Global Trading Week Begins with Asian Shares Surging and Oil Prices Jumping
Asian shares continued their upward trajectory, following the rally in global equities that seems unfazed by concerns about economic growth and rising interest rates.
Last Friday, the US market saw gains driven by big tech, options positioning, and expectations of the Federal Reserve keeping rates unchanged this month, with a likely increase in July.
The recent mixed jobs report influenced bets on the Fed, as it showed signs of labor-market slackening in May despite an increase in hiring. This strengthened the argument of Fed Chair Jerome Powell and other officials that more time should be taken to assess incoming data and the evolving outlook before raising rates again.
The dollar showed slight strength, reflecting rising US yields. Meanwhile, the euro, pound, and Australian dollar moved lower, while the yen weakened beyond 140 against the greenback.
Oil prices experienced a significant jump of over $1 a barrel on Monday. The surge was triggered by Saudi Arabia, the world's top exporter, announcing plans to cut production by an additional 1 million barrels per day from July. This move countered macroeconomic headwinds that have been pressuring the market.
Brent crude futures reached $77.64 a barrel, up $1.51 or 2%, and even touched a session-high of $78.73 a barrel earlier. US West Texas Intermediate crude climbed $1.41 or 2% to $73.15 a barrel, reaching an intraday high of $75.06 a barrel.
The increase in oil prices builds upon the 2% gains from Friday. Saudi Arabia's energy ministry confirmed that its output would decrease to 9 million barrels per day in July, down from around 10 million barrels per day in May. This reduction represents the kingdom's largest cut in years.
The voluntary production cut by Saudi Arabia comes in addition to the existing agreement within OPEC+ (OPEC and allied countries, including Russia) to limit supply until 2024 in an effort to boost oil prices. OPEC+ currently accounts for around 40% of global crude production and has implemented cuts of 3.66 million barrels per day, equivalent to 3.6% of global demand.
The surprise announcement by Saudi Arabia, considering the recent adjustment to quotas, is expected to tighten the oil market even further in the second half of the year, according to ANZ analysts. Consultancy Rystad Energy predicts that the additional cut by Saudi Arabia could deepen the market deficit to over 3 million barrels per day in July, which may lead to higher prices in the coming weeks.
Goldman Sachs analysts described the OPEC+ meeting as "moderately bullish" for oil markets, suggesting that December 2023 Brent prices could increase by $1-$6 per barrel, depending on the duration of Saudi Arabia's output at 9 million barrels per day over the next six months.
Saudi Arabia's Minister of Energy, Prince Abdulaziz bin Salman, emphasized his commitment to stabilizing the market, stating that he would do whatever is necessary. However, some experts believe that the voluntary cut aims to provide downside protection rather than to drive a sustained rally, given concerns about macroeconomic weakness.
Although the announced reductions by Saudi Arabia and other countries seem significant, some of them will have limited real impact as the targets for Russia, Nigeria, and Angola have been adjusted to align with their actual production levels.
Key events to watch this week include the Eurozone S&P Global Eurozone Services PMI and PPI on Monday, US factory orders and ISM services data on Monday, and ECB President Christine Lagarde's appearance in the European Parliament on Monday.
This week, the central banks of Australia and Canada are scheduled to have their meetings. It's an important event for the markets, as they perceive a significant possibility, approximately 40%, that the Reserve Bank of Australia (RBA) might catch everyone off guard by implementing a quarter-point increase on Tuesday. This speculation arises partly due to concerns among some economists about the impact of a minimum wages decision, which they fear could add to inflationary pressures.
On the other hand, the Bank of Canada (BOC) will hold its meeting on Wednesday. A majority of economists who were surveyed by Reuters anticipate that the BOC will maintain the current interest rates at 4.5% throughout the year. However, there remains a notable risk of another rate hike in the near future, even though it may not be the consensus opinion among economists.