Two poles of the market: peace oil and German storm

The American claim to DB for $14 billion looks as the next attempt to pressure Germany

The market began to show activity. Euro seriously felt the problems of Deutsche Bank, OPEC unexpectedly came to the agreement, Italy blackmails with the EU, Great Britain looks for a compromise and only the dollar looks like the quiet observer.

Euphoria wave from the OPEC`s decision to reduce oil extraction to levels of the beginning of year gradually abates. Of course, the fact that for the first time two oil countries (Iran and the UAE) supporting counter parties in the Syrian and Yemen conflicts sat down at a negotiating table - already great political achievement. But there is still no mechanism and the specific plan of reducing amounts of production by the countries of cartel.

Against the background of the fact that members of OPEC don't observe own production quotas for a long time, for some reason it`s authorized to Iran even to increase production, and it`s recommended to exempt Libya and Nigeria from execution of general obligations in general. Nevertheless, Iraq can't accept the transaction on restriction of oil extraction by the OPEC countries in its current form: the technique of calculation of the extracted barrels which is planned to be used in case of assessment of how the agreement is observed doesn't arrange Baghdad. So the next arrangement has character informal at all not obligatory to execution.

Nervous fall of euro last Friday is caused by concerns about destiny of Deutsche Bank. However, shares of this bank fall not the first day and analogies with 2008 are hardly pertinent. Nobody is interested in bankruptcy of DB, as a last resort, the ECB somehow will interfere, but the European market still properly will shake before the situation is stabilized.

According to internal documents of bank, which became available to Bloomberg, several hedge-funds (Millennium Partners, Capula Investment Management, Rokos Capital Management and others), which are carrying out clearing of transactions with derivatives in DB, removed surplus of cash from accounts of this bank and close the line items in it. It sharply strengthens problems of bank with cash. Some clients using premium broker services of bank this week transferred a part of the line items in derivatives to other trading floors.

The American claim to DB for $14 billion looks as the next attempt to pressure Germany, most likely - in negotiations on Transatlantic Commercial Partnership, which some time ago have reached a deadlock because of the German and French attitude on key questions. Merkel categorically doesn't want to give to DB diplomatic help concerning the claim of the USA and in general excludes the state help for this bank in the current year.

Other way of resolution of DB crisis - it to agree with the Ministry of Justice about reduction of penalties provided that the bank also should reduce bonuses as it can easily save to it €1-2 billion. The DB problems also caused concerns about other European Banks: Credit Suisse and Barclays also conduct with the American government negotiations on settlement of the conflict because of mortgage securities.

At present analysts of the ECB consider a serious negative the decision of some large banks to leave the Euribor group that can complicate verification of transactions and undermines a settlement rate. Fall of the prices of bank shares can strike at crediting, but political support at such moments isn't admissible.

From the next hints of madam Yellen it becomes clear that the Federal Reserve considers the possibility of extension of the QE program on other asset classes. The American regulator seriously thinks over this plan, despite a total failure of direct purchases of such assets by the Bank of Japan and Swiss National Bank where the share repurchase didn't affect an expansion in consumption in any way. So far within QE only long-term treasury bonds are buy up, but rumors go long ago that FRS asks the price of corporate bonds and shares. Most likely, it`s the plan in case of new financial crisis, when the Central Bank doesn't manage to leave a present round of QE yet, and it will be necessary to support economy even more actively, though won't be opportunities for purchase of bigger amount of treasures.

From other information you should note:

  1. Italy expects that the EU will subtract expenses on migrants and an earthquake from the purposes relating for determination under the budget - before a referendum on the constitutional reform in Italy on December 4 the similar statement sounds as the ultimatum.
  2. Great Britain shall find option of separate WTO membership before applying article 50. Group of finance companies of the USA declared to the prime minister May, that in case of adoption of investment decisions they don't intend to wait for 2 years for results of an exit from the EU. The head of the Eurogroup Dijsselbloem already declared destructive consequences for the European market, if the agreement of Great Britain with the EU on financial services isn't though in 1 quarter 2017. At the weekend May has declared that process of an exit of the country of structure of the EU will begin no later than March of the next year and has to be complete by 2019. Under impression of these news the pound/dollar has opened with a bear gap in 60 points and wasn't restored yet.
  3. Since October 1 the yuan, also known as the renminbi, will join dollar, euro, yen and the British pound as a part of a basket of special drawing rights of the IMF. Of course, to become a part of the SDR basket in the IMF doesn't mean to be world reserve currency yet, but China passed a way from the 10th place by the GDP size to 2nd just in 20 years, and achieved the international recognition of the yuan − in 10, so the currency opposition of the USA and China passes into more active phase.
  4. The euroQE program didn't achieve the declared goals yet, and practically there are no state bonds for acquisition in the market. The ECB already bought up more than a half of transferable securities of Germany and France, therefore their cost reached historical maxima. Now the Central Bank can expand the program of monetary stimulation due to transactions in the stock market and include in the list of the bought-up assets exchange funds (ETF) on the share of European companies. The amount of injections can make €200 billion.

Except the American statistics on Wednesday and Friday it is worth paying attention to the PMI indexes of the leading countries, data on GBP and reserves of oil. We listen carefully to news from the adjacent markets especially.

EUR/USD: resistance: 1.1250 - 1.1270 - 1.1310 - 1.1350 (strong); supports: 1.1210 - 1.1180 - 1.1150 (strong) - 1.1090. Couple violently keeps in the range of 1.1150 - 1.1270, levels 1.1111 and 1.1000 are protected by market makers from breakdown down, but it should be taken into account risks of the movement to protection in the range (1.0982/1.0954). For a change of a trend sure trade higher than 1.1311 is necessary, but to NFP it is improbable.

USD/JPY: resistance: (101.50/101.69) (strong) - (102.02/102.24) (strong) - (102.50/102.69) (a zone of market makers) - 103.25; supports: (101.10/100.90) - (100.30/100.17) (strong, protects level 100.00) - (99.72/99.66) - 98.94 - 97.20. Interests of business demand the strong movement up, but to NFP is most probable flat in the figure range.

Author: Navsher Bartash,
ForexChief Currency strategist