US and European futures are trading lower while investors continue to pay close attention to the landmark shift in geopolitical tension in Ukraine. Oil prices are highly volatile on the back of Russian military news, and traders are awaiting significant economic numbers, determining the future path for US equity markets.
Volatility in Oil Prices
Volatility in oil prices has taken another turn as traders are trying to make sense of the recent changes in geopolitical tensions. Basically, on the one hand, you have good news that there is some de-escalation in geopolitical uncertainty as Russia has withdrawn some army from Kyiv. On the other hand, the US hasn’t acknowledged this thoroughly as it is saying that Russia’s dial back on its military strategy in Ukraine is minuscule. The issue here is sanctions on Russian energy, which has put the oil supply further out of whack. If the US acknowledges that Russia is moving in the right direction, we can see the oil supply issues easing off. But if the US stance doesn’t shift significantly, we will likely see oil supply issues anchored in place. Traders know that if the Russian army doesn’t advance further in Ukraine and begins to withdraw from Ukraine, the EU is less likely to comply with US demands. It is heavily dependent on Russian energy sources.
Another thing that traders are also keeping a close eye on is the OPEC+ meeting. The cartel has made its position clear that it doesn’t want to get involved in any political tensions, and Russia will stay part of OPEC+. The only question standing in front of traders is how much more oil we will see from OPEC in its meeting. Our base case is that we will only see a moderate increase in oil supply by OPEC+ as it is constrained due to its spare capacity. One factor that can significantly shift oil supply is if Iranian oil comes back to the market, and looking at the circumstances, it doesn’t seem that is going to happen that easily. Both Israel and the Middle East want personal assurance from the US if it wants to lift the sanctions on Iran.
Regarding technical price analysis, Brent oil prices touched the 50-day SMA daily and bounced sharply back up, confirming that bulls are ready to bag a bargain. Brent oil has decent support around the $100 mark, and as long as the price continues to respect this price level, we are likely to see an uptrend picking up more strength.
The most important economic number for today is the US ADP Job data. This data sets the tone for the upcoming US NFP number, which is due on Friday. Last month, we saw tremendous improvement in the US labour market, making the Fed raise the interest rate. Traders are expecting a decent number this time as well, and the forecast is for 455K while the previous reading was 475K. A strong reading is likely to trigger a risk-on rally for the US equities as investors will feel more comfortable with the Fed’s tightening of monetary policy. If the number misses the forecast and shows weakness, speculators are likely to punish the markets because they believe that the Fed is making another policy mistake.
In addition to the US ADP data, we also have the US final GDP q/q data, and the GDP is expected to grow by 7%. Finally, keep an eye on the US crude oil inventory number, which will be released at 15:30 GMT, and the forecast is for -2.0M.
Bitcoin and Ethereum
The crypto king is still hesitating to break the most crucial resistance level of 50K, while bulls keep a close watch on this price level. If the BTC price breaks this price point, it will be almost certain that the bull run will push the price towards the 60K price mark, the next significant resistance point.
As for Ethereum, the second biggest crypto coin by market, it continues to trade above the 3K price level. Much of that momentum is driven due to the hype in NFTs and institutional traders bagging ETH as they know that other ETH killers aren’t likely to have market penetration like Ethereum. For instance, if one looks at the NFT transactions on ETH, they are still mammoth compared to other ETH killers like LUNA and Solana.
In terms of forex, the pair that you want to keep an eye on is the Russian Ruble. It experienced a massive move yesterday on the back of easing geopolitical tensions, and it is likely to remain immensely volatile as traders are hoping for no further sanctions against Russia. In addition to this, Russia has been meeting all of its debt obligations so far, and energy producers and government officials have made it clear that their debt holders must accept Russian Ruble if they want to get paid.
The dollar/yen pair is another one to watch, and traders keep a close eye on the Japanese bond yields. The recent intervention by the BOJ to keep the bond yields in check sent shock waves for the yen, and traders are expecting other similar actions by the BOJ as they have started to soar again. The biggest fear among traders is that if the yields begin to rise for the US treasuries, the Fed will have to take a similar action which means further expansion of the balance sheet, making the dollar vulnerable.