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Riskier Assets Rally Following Surge in Oil Prices

By:
David Becker

Riskier assets in Europe are in rally mode led by the peripheral countries as risk appetite returns as crude oil prices remain buoyed.  The surprise

DAX

Riskier assets in Europe are in rally mode led by the peripheral countries as risk appetite returns as crude oil prices remain buoyed.  The surprise agreement by OPEC led to a 5% surge in oil prices during U.S. trading hours allowing stocks to climb during the European trading hours on Thursday.  Stocks already jumped higher in Asia, following from gains on Wall Street and with energy producers and commodities supported by the unexpected OPEC agreement. In early afternoon trade the DAX is up 0.70% on the day, the FTSE 100 up 1.20%.

Oil prices are slightly lower on Thursday after surging on Wednesday following the unexpected news that OPEC had agreed to cap production. Markets will be paying close attention to the implementation of the production cap, particularly given the lack of information about how much each producer will curtail output. The group announced that it will be setting up a committee to work out how the output reduction will be divided among producers.  Traders also needed to absorb an unexpected draw in crude oil inventories which was reported by the Department of Energy on Thursday.

Sentiment continues to be robust in Europe.  On Thursday the Eurozone ESI economic confidence jumped to 104.9 in September from 103.5 in the previous month. The reading was the highest level seen since January of 2016. The breakdown in the release showed an improvement in manufacturing confidence, while services confidence remained steady and consumer confidence improved slightly over the month.

It appears that lending data in the UK was indecisive as mortgage approvals dropped to a 21-month low of 60.1k, down from 60.k in July. Consumer credit, however, rose by GBP 1.6 billion, up on the median forecast for GBP 1.4 billion, while mortgage lending, which is a more laggard indicator compared to mortgage approvals, rose to GBP 2.9 billion from GBP 2.7 billion in the month prior.

There were two key pieces of economic data released on Thursday in Germany, Europe’s largest economy. First, German jobless number came in better than expected in September, notching up a gain of 1K over the month, versus expectations for another slight dip in the reading. Still, the jobless rate remained at a record low of 6.1% and the German labor market continues to look healthy, but this is a lagging indicator of course and while the latest Ifo reading looked very healthy and growth forecasts for this year are being revised up, the medium term outlook remains subject to downside risks amid the Brexit fallout and the refugee crisis.

On the inflation front, German state inflation increased, with prices across 6 states up around 0.2% month over month on average and the annual rate lifted by around 0.3 percentage point, backing median expectations for an acceleration in the Pan-German annual rate to 0.6% year over year from 0.4% year over year in the previous month.

About the Author

David Becker focuses his attention on various consulting and portfolio management activities at Fortuity LLC, where he currently provides oversight for a multimillion-dollar portfolio consisting of commodities, debt, equities, real estate, and more.

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