Daily Kickstart (Oil Gets “Crude” Awakening, RBI Shocks Markets)

We start this morning not with FX but with crude.

By now it’s no secret that oil is stuck between OPEC/non-OPEC production cuts on the bullish side and rising US production/stockpiles on the bearish side. To be sure, this was easy to see coming. The same wide open capital markets that helped US producers plug funding gaps (i.e. cover their outspend) helped otherwise insolvent companies stay in business – zombie style – until such a time as prices rose above ~$50/bbl. Now, OPEC production cuts are being offset by the dynamics at play in the US. For instance, have a look at the API numbers out Tuesday evening:

Crude inventories +14.2m bbl last week, according to people familiar with data.
Cushing +624k
Gasoline +2.9m
Distillates +1.37m
Crude build would be largest since Oct. 28 when compared with EIA data

“That was quite a build compared to estimates,” Michael Poulsen, analyst at Global Risk Management said. “If confirmed, it shows the shale oil guys are up and running again.”

No sh*t Mike.

“There’s a recognition that even with the OPEC production cuts, it’s going to take some time for this large inventory overhang to be reduced to more normal levels,” Ric Spooner, chief market analyst at CMC Markets in Sydney added.“It leaves the oil price vulnerable to a move back below $50.”

Needless to say, crude plunged on the numbers.

So given those industry-funded figures, the market is obviously anxious about what the DOE data will show at 10:30 EST. Here are the estimates: Crude forecast +2.5m bbl, gasoline +1.5m bbl, distillates +500k bbl. Compare those to the API numbers and you can get an idea of why everyone is a bit nervous.

All of this is so painfully obvious that I hesitate to even report it. I mean maybe I’m just cranky this morning, but why anyone is caught off guard here is completely beyond me and I’ve been saying for months that any rally you get in crude will not be sustainable until capital markets return to normal and otherwise insolvent US producers are put out of business permanently. Only then will things balance. But you know, some people just don’t f*cking get it:

(Deutsche)

If you think that long positioning looks exceedingly ridiculous, you’d be right. Here’s what Citi wrote on Monday (and again, this is so obvious that I didn’t even bother quoting the note, but since Bloomberg has picked it up this morning, I’ll highlight it):

Aggregate ICE Brent and NYMEX WTI money manager net length has been scaling new records since mid-January, hitting the paper-equivalent total of ~820m bbls. Combined with petrol products, fund net length hit an all-time high above ~1bn bbls. With crude vol so low and the market stretched so long, we see the potential for a sharp liquidation event this quarter.

Moving on, the dollar was steady overnight and EURUSD hit its lowest in a week as leveraged selling interest triggered stops below 1.0660, traders in London told Bloomberg. This is the third daily loss for the pair, which is on course for its longest losing streak since mid-December. EURUSD weakness is spilling over into EURCHF as the pair dropped to 1.06368, the lowest since June 24 (i.e. Brexit).

Meanwhile, in a story I’m almost sure you don’t care anything about, India’s central bank surprised markets by keeping rates on hold:

INDIA’S RBI CHANGES POLICY STANCE TO NEUTRAL FROM ACCOMMODATIVE
INDIA’S CENTRAL BANK KEEPS BENCHMARK RATE UNCHANGED AT 6.25%
RBI KEEPS REPURCHASE RATE UNCHANGED AT 6.25 %
INDIA 2026 BONDS YIELD JUMPS 15BPS TO 6.58%
INDIA BOND YIELDS SURGE MORE; 2026 DEBT YIELD UP 24BPS TO 6.67%

10Y yields are now up something like 31bps.

Here’s the Street’s response:

Nomura Holdings (Vivek Rajpal, rates strategist)
- Don’t think market was positioned for change in stance to neutral
- Bonds will trade in higher range, probably 6.45% to 6.75% will be new range 10-year yield

Standard Chartered (Nagaraj Kulkarni, senior rates strategist)
- Price action suggests rates market is unwinding all of its rate-cut expectations
- Expect “bear steepening of the rates curve” to persist in near term
- Says shift in RBI’s stance and resulting change in Standard Chartered’s policy rate view has implications for its yield forecasts, which now under review

Dai-ichi Life (Toru Nishihama, EM economist)
- Decision to keep policy rate unchanged is quite a “big surprise,” and bond yields are jumping because market had priced in a rate cut
- Inflation remains low and that would mean room for a future rate cut probably still remains

Credit Suisse (Deepali Bhargava, economist)
- “Bottom-line is that we are at the bottom of the cycle”
- RBI may still cut once more if inflation remains below 4% till March

Macquarie (Nizam Idris, head of FX and FI strategy)
- RBI seems to think that there’s sufficient liquidity and sufficient easing which may be better transmitted now after demonetization
- Central bank showing preference to be on cautious side side rather than supporting growth
- INR may take guidance from stocks in short term

Capital Economics (Shilan Shah, economist)
- While the economy has taken a hit from demonitization, it hasn’t been catastrophic
- Continue to think that rate hikes will come onto the agenda much sooner than is generally anticipated
- RBI may begin hiking rates over next 12-18 months as its medium-term inflation target comes under pressure

And finally, here’s the rupee: