European Open Preview – Risk sentiment sours; OPEC summit front and center


Marios Hadjikyriacos, XM Investment Research Desk
  • Risk appetite crumbles as US arrests Huawei CFO, generating worries of re-escalation in the trade conflict
  • Today, all eyes are on OPEC’s meeting (1200 GMT); expectations for a production cut are elevated
  • Loonie nosedives to a 1½-year low as BoC shifts to a more cautious stance

Risk appetite falters on fears of “trade war” re-escalation

After a relatively calm Wednesday, risk appetite deteriorated once more during the Asian session on Thursday, following news that the CFO of the Chinese tech colossus Huawei Technologies has been arrested in Canada, to be extradited to the US. Although not clear yet, the charges seem related to a violation of US sanctions against Iran. China’s embassy in Canada demanded her immediate release.

Whether correctly or not, markets interpreted this as a severe risk to the “cease-fire” in the trade war. It underscores that US-China frictions likely run deeper than purely trade matters, and that the gap between the two on burning issues like forced technology transfer and intellectual property may be too large to bridge over 90 days. Stock markets in Asia were a sea of red, while futures tracking the major US indices are also pointing to a lower open today, of around -1.0%. Accordingly, the defensive yen – and to a lesser extent the dollar – are outperforming, while risk-sensitive currencies like the aussie and kiwi are surrendering ground.

OPEC meeting in the spotlight

The main event today will be the OPEC meeting in Vienna (1200 GMT), where expectations for a production cut to stabilize oil prices are riding high. Investors appear relatively confident that an output reduction will indeed be delivered, though there’s a wide range of estimates around the size of any cut. Market chatter continues to suggest a cut of around 1 – 1.5 million barrels per day, with anything near the upper bound of this range likely to help oil prices recover, whereas anything near the lower end – or worse yet below it – will probably hurt crude.

Admittedly, predicting the magnitude of a cut is difficult, as the number required to balance the market may differ from the “politically acceptable” number that can be agreed among players. That said, upside risks to prices appear less pronounced than downside ones. A major cut that exceeds expectations would probably infuriate the White House, hence Saudi leaders may want to avoid that route. On the other hand, the producers may fail to agree entirely, or may agree on the need to cut but not on how much, disappointing markets. Besides crude prices, oil-sensitive currencies including the loonie, Norwegian krone, and Russian ruble will also take their cue from the outcome.

Loonie dives to 1½-year low as BoC strikes a cautious tone

The Bank of Canada (BoC) kept its policy unchanged yesterday, as widely anticipated, and shifted to a more cautious bias amid the collapse in oil prices. Policymakers noted activity in Canada’s energy sector may be “materially weaker than expected”, and that “data suggests less momentum” in Q4. The loonie collapsed to a fresh 1½-year low versus the dollar as investors pared back bets for a rate increase at the January meeting, a prospect now priced in with a mere 26% probability, versus the 68% prior to yesterday’s decision. Now, the most crucial driver for the loonie will be today’s OPEC summit, though some remarks by BoC Governor Poloz at 1350 GMT may also attract attention.

Other highlights for today

The highlights on the US economic calendar are the ADP employment report and the ISM non-manufacturing PMI, both for November. The ADP number is projected to be solid, though note that the correlation between the ADP and the NFP print that is due tomorrow has declined substantially, so today’s release may carry less importance in the eyes of investors. Finally, the US trade balance for October is also due.

As for the rest of speakers, BoE Deputy Governor Ramsden (1000 GMT) and Atlanta Fed President Bostic (1715 GMT) will deliver remarks.