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According to Bloomberg “Saudi Arabia has privately told some market participants it could raise production much higher if needed, even going to a record of 12 million barrels a day, according to people familiar with the conversations” There will be Blood” at the NYMEX open

Saudis Plan Big Oil Output Hike, Beginning All-Out Price War

The OPEC+ meeting concluded with no agreement to either extend or strengthen current production compliance commitment. For a good bulk of the market, this is a surprising outcome given the Covid19 collapse in oil demand taking place. Yet, this is not an unexpected outcome, as traders had feared such an OPEC+ breakdown since its very inception in late 2016.

Russia despised the massive resurgence in US oil output, giving Washington carte blanche to set the global oil agenda and reshape the oil market pecking order to meet the miscellany of its interests as the world’s preeminent economic and military power. Personally, as far as Moscow is concerned, I think the tipping point was the US imposed sanctions on Rosneft for marketing Venezuela oil which

Buckle up as oil prices will surely topple, but the question is by how much as the shock-and-awe Saudi strategy will propel oil markets into a period of radical uncertainty. Russia baulking was one thing, but Saudi ramping up production is a bird of another feather.

A new oil world order has arrived, and it will be pronounced by a greater uncertainty principle that will see volatility ratchet higher and oil prices drastically lower as traders agitatedly re-price the curve.

My $35-40 WTI break-even theory will hold about as much support as a perforated can of oil at tomorrow’s open. Traders will struggle in premarket position jostling to comprehend the implication of the return of the new world order for oil. But one the thing that looks clear, the Oil market’s biggest grand illusion will give way to a three-way struggle for global oil dominance.

But this struggle could pale in comparison to an unprecedented VaR implosion that will certainly send global central banks  and G-7  leaders back to the drawing board( if there not on a call now) as we’re on the event horizon of a massive credit risk black hole as a financial disaster is brewing in the form of an  industry-wide  meltdown .”There will be blood.” on the street.

Besides a restless night for any oil traders that went home long contracts on Friday, there will undoubtedly be a considerable amount of panic in oil town USA (Huston), and pretty much everywhere else that’s a price taker in the global oil markets.

Covid-19 fear stokes demand all things gold.

Gold is moving higher in an extremely volatile manner as the broader financial markets fall prey to an edgy ‘risk-off’ mood. The equity sell-off and declines in the US yields positively influenced gold demand last week and should continue to stoke demand this week.

Asian equity markets were sharply lower on Friday, followed by steep declines in Europe and then US markets tanked. The bond market was especially supportive of gold as both the 10-year UST and Bund yields fell to near historic lows.

Gold pushed rapidly higher throughout Asia and Europe on reported inventory demand for gold bars from Switzerland, and European vaults, which coincided with a headline from a Swiss health official saying that Switzerland is on the brink of an epidemic.

A lower opening in US equities weighed further on risk sentiment and propelled gold towards the $ 1700. And with investors focusing on the Covid 19 highlight reels, gold shrugged off a stellar jobs report.

Global investors continue to show an insatiable demand for all things bullion ( ETF paper, scrap, bars, and coins), which is running tangentially to both the increase in COVID-19 cases and the anticipated negative economic and financial market impact.

While it’s possible that Friday’s equity declines eventually triggered margin-related selling again, which cut and temporarily reversed gold’s gains. It’s also likely with inside reports that a colossal producer was hedging gold against the South African Rand brought unexpected supply to the market and could have also contributed to capping prices on Friday.

But all the elements for further gold gains remain intact. 

All things being equal, however, and as equity market continues to sell off as newer Covid 19 cases get reported around the world, we may see more liquidation of gold to cover margin calls. But this does not mean the gold rally is over.

Instead, it’s possible more gold buyers will stand in front of these moves given the USD is trading like an echo to the explicitly dovish shift in the Fed narrative; the weaker USD is massively good for gold as the PM traders recentred on the JPY vs. XAU  correlation. This key cross-asset relationship has historically been hugely positive for gold prices when both move in tandem to risk aversion. ( Yen higher Gold higher)

Also, It looks like the Fed will cut rates at the March 18 meeting so under current circumstances of lower US yields and a weaker US dollar, and even if risk eases modestly, it still looks like gold can go higher, with the next significant level USD1,700/oz. well in reach.

 As for the US dollar

Are we entering a dollar sell all vortex? It sure seems that way as countries with limited monetary policy flexibility see significant currency appreciation because they cannot cut. Countries with room to cut are getting a weaker currency and lower rates. The currency wars are back on, but the funder countries have no ammo. Have you seen the US 30-year yield on Friday?? Wow.

It is not apparent to me what will stop the USD rout in G10, though an appearance by the BOJ or MOF is increasingly likely as USDJPY tickles below 105.

Week Ahead

Market participants will get a respite from Fed speak this week as we are now in the blackout period ahead of the March 18 FOMC meeting. In only hours \after the Fed’s extraordinary inter-meeting 50 basis point rate cut last Tuesday, the market has aggressively brought forward the timeline for Fed easing and is pricing in by another 50-bps next Wednesday. Also, the majority of quality analysts are now projecting real GDP growth to be flat in the first half of the year — the slowest two-quarter growth rate since the crisis — with Q2 showing a contraction of 0.6% at an annualized rate.

I’m going to skip this week’s economic data analysis as it relatively meaningless when global markets are in meltdown mode since the coronavirus crisis arrived in the US. I’ve never seen such a muted reaction to such a healthy payroll number. That’s no great surprise; no one cared about payrolls with all eyes focused the Covid19 media reels.

Fixed income and equity markets are on the way to pricing in zero Fed rates and a recession. While how far are we from the bottom, and what would it take for sentiment to turn are the primary questions on every investor’s minds. Those I can’t answer, but I can tell you things are complicated to navigate.

Massive credit tail risk building

There’s another significant risk-off move brewing, with funding concerns now clearly in focus. The sell-off in European banks is raising a few eyebrows, and market participants are now clearly considering the possibility of an all-out funding squeeze. Indeed, given the expected bankruptcies and massive demand for short-term credit, its no wonder EU bank stocks are tanking, and that basis is widening. Another spike on the basis may confirm the beginning of a more protracted equity market sell-off, and even if the ECB steps in with cheap loans, that will probably take time to filter.

It reminds me of 2008, where for a week or so, it is impossible to position for the endgame. The only trades that made sense were ‘cheap options’ like Gold and JPY, but even those are not so cheap and becoming expensive with USDJPY at 105 and gold closing in on $1700.

Published by Stephen Innes, Asia Pacific Market Strategist at AxiCorp