It is all about inflation and oil
Global markets are still witnessing a period of fluctuation that is likely to continue ahead of key events and economic releases throughout the week of April 10 to 17. This fluctuation is supported by the dovish tone echoed by some central banks, including the European Central Bank (ECB), and the Federal Reserve (Fed). U.S. Fed Chief Janet Yellen had refuted claims that the Fed’s December rate hike was a mistake, saying that the country’s economy had witnessed a tremendous progress following the global financial crisis. Meanwhile, Yellen’s European counterpart, ECB’s Chief Mario Draghi had also warned at the beginning of April that the Eurozone faces downward risks despite the lenient monetary policy. Draghi’s famous pledge in 2012 to do “whatever it takes” to save the euro doesn’t seem effective now.
It is worth noting that the Fed is the only central bank that is tightening its monetary policy at a time when central banks across the globe are easing theirs, amid an ongoing slowdown in the global economy. However the focus will be on the U.S. since the Fed’s policy remains the main driver of the global markets.
For the time being, all eyes are set on the upcoming inflation data from several key regions and a key meeting for the Organization of Petroleum Exporting Countries (OPEC), scheduled for April 17 in the Qatari capital Doha.
This week (April 11 to 16), is all about inflation. Everyone will be eyeing inflation data that are expected to be released by China, Germany, Japan, the U.K., the eurozone and the U.S., and which are all set to have a notable impact on the markets. The figures are expected to show a positive surprise in light of the recovery in crude oil prices over the past few months.
A pick up in global inflation might be good news for central banks worldwide, but then again, that may be “the good news at the wrong time.” No one will be happy to see higher inflation at a time when most of the central banks are easing their policies due to the slowing economic activity. Yet, this might be the beginning of stability in the markets; but it is still very early to judge.
In China, the Consumer Price Index (CPI) is set to rise to 2.4 percent, which would be the highest inflation rate since 2014. The U.K.’s CPI is expected to rise to its highest level since December 2014.
As for the EU, the final core CPI figures are set to remain unrevised at 1 percent and a negative 0.1 percent for the CPI, which would be the highest reading in two months.
The U.S.’s month-on-month CPI is likely to rise by 0.2 percent following its decline by the same rate in March. The country’s year-on-year core CPI is set to remain stable at 2.3 percent, which would still be the highest reading since September 2008.
Meanwhile, global markets are likely to be influenced by crude oil shifts more than any other time this year. The reason for that is the upcoming OPEC meeting where member states will discuss the possibility of freezing their oil production in order to stabilize the markets.
In March, the Saudi deputy crown prince said his country, the world’s top oil producer, will not freeze its output if its nemesis across the Gulf waters, Iran, refuses to freeze production at current levels.
Tehran’s oil output is estimated at 3.2 million barrels a day, while Saudi Arabia produces around 10.2 million barrels a day.
A freeze in OPEC’s output should also give a nudge to oil prices in a market that has been oversaturated for quite some time.
A deal at the OPEC meeting will also give a boost to equities. However, it is the earnings season in the Arab region, and the estimates aren’t really optimistic, due to the turmoil the markets have witnessed towards the end of 2015 and early 2016.
That is why the optimism and hype surrounding the Doha meeting might be something to take advantage of, albeit with the caution that estimates of lower earnings may lead to a wave of profit netting ahead of the earnings.
Traders also need to realize that the Doha meeting’s impact might be priced in already. Why? Because crude oil has already seen a sharp recovery, as many are convinced that the Doha meeting will result in some good decisions.
And as expected, the outcome of that convention depends on Iran.
It is not clear yet whether Tehran will join the rest of the producers in freezing oil production, especially that its energy minister said in March that it wouldn’t be fair for his country to halt production at 3 million barrels a day when others, like Saudi Arabia, were producing record-level output.
Whether OPEC members agree to freeze production or not, the important idea here is that both OPEC and non-OPEC producers—namely Russia—are holding together nowadays, which creates a positive sentiment for the oil market.
Moreover, no matter how much oil prices drop, there is no other alternative for this black gold for at least the next decade. Therefore, at some point, a recovery is expected sooner or later.
Nour Eldeen Al Hammoury is the Chief Market Strategist at ADS Securities.