The front-month WTI crude oil contract has jumped over +2% in Asia Tuesday, catching up with Brent crude oil’s rally after the Labor Day holiday. The front-month Brent crude oil contract rose +1.71% on Monday and has been up around +0.4% so far today. Optimism in the oil market is boosted by the pledge, jointly announced by Russia and Saudi Arabia, to stabilize oil prices through production freeze. On equities, Euoprean shares were mixed with the energy sector gaining and the banking sector weakening. The STOXX 600 index climbed +0.1% to a 8-month high, but Germany’s DAX and UK’s FTSE slipped -0.1% and -0.2% respectively.
Russia and Saudi Arabia released a joint statement, pledging cooperation to stabilize crude oil prices. Russian Energy Minister Alexander Novak stated that the announcement marks an “historic moment” in relations between OPEC and non-OPEC members. Russia will also join the informal meeting amongst OPEC and non-OPEC members in Algeria later this month as well as the official OPEC meeting scheduled in Vienna in November. Other OPEC members welcomed the agreement. Kuwait’s acting oil minister Anas al-Saleh indicated that “This dialogue confirms that the main oil producers are watching the oil market… to help achieve stability”, while UAE’s energy minister Suhail al-Mazroui noted in Twitter that it “always support any joint efforts which will benefit market stability”. We reiterate that we remain suspicious over the actual collaboration between Russia and Saudi Arabia. Indeed, such announcements and meetings appear to be gesture to boost oil prices.
UK’s services PMI beat expectations and rose to the highest level since May. Markit’s reading shows a 5.5-point increase to 52.9 in August. Meanwhile, the “all sector” PMI soared to a 5-month high of 53.2, compared with the record decline to 47.4 seen in July. Recall that the manufacturing and construction PMIs also beat expectations, signaling UK can avoid technical recession in the near-term. Markit remains cautiously optimistic, suggesting that “it remains too early to say whether August’s upturn is a dead cat bounce or the start of a sustained post-shock recovery, but there’s plenty of anecdotal evidence to indicate that the initial shock of the June vote has begun to dissipate. Many companies are seeing business return to normal either simply by customer confidence rising or a stoic determination to “Buck Brexit” and carry on regardless”. It added that “uncertainty has certainly eased considerably, helped by the swift settling-in of a new government and central bank stimulus. However, although improving on July’s seven-year low, business confidence is still at one of its lowest levels seen over the past four years. Many companies remain worried about the outlook and how the economy will fare in the event of Brexit, suggesting that political and economic uncertainty is likely to prevail in coming months, subduing growth”. Upbeat economic indicators suggest BOE may refrain from adding more stimulus measures at the meeting next week.
RBA has just announced to keep the cash rate unchanged at 1.5%, following a 25-bps reduction in August. As noted in the accompanying statement, RBA acknowledged that recent data in Australia suggest that “overall growth is continuing, despite a very large decline in business investment, helped by growth in other areas of domestic demand and exports. Labour market indicators continue to be somewhat mixed, but suggest continued expansion in employment in the near term”. It judged that “holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time”. Staying in Asia Pacific, China’s Markit/ Caixin services PMI climbed +0.4 point higher to 52.1 in August. According to the agency, “the indexes for employment and business expectations improved markedly over July’s readings, while the others did not change much. The Caixin China Composite Output Index for August was 51.8, down -0.1 point from the reading for July, but remained steady at a relatively high level. Overall, the economy continued to expand in August at a pace similar to the growth rate for July, but conditions in manufacturing and service sectors diverged again. Downward pressure on China’s economy remains and supportive policies must continue”.
Today, US’ ISM non-manufacturing index probably stayed unchanged at 55.5 in August. In the Eurozone, the retail PMI would be released while the final estimate of the region’s GDP growth should have stayed unadjusted at +0.3%.