Oil prices continue to be front and center for traders in a relatively quiet market. Brent crude surged 3.5% to trade above $64 on Monday, after the arrests in Saudi Arabia raised investors’ concerns over the stability of the Middle East region. Comments from Saudi Gulf Affairs Minister, Thamer Al-Sabhan, stating that the government of Lebanon has declared war on Saudi Arabia, added more to oil’s political risk premium. Fundamentals remain very positive, with OPEC’s willingness to resume the 1.8 million production cuts, and booming demand from developed and emerging markets. However, conflicts within the Middle East are becoming a major influencer on energy markets, and a further surge in prices will likely be due to political risk premium rather than fundamental support. If tensions escalate further, traders will be targeting $70 for Brent, although such levels may not be sustained in the long run.
In currency markets, the dollar changed little against its major peers, after falling slightly on Monday. There weren’t any significant economic releases to justify the dollar’s weakness, but U.S. Treasury Bonds seem to have a story to tell. Unlike U.S. stocks, which are showing a very bright economic outlook, yields on U.S. 10-year Treasury Bonds fell for six out of the seven past trading sessions, to trade at 2.31%. The yield curve flattened further, with the 2-year – 30-year spread touching 117 basis points, a level last seen in 2007. The flattening yield curve suggests that economic growth and inflation will remain weak in the mid-to-long term, which is just the opposite of what stock markets are suggesting. Who's right and who's wrong, only time will tell.
The decision by Reserve Bank of Australia to keep interest rates unchanged had little impact on the Australian dollar. AUD/USD jumped 0.2% after the announcement, but erased gains shortly thereafter and fell slightly into negative territory. The central bank’s language hasn’t changed, and continues to expect GDP growth to pick up and to average around 3% over the next few years, despite signs of weak inflation and consumer spending. Given the balanced approach by RBA, expect the Aussie to remain in narrow trading range.
The economic calendar is also light today, with only a few tier-2 economic data reports due for release. European Central Bank President, Mario Draghi, is due to speak later today at the ECB forum on banking supervision. But given that ECB has just revealed its plan of a gentle taper two weeks ago, I don’t expect his comments to move the markets.