3 events to watch this week

The financial markets will return to normality this week after the Thanksgiving holiday in the US. There is still a risk-on tone to markets, after the S&P 500 ended the week up more than 1%, the Nasdaq closed lower on Friday, however, it was also higher by 1.13% overall last week, as the US’s tech index inches towards its all-time high above 16,000. The question now is, will it reach this important milestone before the end of 2023? At the start of the week, US stock futures are higher, and the FX market is waiting for direction to come during the European and US session. The oil price is also in focus this week, along with bond yields and the US PCE report. We will also be watching the euro closely to see if politics starts to get in the way of the single currency.

Opec + to hold rescheduled meeting

The Brent crude oil price fell more than 1% on Friday and closed the week below $80.50 per barrel, as it continues its recent spate of losses. The driver of last week’s losses was Opec+ and its delay to its scheduled meeting on Sunday, which will now take place this coming Thursday, 30th November. This meeting was expected to discuss oil production cuts into 2024, however, according to reports Opec producers could not reach an agreement on production levels and further production cuts. The dissent was apparently led by African countries and Nigeria reported last week that it has increased its oil production in Q3, which no doubt caused consternation from some quarters within Opec. The market has had to wait to get clarity on what Opec does next and whether further production cuts are possible in the future. This uncertainty has weighed on the oil price, and Brent crude has fallen sharply after reaching $98 per barrel in September, it is now just above $80 per barrel. The Opec production cuts have not helped to buoy the oil price, which is weighed down by a sluggish China and the prospect of a mild global recession next year. Added to this, COP 28 takes place in Dubai this week, which could focus minds once more on the global transition away from hydrocarbons.

While Cop 28 is important, there is no getting away from the fact that since the Russian invasion of Ukraine, the prolonged use of hydrocarbons is a reality, and the Opec cartel can control the price of oil. Even though there is a dissent among some Opec producers, the decline in the oil price in recent months, could give Opec + more reason to deepen and extend production cuts into the future. Saudi Arabia has already cut 1 million barrels of daily oil production, they could ask other members to help to share the burden of production cuts in a bid to boost the oil price. Thus, as we move into the coldest months of the year in the West, the oil price could get volatile. We would expect any announcement of further production cuts on Thursday to be met with a bounce in the price of crude, although resistance lies at $87.90 – the high from 2nd November. If there are signs of infighting at the meeting, or it is delayed further then we could see the price of Brent fall below $80 per barrel and hurtle back towards the $75 per barrel mark.

US: will a Black Friday binge weigh on US bonds?

A swathe of US data will be released on Monday after the Thanksgiving holiday. New home sales are expected to decline moderately, in a sign that higher interest rates are starting to bite. There is also a large number of short-term bond auctions in the US at the start of the week. These should go off without a hitch. 10 -year US Treasury yields have risen moderately in the last 5 days, and the yield is currently below 4.48%, as the market continues to expect a dovish Fed and a soft economic landing. We should get information that either supports or diminishes this argument later this week. Last week saw flash PMIs for the US, the manufacturing PMI fell for November while the service sector PMI registered a gain. This week we get the Core PCE report for October. This is the Fed’s preferred inflation measure, prices are expected to rise by 0.2% on the month, and the annual rate is expected to fall back to 3.5% from 3.7% in September. While this is following the overall trend of lower inflation in the US, it does show how slow core prices are falling and how far they remain from the Fed’s 2% inflation target. Personal income and personal spending are expected to moderate to 0.2% growth for October, however, this week we will find out how well Black Friday went and whether or not this ignited a spending binge in the US and elsewhere. Will signs of a strong global Black Friday spook the bond market? If yes, we could see yields rise and a modest dollar recovery take hold. However, consumer strength could also be good news for the stock market, as investors try to get on the Santa rally bandwagon.

UK bond auctions and the pound

Elsewhere, we will be looking closely at the UK’s 30-year Gilt auction on Tuesday at 1030 GMT. The market remains sensitive to the outcome of government bond auctions, as we emerge from a period of unusual bond market volatility. The previous auction saw an average yield of 4.926%, anything higher than this could spook the market. It is worth noting that 10-year Gilt yields rose last week after the Chancellor added more debt auctions to the schedule for this year and did not reduce borrowing over this fiscal year by as much as expected. However, the rise in bond yields boosted the pound – what a difference a year makes - and the pound index was one of the best performers in the G10 FX space last week, gaining 1.46%. Thus, for now, higher bond yields are helping to boost GBP.