Despite questions over compliance, yesterday’s Opec deal is being seen as a real game-changer that could push prices higher - meaning fresh inflationary pressures and higher prices at the petrol pumps.
The comments, made in parliament, fuelled hopes that Britain might avoid a ‘hard Brexit’. Sterling hit two-month highs, before dipping a little -- and is currently up 0.5% at $1.257.
Government bonds have also sold off today, driving up the yield on benchmark US debt. UK borrowing costs also rose, with the yield on 10-year gilts up from 1.5% to 1.51%.
And European stock markets have closed in the red:
FTSE 100: down 30 points at 6752, -0.45%
German DAX: down 106 points at 10534, -1%
French CAC: down 17 points at 4560, -0.4%
Investors are fretting about Sunday’s Italian referendum on constitutional reforms, and Austria’s presidential election (between a far-right candidate and a Green).
Over on Wall Street, machine and equipment firm Caterpillar briefly suspended its shares today so it could warn that analysts profit expectations are ‘too optimistic’.
Caterpillar cited various headwinds, such as Brexit uncertainty, Europe’s slow recovery and volatility in the oil price. It also warned that any infrastructure programme from Donald Trump probably wouldn’t help its earnings in 2017.
This is the key slide from its presentation to analysts:
Photograph: Caterpillar
Caterpillar’s share price has been rising for weeks, on speculation that Trump’s plans to upgrade America’s highways, airports and schools will mean more demand for its diggers and trucks.
But Wall Street isn’t too worried by today’s warning; Caterpillar’s shares have resumed trading, up 0.25% on the day.
Sunset over the Gulf of Mexico from Venice Beach in Venice Florida. Photograph: Alamy Stock Photo
Now this is interesting....oil giant BP has signed off on a $9bn project to expand its Mad Dog oil field in the U.S. Gulf of Mexico.
The decision follows extensive work bringing the cost of the project down (at one stage, it was going to cost $20bn). And it shows that oil firms are prepared to invest in new projects, if they think the oil price makes it worthwhile.
BP chief executive Bob Dudley says:
“This announcement shows that big deepwater projects can still be economic in a low price environment in the US if they are designed in a smart and cost-effective way.
“It also demonstrates the resilience of our strategy which is focused on building on incumbent positions in the world’s most prolific hydrocarbon basins while relentlessly focusing on value over volume.”
OPEC impact: day after #oil cuts deal BP green lights $9 billion project in the Gulf of Mexico pic.twitter.com/08CjjziRWG
Central Bank news! Agustin Carstens, head of the Bank of Mexico, has resigned.
Carstens, one of the world’s most experienced central bankers, has been appointed to run the Bank of International Settlements (BIS is basically the central bankers’ central bank).
He will leave the Bank of Mexico in July 2017, and start at BIS three months later.
The top rung of central banking is a little like Formula 1 -- with a small number of candidates moving between a limited number of seats.
So Carstens’ appointment may have a knock-on effect on the European Central Bank; board member Benoît Cœuré could possible have got the BIS job, but is now free for other challenges...
Carstens' move also means #ECB's Coeure will stay in Frankfurt. His mandate ends in 2019, just like #Draghi. Clearly a potential successor.
Opec’s surprise supply cut is forcing traders to rapidly reassess their expectations.
Jane Sydenham, investment director at Rathbone Investment Management, calls it a ‘knee jerk’ reaction to yesterday’s deal:
“Whilst at present the news is good for the markets, it is much more difficult to say how this will play out in the longer term.
We’re currently experiencing a knee-jerk reaction, unsurprising since this is the biggest co-ordinated action in eight years. It is likely that this will run on for a little while longer but how the markets price in the unexpected oil inflation is something we are yet to see.”
Former cabinet minister Iain Duncan Smith, who campaigned for Brexit, has criticised the idea that Britain might make payments to the EU after leaving the bloc.
Prominent Brexit-backer Iain Duncan Smith claimed Mr Davis had given a “convoluted” answer and may have been talking about “bridging arrangements” to phase out UK contributions to the EU.
The former cabinet minister insisted there was no way of reaching a deal to pay the EU for access to the single market.
He told BBC Radio 4’s The World At One:
“My sense is that I don’t think that he was absolutely answering the question that was posed to him.
“What he’s talking about here is how do you get a deal that allows British and Europeans to access each others’ markets without the necessity of tariff barriers or artificial barriers against service etc.
“I don’t think there’s any way in which you can reach a deal whereby you say ‘I’ll pay some money in and therefore you allow us access’, because you might as well have tariff barriers at that point.”
Other Brexit supporters have also expressed disquiet about this idea in the past; but it all depends on the kind of Brexit deal that Theresa May goes for.
Today’s pound rally follows the currency’s best month since 2009.
Sterling gained 6% against the euro in November, 1,5% against the US dollar, and almost 15% against the Japanese yen.
It may show that the markets are becoming less worried about the UK, following more solid economic data since June’s Brexit vote.
Kathleen Brooks of City Index says:
Momentum is particularly strong against the yen and its recent performance has been staggering, GBPJPY is up more than 14% since the start of November!
Political risks around Brexit are receding, as political risks elsewhere start to bite. The cost to insure UK sovereign debt has fallen sharply since spiking back in June.
Good economic news from America: its factory sector is growing at its fastest pace since the Brexit vote.
The ISM manufacturing index has jumped to 53.2 in November, from 51.9 in October, which is the fastest rate since June. Firm said they were benefitting from strong domestic demand.
A rival survey, from Markit, was also just released. It’s even more encouraging, showing activity rising at a 13-month high.
Opec’s decision to cut output by 1.2m barrels per day looks like a real game-changer.
The group’s secretary general, Mohammed Barkindo, is telling Bloomberg TV right now that it was a “historic landmark”
Sam Wahab, director of oil and gas research at Cantor Fitzgerald Europe, believes the price could keep rising:
“Yesterday’s agreement has truly changed the landscape for oil over the coming years, putting a floor of $50 a barrel under oil prices.
“Prior to this agreement, the environment of sub $50 oil was likely to persist, but this move sufficiently addresses the supply/demand dynamics, with some 3.5% of supply being cut from January.
“It means 2017 will likely see prices around the $55-$60 a barrel mark, and we may yet see further jumps in prices as soon as next week if the non-OPEC members also agree a production cut at their meeting on Friday 9th December.
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