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Research Market strategy
by Swissquote Analysts
Daily Market Brief

Oil under pressure as Russia refuses to cut production. NFP in focus


Oil under pressure as Russia refuses to cut production. NFP in focus

By Ipek Ozkardeskaya

US equities recorded timid gains on Thursday, while stocks in Asia edged lower on renewed anxieties about the spreading coronavirus as a Chinese doctor in Wuhan was reported dead and residents were asked to report their temperatures daily. More companies including Tesla decided to temporarily close their stores in China. While the Chinese New Year break will officially end next week, it is unsure if life will get back to its normal course as soon as next week. If the crisis extends, some companies may consider momentarily moving their production plants outside China. In this respect, Fiat Chrysler warned that a move to Europe is possible to avoid shortages in China-made parts. Measures like this will likely have an impact on prices worldwide and weigh on company profits. This is what investors are selling today, though the sell-off is much more contained compared to the panic headwinds that we have seen over the past two weeks. Beijing tried to reassure investors that the economic impact of the coronavirus will be temporary. Of course, the comments didn’t give an order of magnitude.

On the data front, the Chinese trade surplus narrowed to $39.16 billion from $46.79 billion. Exports rose 9.1%, as imports fell 1.5%. Chinese FX reserves fell more than expected to $3.088 trillion.

Nikkei fell 0.19%, Shanghai’s Composite reversed earlier losses, Kospi and ASX 200 lost 0.72% and 0.38% respectively.

WTI crude will likely remain under a heavy selling pressure as Russia blocked OPEC’s response to the coronavirus saying they need more time to evaluate the impact of the virus on the market. If OPEC fails to adjust production to an estimated 20% slump in Chinese demand, there will be little to support oil prices above the $50 a barrel.

FTSE (-0.22%) and DAX (-0.08%) futures hint at a lackluster start on Friday.

The US dollar extended advance against the euro and the pound. Cable fell to 1.2920 on mounting worries that the Brexit negotiations would be tough.

The euro fell another notch against the US dollar amid the German production fell 3.5% on month to December versus 0.2% contraction expected by analysts and 1.2% expansion printed a month earlier. German exports grew 0.1% over the same month, less than 0.5% expected by analysts. Hence, the weak German data came as a warning that the slowdown in German economy may have not bottomed out just yet.

The US nonfarm payrolls report is the highlight of today’s economic calendar. On Wednesday, the ADP report surprised significantly on the upside with a solid 291’000 print versus 157’000 expected by analysts and 199’000 printed earlier. Today’s data may show that the US economy added 160’000 new nonfarm jobs in January, more than 145’000 printed a month earlier but less than the past twelve-month average of 170’000.

Even though a solid ADP number doesn’t necessarily predict a strong NFP read, the ADP report has a certain influence on the sentiment before the monthly NFP release, and that sentiment is positive this month.

But the bigger picture tells a different story. This month, the US companies announced the highest job cuts since February last year. Technology companies led cuts, followed by retailers and industrial goods manufacturers. Bankruptcies and financial difficulties due to tough economic conditions costed in average 50’000 jobs to the US economy every month last year.

Whether the conditions would improve with the US- China trade truce is yet to be seen. Companies will certainly feel the pinch of the slowing activity in China due to the coronavirus. And China may have some difficulties fulfilling the US’ phase-one demands amid the coronavirus shock on its economy. Therefore, and with the best of intentions, the deal may not go according to the initial plan, even though US Treasury Secretary Mnuchin sounds optimistic that China would live up to the expectations.

Back to jobs data, an encouraging NFP print today could enhance the actual rally in the US dollar and the US yields, while a soft figure could call for a correction in US dollar before the end of the week. The 98 mark should give support to the US dollar index, unless we see a surprisingly low read below the 100K.

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