Crude Oil Crumbles Amid Choppy Trade Elsewhere

WHERE WE STAND – A relatively quiet start to the week yesterday, in terms of news- and data-flow at least, with participants rather lacking conviction in relatively tentative trade, as is so often the case when such a bumper slate of event risk looms large on the horizon.

In fact, participants seemed to spend the bulk of Monday digesting the weekend’s events which, admittedly, gave folk plenty to chew over.

Prolonged coalition negotiations look to be on the cards in Japan, after the ruling LDP-led coalition lost their parliamentary majority in Sunday’s election. The length, and likely conclusion, of these negotiations of course remains to be seen, though the huge dose of uncertainty that they will bring makes a bullish Japan stance something of a tough sell in the short-term, if nothing else.

The JPY, naturally, traded softer yesterday, losing around 1% as USD/JPY rose north of the 153 figure for the first time since July, with the election-linked uncertainty also likely to delay the BoJ from rushing to tighten policy further, certainly not at this Thursday’s meeting, and perhaps even casting doubt on a December hike as well. While this JPY weakness did see a knee-jerk rally in the Nikkei, I struggle to see this move as being sustainable, and would favour fading rallies at least until we gleam a greater degree of certainty over the makeup of the new government.

It's worth remembering here that, the last time the LDP lost power, in 2009, saw a spell of three prime ministers in as many years from opposition parties, in what was only the second time since 1955 that the LDP had not governed the ‘land of the rising sun’. A key part of the bull case towards Japan had, up to now, been relative political stability compared to DM peers – that’s quite obviously no longer the case.

Meanwhile, the geopolitical situation in the Middle East appears to have cooled substantially, with Israel’s weekend retaliatory strikes on Iran having centred on military infrastructure, and avoided any oil, energy, or nuclear installations. In short, it seems the strikes were more of a ‘face saving’ response, akin to that seen in April, as opposed to being designed to spark a further escalation in tensions.

Consequently, a significant degree of geopolitical risk premium was priced out of crude. Yesterday saw front WTI notch its worst day in over 2 years, while front Brent fell 6% in its biggest one-day decline since August 2022. With the aforementioned risk premium having been priced out, the floor that had been supporting prices now seems to have been removed which, coupled with the dour demand outlook, likely gives crude bears the upper hand in the short-term.

Elsewhere, equities lacked a catalyst, though the S&P did grind out a modest gain of around 0.3%, as the Nasdaq ended unchanged. While the medium-run path of least resistance does indeed continue to lead to the upside, it wouldn’t be a surprise to see a further de-risking in the short-term, and some turbulent trade for now, ahead of election day next Tuesday.

This is particularly true considering that, with the S&P having gained 22% this year, the YTD performance marks the best election year performance – at this stage – in at least the last 6 electoral cycles. Few participants would want to surrender those gains,  

For the Treasury participants, in contrast, the day was full of factors to digest. Supply, in fact, was digested rather poorly, with the 2-year auction tailing by 0.8bp, and the 5-year by an even chunkier 1.6bp. Clearly, both of these auctions tee things up rather poorly for the 7-year supply later on. The day also brought the latest quarterly refunding announcement, which saw the Treasury marginally revise down the Q3 borrowing estimate, to $546bln from $565bln, ahead of the issuance breakdown to be announced on Wednesday.

Finally, Monday proved a largely directionless day in the FX space, besides the JPY weakness mentioned earlier on. Nevertheless, that meant that the dollar remained north of both the 104 figure, and the 200-day moving average, setting the buck up for further gains in the near-term, as the ‘US exceptionalism’ theme persists into Wednesday’s Q3 GDP release, and as pre-election risk aversion likely continues to contribute to some lingering haven demand.

LOOK AHEAD – A busier docket awaits today, with some intriguing macro events, as well as the start of ‘magnificent seven’ earnings reports.

On the data front, September’s US JOLTS job openings figure is likely of most interest, with openings set to have largely held steady around the 8mln mark last month. Though the read-across to Friday’s October employment report is rather limited, a soft print could well see some ramp up bets on another 50bp Fed cut once more – though I think the bar to consecutive ‘jumbo’ cuts is a very, very high one. The latest consumer confidence figures are also due, from the Conference Board, with the index seen ticking higher to 99.5, from 98.7, presumably a result of declining inflation expectations.

Turning to earnings, a busy calendar lies ahead as the busiest week of Q3 reporting season continues. Alphabet – aka Google – are the star of the show, being the first of 5 ‘magnificent seven’ companies to report this week, with derivatives seeing a +/- 5.5% move in the stock after hours. Other notable reports include McDonald’s, after the E. coli scandal reported last week, and AMD, whose report may offer some read-across to other AI-exposed names, such as Nvidia, who don’t report for around a month.