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Weekly Analysis: Bitcoin Takes on $2000 as Stocks Hit by Trump-Scandal

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Donald Trump

Weekly Recap

Asset Current Value Weekly Change
S&P 500 2380 -0.45%
DAX 12638 -1.22%
WTI Crude Oil 50.48 4.77%
GOLD 1255.00 2.11%
Bitcoin 1985 13.43%
EUR/USD 1.1205 2.74%

 

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Global stocks had their most volatile days since the US election in November, as the recent scandal of the new US president sparked a strong sell-off on Wednesday. The major indices recovered well after the slump, although the previously leading NASDAQ lagged the other benchmarks, hinting on a change in the underlying trends. European and Asian equities followed the US market lower, with Japanese stocks being hit hard by the renewed safe-haven demand for the Yen. The late week bounce was weak in the Nikkei, the DAX, and the EUROSTOXX 50, while the S&P 500 was helped by the relative strength of the energy sector.

The Chinese market traded sideways during the global correction, but it failed to regain its previous losses, despite being among the stronger regions globally. Commodities head a mostly positive week, even as the mid-week decline affected the risk-on part of the segment. Gold finished above the $1250 level as it got a boost from the negative sentiment, while crude oil surged above $50, as the OPEC and Russia agreed to extend the previous production cut by 9 months, and the global market showed signs of stabilization. The USD has been the weakest major currency amid the political turmoil in the US, while the Yen, the Euro, and the Swiss Franc gained significant ground during the week. Commodity currencies also rallied thanks to the Dollar slump, while the Pound finished above the 1.30 level for the first time since last September.

 

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US Dollar Index, Daily Chart Analysis

Cryptocurrencies

The coins experienced yet another rotation-week, as NEM, Bitcoin and Ethereum took over the leadership of the market from Ripple in the second half of the week, as BTC crossed the $2000 mark for the first time in history, while ETH jumped by around 50%. Ethereum caught up with XRP regarding market capitalization while NEM doubled in value, pushing Litecoin lower in the list. LTC got through a deep correction and it currently trades slightly below the $30 level, after getting close to $20 during the week. Ethereum Classic, Dash, and Monero also climbed higher, while Stellar was relatively stable after 2 weeks of crazy trading.

Ripple, 4-Hour Chart Analysis

Economic Numbers

Economic numbers remained mixed at best, especially in the US, where the housing market provided a couple of negative surprises, while industrial production was better than expected, and the Philly Fed index showed an encouraging reading. The British economy showed signs of life after a bearish period, and that helped the local assets against their global peers, with the CPI index and Retail Sales both coming in way above the consensus estimate. The other European releases were generally in line with expectations, but growth remains slow in the Eurozone.

Technical Corner

S&P 500, 4-hour Chart Analysis

The S&P 500 gained relative strength this week, as the broad and deep correction rearranged the US market, amid the surge in volatility. The extended topping process ended with a quick move lower with strong momentum. The decline was led by the NASDAQ, with most of the major global benchmarks losing anywhere between 2-3%. The S&P 500 spiked below the key support zone between 2350-2355 before recovering the majority of its losses and finishing the week near 2380. The short-term trend is now neutral after the benchmark moved out of its rising trend channel.

Key Economic Releases of the Week

Day Country Release Actual Expected Previous
Monday CHINA Industrial Production (yearly) 6.5% 7.0% 7.6%
Monday SWITZERLAND PPI Index -0.2% 0.00% 0.10%
Monday US ES Manufacturing Index -1.0 7.6 5.2
Tuesday AUSTRALIA Montery Meeting Minutes
Tuesday UK CPI Index 2.7% 2.6% 2.3%
Tuesday EUROZONE Flash GDP 0.50% 0.50% 0.50%
Tuesday GERMANY ZEW Economic Sentiment 20.6 22.3 19.5
Tuesday US Building Permits 1.23 mill 1.27 mill 1.27 mill
Tuesday US Housing Starts 1.17 mill 1.26 mill 1.20 mill
Tuesday US Industrial Production 1.0% 0.4% 0.4%
Wednesday UK Average Earnings 2.4% 2.4% 2.3%
Wednesday UK Unemployment Rate 4.6% 4.7% 4.7%
Wednesday EUROZONE Final CPI 1.90% 1.90% 1.90%
Wednesday CANADA Manufacturing Sales 1.00% 1.10% -0.20%
Wednesday US Crude Oil Inventories -1.8% -2.5 mill -5.2 mill
Thursday JAPAN Prelim GDP 0.5% 0.4% 0.3%
Thursday AUSTRALIA Employment Change 37,400 4,500 60,000
Thursday AUSTRALIA Unemployment Rate 5.7% 5.9% 5.9%
Thursday UK Retail Sales 2.3% 1.2% -1.8%
Thursday US Initial Jobless Claims 232,000 240,000 236,000
Thursday US Philly Fed Manufacturing 38.8 18.9 22.0
Friday CANADA CPI Index 0.4% 0.5% 0.2%
Friday CANADA Core Retail Sales -0.20% 0.20% -0.10%

 

The Story of the Week: The OPEC Production Cut: A Tale of Unintended Consequences

 

The Change of the Cost Curve of US Shale Oil Producers (Source: Goldman Sachs)

Shale oil has been dramatically transforming the energy segment in recent years, but how much so? Ecological impacts aside, the fracking technology went from an interesting alternative to deep-water and other extremely costly oil sources, to being a threat to the dominance of the OPEC. The chart above shows how the US producers lowered their cumulative break-even curve to the point where most of the hypothetical production of the shale players would be profitable between $50 and $60 per barrel. Compared that to the fact that 3 years ago there was virtually no profitable shale production below $80 per barrel.

Now, this is where it gets interesting. Last years crude oil rally topped out, guess what, near $55 per barrel, which is eerily close to the estimated breakeven of the bulk of the shale production. And that’s not a coincidence; most analysts agree that shale-oil, given its flexible nature, will do just this— cap the price of crude oil, while also limiting the profits of the traditional oil producers. Sure enough, the OPEC just this week announced the extension of a production cut that was supposed to stabilize the market and help a rebound in prices.

But what are the consequences of the deal? Long story short, it leads to a slow decline in the market share of the cartel, while encouraging shale producers to innovate even more and push this invisible price-cap even lower. And to go back to the root of the historic decline in the price of oil in 2015, it was none other than Saudi Arabia that flooded the market with cheap oil, in an attempt to knock US shale players out. What really happened, is that the slowing of the global demand growth coupled with the “forced” shale revolution brought about a new era for the whole energy complex.

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Analysis

Long-Term Cryptocurrency Analysis: Bitcoin Outshines Altcoins Again

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The most valuable coin had another encouraging week, as it emerged from a brief but violent correction, just to reach new highs towards the end of the week, draining capital from altcoins. The total value of the market is stagnating near the all-time high, but BTC crossed the $100 billion mark as it surged past the $6000 price level, controlling 58% of the market.

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With the long-term MACD clearly being overbought, and as the long-term target has been hit, investors should now be looking for exit points, even as the short-term uptrend is intact. The range projection target of the recent correction is found at $7000, but correction risks are already high, and only small positions should be kept in the current setup.

BTC/USD, Daily Chart Analysis

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Most of the major altcoins are trading in narrow ranges this weekend after a slightly bearish week, as the optimism surrounding Ethereum’s major update faded and the second largest coin re-entered its previous range.

Litecoin, Dash, and Monero are still looking encouraging despite the lengthy correction, while the recently, while the relatively weak Ethereum Classic IOTA continue to show worrying signs. As the Bitcoin long trade is getting stretched,  let’s see the how the daily charts of the altcoins are shaping up.

(more…)

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Analysis

Will Crude Oil Reach $68 a Barrel in 2018?

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Crude oil prices are likely to climb close to $68 per barrel mark in 2018. We believe that oil supply will be hit due to a few geopolitical issues if they play out as we expect. Additionally, though high crude prices will be a strong incentive for the shale oil drillers to pump more, their increase is unlikely to tilt the deficit into oversupply.

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Key observations

  1. The OPEC production cut is tilting the crude oil markets to a balance
  2. Rise in the shale oil production is unlikely to equal the increase in demand in 2018
  3. The geopolitical issues can tilt the markets into a deficit
  4. If crude oil breaks out of $55 per barrel, a move to $68 is likely

What are the current market conditions?

OPEC oil production cuts

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The November 2016 production cut by OPEC and its allies is helping the market stabilize. The US crude stockpiles have been decreasing over the past few months, which indicates that the OPEC cuts are having their desired effect, albeit slowly.

The stockpiles in the Organisation for Economic Co-operation and Development (OECD) nations is down to just under 3 billion barrels, which is roughly 171 million barrels above the 5-year average. The OPEC wants to bring the inventory levels below the 5-year average.

Reports suggest that the OPEC and its allies will extend the deal, which is set to expire in March 2018 by another 9-months. However, the oil cartel is unlikely to deepen the cuts. In the September quarter, it had produced 32.9 million barrels per day (bpd), as against 33.4 million bpd production in November 2016, prior to the production cut agreement.

In the fourth quarter of this year, the OPEC production is expected to further decline to 32.7 million bpd.

US shale oil production

The main threat to any recovery in crude oil prices is the ever-increasing production of the US shale oil drillers. US crude oil production, which averaged about 9.2 million bpd in the first quarter of this year has increased to 9.56 million bpd by the third-quarter.

The US Energy Information Administration (EIA) expects the average US crude oil production to increase to 9.9 million bpd in 2018, compared to 9.2 million bpd in 2017. That is an addition of 700,000 bpd of supply.

On the other hand, Investment bank Tudor, Pickering, Holt & Co (TPH) expects US crude oil production to reach 10.2 million barrels in 2018.

So, on an average, crude oil production by the shale oil drillers is expected to increase by 700,000 bpd to 1 million bpd.

Demand increase in 2018

The global economy is growing at a decent pace, which is expected to increase the demand for crude oil. The US EIA expects the global demand to increase by 1.6 million bpd in 2018.

Therefore, with everything else being equal, this will lead to a faster reduction in crude oil inventory and an improvement in sentiment, but not a large increase in price.

So, why do we expect crude oil prices to increase next year?

What are the events that have changed in the recent past that warrant a change in our view?

For the past two years, oil prices have not responded to geopolitical tensions because of the supply glut.

However, next year, when the markets are in a balance, any geopolitical event that can have an effect on the supply side will tilt the market to a deficit, resulting in a rally in oil prices. What are these events?

The Iran sanctions

President Donald Trump has been a critic of the deal between the US and Iran, which led to lifting of sanctions on the Islamic nation. The deal is called the Joint Comprehensive Plan of Action (JCPOA). As a result of this deal, Iran was able to resume its exports, which have skyrocketed from about 1 million bpd in 2013 to about 2.3 million bpd in September 2017.

President Trump decertified the deal on October 13 but has still not quit the deal. He wants the deal to be renegotiated, however, the remaining countries who were party to the deal and Iran are unwilling to do so.

This creates a tension between the US and Iran. Chances are that President Trump will withdraw from the deal sometime next year to fulfill his pre-election promise of ripping the deal apart.

What are the repercussions if the US quits the deal?

Presently, the EU nations are not in favor of scrapping the deal with Iran. If the US unilaterally withdraws from the deal, Iran’s exports are unlikely to have an immediate effect, until the EU decides to support it. After all, EU has been the major consumer of Iranian oil since sanctions were lifted.

However, Iran’s fields are aging. They need fresh investments to keep the oil flowing at the current rate. If the US quits the deal, it is unlikely that major oil companies, that have operations in the US will enter Iran. This can limit the capital flows to the Islamic nation’s oil sector.

As an immediate effect, the US sanctions will “put at risk a few hundred thousand barrels of Iranian exports,” Goldman Sachs wrote in a research note. However, these are only estimates and the real impact will be known only after the US withdraws from the deal. Due to the uncertainty, the markets are likely to boost prices higher, until it gets a clear picture of the effects.

Geopolitical tensions in the gulf can lead to a severe shortage of oil

The northern Iraq region – Kurdistan – is a semi-autonomous region, which recently declared Independence from Iraq. This has led to a conflict between the two. While the Iraqi forces have declared their victory in the important oil-rich region of Kirkuk, the victory is not final because the Kurdish army did not put up a fight initially to defend the oil-rich region.

However, both the Kurdish peshmerga and the Iraqi army have been trained by the US. Therefore, if the conflict is not resolved quickly, through a dialogue, it can turn bloody and lead to disruption of about 600,000 bpd of oil supply.

“Oil prices could spike a lot higher on this development because this time is different, after years of war in the region. The battle, finally, is for the oil, and no other reason. In other words, here we go,” John Kilduff, partner at energy-focused investment manager Again Capital, told CNBC.

Unless a permanent solution is reached, we expect these issues to linger on and again crop up in 2018, propping prices higher.

What does the chart forecast?

The WTI crude has been broadly trading in a range of $42 and $55. Oil has taken support close to the $42 levels four times in the past year and a half. Therefore, this is a strong support level and can be used as a stop loss for our positions.

On the upside, the zone between $50 and $55 has been a strong resistance. Oil has struggled to breakout of this zone. However, if any geopolitical event triggers a breakout above $55, a rally to $68 levels is likely, which is the minimum target objective of a breakout from the range.

How can we benefit, if crude rallies according to our expectations?

The best way to benefit from the rise in crude oil is to trade the oil futures, but due to their volatility, it is not advisable to hold it for the long-term.

The oil-based ETFs can offer an opportunity to take a position in oil. Individual energy stocks are also another means of benefitting from a rally in crude oil.

We shall soon identify the best oil-based ETF and stocks that can offer good returns in 2018.

Risk to our analysis

Our analysis is based on the assumption that the existing geopolitical issues are unlikely to be sorted out within the next year. However, a good dialogue can easily put an end to these, thereby invalidating any risk-premium to crude oil.

Also, consistent high prices above $50 can increase the US shale oil production, much higher than the currently anticipated levels. This will prevent the markets from balancing out.

Due to infighting among its members, the OPEC and its allies can opt out of the production cut deal,  which will boost supply and can lead to a crash in crude oil prices.

Featured image courtesy of Shutterstock. 

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Analysis

Daily Analysis: Stocks Shoot for the Moon as Senate Passes Budget

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Friday Market Recap

Asset Current Value Daily Change
S&P 500 2574 0.53%
DAX 12991 0.05%
WTI Crude Oil 51.60 0.25%
GOLD 1283.00 -0.49%
Bitcoin 6038 6.40%
EUR/USD 1.1776 -0.64%

Financial markets got very active today thanks to the US Senate’s decision to pass the 2018 budget, paving the way for the tax reform plan that’s been welcomed by investors in recent weeks. The Dollar, equities, and Treasury yields all got substantially higher with the Dow and the S&P 500 scoring yet another all-time high. The NASDAQ and the Russell 2000 failed to follow the former benchmarks to record highs, but the short-term rally is still definitely intact, despite the overbought readings and the overvaluation issues.

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Dow 30, Daily Chart Analysis

Forex markets were also very active as the Dollar cruised higher against all of its major counterparts, with the exception of the Great British Pound that rebounded strongly after the optimistic words of Angela Merkel regarding the Brexit process. The New Zealand Dollar continued yesterday’s negative trend, while the Canadian Dollar was also hit hard amid the early decline in the price of oil and the negative economic surprises from the country.

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Gold is down yet again, as it failed to reclaim the $1300 level amid the improved global sentiment that also weighed on the Japanese Yen as well. The Yen’s weakness helped the Nikkei to another two-decade high, as the USD/JPY pair surged to 113.50 for the first time since July.

USD/JPY, 4-Hour Chart Analysis

Cryptocurrencies

Bitcoin’s new all-time high made headlines in the segment today, as the most valuable coin surged past $6000 for the first time ever, even as the currency traded as low as $5100 just a few days ago. BTC also reached $100 billion in market cap, and the coin accounts for more than 57% of the total value of the crypto segment.

The other majors are virtually unchanged despite Bitcoin’s rise, with only IOTA losing significant ground and Ripple trading in a volatile fashion after its crazy week. Litecoin and Monero also performed relatively well, while Ethereum got stuck below the $315 line yet again, and NEO finally settled down, although it continues to trade below the crucial $30 level.

BTC/USD, 4-Hour Chart Analysis

Key Economic Releases on Friday

Time, CET Country Release Actual Expected Previous
14:30 CANADA CPI 0.2% 0.3% 0.1%
14:30 CANADA Core Retail Sales -0.7% 0.3% 0.2%
16:00 US Existing Home Sales 5.39 mill 5.32 mill 5.35 mill

Key Economic Releases on Monday

Time, CET Country Release Expected Previous
14:30 CANADA Wholesale Sales 1.1% 1.5%

Featured image from Shutterstock

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