Weekly Report

Monday 9 Jan 2017 - Friday 13 Jan Dec 2017

ENERGY

Crude Oil- Crude oil prices closed the week with losses on doubts about the extent of OPEC output cuts. US West Texas Intermediate crude oil futures settled at  $52.41 a barrel, while Brent crude futures were around $55.47 at the end of the day. Also, denting investors´ sentiment, were poor Chinese figures, as the country reported this Friday its largest fall in exports since 2009.

OPEC members pledged to cut back output by 1.2 million barrels to no more than 32.5 million barrels a day, while other non-OPEC joined the deal  to cut production by nearly 600,000 barrels a day. Still, Iraq has continued to raise production, threatening the effectiveness of the mentioned deal. The country has signed contracts to increase its production by over 4.7 million barrels per day in the years ahead, making insignificant their decision to reduce output by 120,000 barrels a day to help OPEC.

Early in the week, the Energy Information Administration report  showed that crude oil inventories climbed 4.1 million barrels during the week ending January 6th, against expectations of a 1.162 million barrels build, adding pressure to the commodity. The total stockpile now stands at 483.1 million barrels. The same report showed that US crude oil imports averaged  roughly 9.1 million barrels per day for the week, higher than the 1.9 million barrels from the week before. Crude oil refinery inputs averaged 418,000 more barrels per day than the prior week’s average, bringing the average inputs to about 17.1 million barrels per day. Total motor gasoline inventories rose by 5 million barrels last week, whilst distillate fuel inventories increased by 8.4 million barrels. The total for commercial petroleum inventories climbed by 13.4 million barrels from the prior week.

On Tuesday, the EIA released its Short-Term Energy Outlook, which includes its first forecasts for 2018. According to it,  crude oil prices are expected to increase slightly during 2017 and 2018. Brent crude oil prices are forecast to average $53/b in 2017 and $56/b in 2018. West Texas Intermediate crude oil prices are forecast to average $1/b less than Brent in both 2017 and 2018. Despite the recent OPEC agreement, EIA expects global petroleum and other liquid inventory builds to continue, but at a slowing rate, in 2017 and 2018.

On a positive note, Baker Hughes reported that the number of rigs drilling for oil in the US fell by 7 to 522, the first fall in almost three months.

Natural gas -  Natural gas futures recovered sharply from a weekly low of $3.095 per million BTUs, closing the week at $4.413 per MMBTUs, helped by a strong decline in US inventories.

The EIA weekly Natural Gas storage report showed that supplies of natural gas fell by 151 billion cubic feet for the week ended January 6th. That was more than the 137 billion cubic feet average decline expected by  market's analyst. Total stocks stand at 3.160 trillion cubic feet, down 363 billion cubic feet from a year ago and 4 billion cubic feet below the five-year average, the government said.

The Short-Term Energy Outlook released by the same organism last Tuesday, says that dry natural gas production is estimated to have averaged 72.4 billion cubic feet per day (Bcf/d) in 2016, a decline of 1.8 Bcf/d (2.4%) from 2015, which would be the first time annual average natural gas production has fallen since 2005. The report forecasts dry natural gas production increases by an average of 1.4 Bcf/d in 2017 and by 2.8 Bcf/d in 2018. On a separate report, the EIA said that natural gas price in 2016 were the lowest in nearly 20 years, averaging $2.49 MMBtu, noting that prices were quite volatile all through the year.

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FOREX

Forex - The soft tone of the American dollar persisted at the beginning of the week, later exacerbated by Trump's press conference last Wednesday. President-elect Donald Trump held his first press conference since winning the election, disappointing markets as he offered no clues on upcoming investment or tax policies. In fact, most of the press conference was an extension of his personal battle against the media, accusing media of spreading "fake news" and even denying some journalist their right to ask questions. The conference hit stocks, as he criticized the pharmaceutical industry and announced some penalty taxes on cars' imports coming from Mexico. He also said that he will build the wall and that the country will end up paying it, while he vowed to repeal and replace Obamacare within the “same hour” he becomes president, though he did not detail a specific plan. The event fueled the uncertainty that the FED announced a week earlier, resulting in the dollar falling against all of its major rivals.

The EUR/USD pair upward corrective movement extended this week, posting its first week of solid gains since last October, settling around 1.0650. Still too close to the multi-year low posted at the beginning of the year, the risk of further decline is not over yet. Political woes in the region will likely keep the EUR subdued. The ECB´s meeting next week may shed some light over the future of the common currency. Data released lately showed that the economy has strengthened during the last quarter of 2016, with inflation above 1.0% for the first time in three years. Still, is too early to think that the Central Bank is ready for tapering.

The British Pound fell for a second consecutive week, plummeting to 1.2037, level not seen since last October, against its American rival. Broad dollar's weakness was not enough to offset rising concerns over the upcoming Brexit, particularly after Downing Street confirmed that UK's PM Theresa May will outline the government's Brexit strategy in a speech this Tuesday. Over the previous weekend, and  in a TV interview, May hinted that the UK will leave the EU single market, by saying that Britain couldn't hang on to "bits of EU membership," providing investors a reason to dump the Pound.

Falling US yields amid decreasing confidence in US growth, put the Japanese Yen back on demand, with the USD/JPY pair falling down to 113.75, its lowest since last November. The US 10-year note benchmark, fell as low as 2.329%, but recovered  at the end of the week, closing at 2.39%. The pair retraced barely the 23.6% of its post-election run,  making of the movement a mere correction. Still, the risk of further slides remains high, with renewed selling pressure below 114.00 probably seeing the pair returning to the 110.00 level by the end of the quarter, amid Japan's fiscal-year close.

The Canadian and the Australian dollar surged sharply on the back of rising commodities, with the Aussie outperforming its mayor rivals and recovering up to 0.7500 against the greenback, trimming most of its post elections losses. The USD/CAD fell to fresh 3-month lows, although the setback in crude oil prices made the pair bounced by the end of the week. Base metal gains will likely continue supporting the AUD, while the Loonie's future is attached to oil's woes.

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INDICES

Indices- Despite shedding some ground weekly basis, US stocks held within its latest range and not far from record highs. The Dow Jones Industrial Average  and the S&P closed the week at 19,885.73 and 2,274.64, down 0.39% and 0.10% respectively, although the Nasdaq Composite surged by 0.96% and settled at 5.574.12, a record high. US equities found some support this Friday on bank's quarterly earnings reports, with J.P. Morgan Chase reporting a profit of $6.73 billion, or $1.71 a share. Bank of America announced earnings rose by 43%, although Wells Fargo reported a profit of $5.27 billion, or 96 cents a share, below the $5.58 billion, or $1 a share, in the same period of 2015. The financial sector was the most benefited during the post-election rally that drove indexes to record highs, as investors expect banks to benefit from rising rates. The growing uncertainty spurred by Trump's press conference, however, may trigger a sharp downward corrective move during the upcoming days, particularly if US data begins to disappoint.

European equities gained on Friday, but was barely enough to put them into green territory weekly basis. The German DAX added  109 points in the last trading day of the week and settled at 11,629.18, some 30 points above previous Friday's close. The pharmaceutical sector was among the worst performers, hurt by Trump's comments on Wednesday, while mining-related equities outperformed, amid a sharp bounce in base metals. The FTSE 100 closed at fresh record highs for 15 consecutive trading session, ending the week at 7,337.81, getting additional help from a weakening Pound. Most of the FTSE 100 listed companies make their profits abroad, which means that a falling local currency results in largest gains. However, at some point, the market will realize that the benefits of a cheaper GBP can't compare with the risk of higher input prices, and result in a sharp u-turn reversal in the index.

In Asia, shares followed their overseas counterparts with the Nikkei falling to a fresh 2-week low sub 19,000 before settling at 19,287.28, undermined by a strong yen that affected the most export-oriented equities. The recovery was supported by optimism on the domestic economy, and good news coming from retailers after Seven & I Holdings reported some strong earnings. Forecasts for Japanese companies' profits  have been improving ever since the US election, as the Japanese yen plunged. The ongoing recovery in the yen won't affect the fourth quarter results, and there are still chances that companies will avoid seeing important set-backs during the ongoing one, if the USD/JPY pair manages to hold above ¥114.00.

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COMMODITIES 

Commodities – Gold prices closed higher for a third consecutive week, although the commodity retreated on Friday,  with the contract for February 2017 settlement on the COMEX division of the New York Mercantile Exchange closing at $1,196.50 a troy ounce. Gold traded briefly above the 1,200 threshold following dollar's sell-off triggered by Trump's press conference, but so far remains unable to regain the level. Market players are seeing the ongoing advance as corrective and temporary, with part of the advance being attributed to a spike of physical demand in India and China, this last ahead of the Chinese Lunar New Year.

Silver for March delivery closed up for third week in-a-row, up around 1.7% to $16.808 an ounce, as a weaker dollar provided support to metals. Despite exports decreased in China, the Trade Balance showed that the country's imports surged by 3.1% in December,  supporting the commodity-sector, alongside with a weaker dollar. Copper for March delivery posted its strongest weekly gain since last November, up 5.8% to $2.690/lb, on the COMEX division of the New York Mercantile Exchange, helped by news coming from China, as copper imports in December rose almost 30% to 490,000 tonnes from a month earlier, whilst rising inflation in the world's second largest economy rose more than expected, reassuring continued demand from the consumer country.

Agricultural commodities also benefited from a weaker dollar, ending the week mixed, but off their lows. Raw sugar futures retreated these past days down to $20.50 cents a pound at New York, down on Friday after India's Food Minister said on Thursday that there were no plans to reduce import duty for sugar in the near term.

Coffee posted strong weekly gains, although prices retreated partially on Friday amid some profit taking after the commodity rose to its highest in six weeks. Futures prices were sharply higher this week amid drought conditions in major coffee-producing countries, ending the week at $148.72.  

The March New York cocoa contract eased to $2,2210 a tonne this week, recovering from a fresh multi-month low on the back of turmoil in top producer Ivory Coast, with gunfire erupting in the city of Bouake ahead of talks between disgruntled soldiers and the country's defense minister on Friday.

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