows.
Today's key event is the April payrolls number. Following that soft 98k reading in March (which was more than likely weather-related) the market consensus for today's print is a more sturdy 190k number. DB expects this rebound to be driven by two main factors. The first is initial jobless claims remaining near a roughly four-decade low and the second being that employee tax withholding receipts are growing at a very healthy rate, indicating a pick-up in income growth. It is worth adding though that while the ADP print earlier this week was fairly solid the employment components from the two ISMs has revealed some softening so that might sound some caution. As always keep an eye on the other components of the employment report including unemployment (expected to nudge up one-tenth to 4.6%), average hourly earnings (+0.3% mom expected) and the participation rate. The report is due out at 8.30am.
European shares declined and the dollar was mixed against its peers ahead of U.S. employment report. The Stoxx 600 index's fall tracked declines in much of Asia and in U.S. futures. Gold climbed from a seven-week low and iron ore fell for a third day.
In Asia, the Shanghai Composite Index was down 0.8 percent at 3,103 after earlier dropping below 3,100. The gauge neared its lowest close this year
The euro meanwhile touched six-months highs of almost $1.10 ahead of France's weekend election, in which polls now expect centrist Emmanuel Macron to convincingly beat right-wing and anti-euro rival Marine Le Pen. The gap between French and German 10-year government borrowing costs also hit a six-month low and despite the dip on the day, European shares were heading for a healthy 1.2 percent rise for the week.
The dollar and U.S. government bond yields had both been nudged lower by the commodity market worries. It is set to be the fourth weekly fall on the trot for the greenback which is now at its lowest since November. The yen and gold rose in tandem as investors took refuge in safe havens, though the latter remained on track for its biggest weekly decline in nearly six months on bets that U.S. interest rates will rise again in the coming months.
A handful of bearish comments emerged overnight, such as Hermes chief economist Neil Williams who said that “I think the payrolls will be under consensus. It fits with my view that the U.S. is going to peak out at a far lower interest rate than markets expect. The Fed's dot plots says 3 percent, but I'm going closer to 1.5 percent.”
