Thursday was quite a day on the markets but not for the reasons that one could had anticipated. Two big calendar positions: the ECB and the ADP were non-movers while markets were moving on oil.
The ECB was expected to be a non-event and it was precisely that. Mario Draghi stressed that there was a lot of stimulus in the pipeline that had been announced in the past (Dec and March) and that for now it looked sufficient to put the economy back on track. Market-wise, however, his remarks that the balance of risks improved, should have been received as euro positive, equity negative because it stressed no need for any further action in a foreseeable future. While we saw some temporary weakness in the DAX, it’s not like the markets reacted seriously to the ECB today.
ADP was another non-event coming up exactly in line with expectations at 173k. A positive revision of 10k for April was not enough to change its neutral feeling, leaving all the job for the NFP tomorrow.
The day was not boring though thanks to the oil market where investors were bracing for the OPEC decision. While no action was expected, investors at least saw some cautious tone coming from officials. OPEC indeed refrained from any action but a sanguine talk from Saudi or Iran officials left an impression that the cartel was ready to pump all the oil it could, hoping that a decline in the US output and demand increase would be enough to keep an upward pressure on prices. Unsurprisingly this left prices tumbling but the DOE report came to the rescue not only showing a decline in the US inventories but also another decline in the US output. Oil keeps hovering just below a resistance of 50-51$/b (for WTI) and bearish signal here could make it an interesting tactical sell in our view.
The DOE report was a turning point for the US equities today. A correlation between oil and the US indices is fairly strong this year and recently there were hopes that a higher oil price will boost the S&P500 EPS this year (via profits of energy companies). So even though the index opened in the red, a solid DOE report helped pull it back towards 2100 level. Just like with oil, the price of the index looks steep to us and these levels provided good selling opportunities in the past.
Coming back to commodities, soybeans surged today on lower estimate of Brazilian exports and concerns over weather in the US but the commodity starts looking like a sell - more on this in today’s commodity report.
There will be few numbers on Friday in Asia but everything will be dwarfed by the US NFP tomorrow. Watch out for the ISM services as well (3pm) as the PMI serviced showed a major decline in activity which could deliver a decisive blow to equities, should it be repeated in a more credible ISM survey.
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