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Opec oil deal dominates market tone for the week

Here are the big questions we are asking at FT Markets into the week when the calendar flips over into December.

Will Opec deliver a meaningful production cut?

All eyes are on Vienna and Opec’s annual gathering with a keenly awaited decision on production levels. An Opec deal on Wednesday that delivers a concrete supply reduction of at least 1m barrels a day, with non-members such as Russia on board could boost oil beyond its recent $40-$50 range.

While traders pushed Brent towards $50 a barrel earlier last week, news on Friday that Saudi Arabia would not attend a meeting with Russia and Kazakhstan on Monday, prompted a pullback in the crude benchmark below $48.

The price action underscores the high stakes for oil traders should Opec stumble in trying to distribute a production cut among members before ministers convene their meeting. A sticking point appears to be Iran, recovering after years under western sanctions, and which believes it should be treated as a special case without any output restraints.

‘’A successful solution is likely to see oil move above $50 a barrel while a weak deal could see oil return below $45,’’ says Ole Hansen, head of commodity strategy at Saxo Bank. However, that’s guarantee volatility will ease for crude he warns.

‘’Complying to agreed production limits has historical been a major challenge for Opec and the market is likely, once the initial rally has run its course, to adopt a wait-and-see approach while we wait for signs that the agreed cuts are being implemented.’’

Can a grand slam US equity market set fresh records?

Wall Street begins a new week after Thanksgiving, in a bullish frame, led by small-caps. Not surprisingly flow data last week showed more money leaving bonds and heading for shares. Equity bulls clearly like the prospect of a fiscal shot in the arm for the economy and a lower US tax rate boosting earnings in 2017. Hence an array of records being set with all four main US equity indices climbing into uncharted territory last week as investors for now ignore the prospect of corporate margins being eroded by higher wages and interest rates.

Mike Bell, global market strategist at JPMorgan Asset Management, says: “An improving growth outlook in the US but with potential political risks to trade argue for both US and international investors to favour US domestic focused equities which benefit from rate rises, such as financials.”

Andrew Milligan, head of global strategy at Standard Life Investments, says equities have scope to rally further so long as Trump focuses on his domestic agenda for boosting the US economy and does not recycle his campaign rhetoric about trade and immigration, topics that have the potential to rattle investors. ‘’A steady trickle of positive domestic news is good for US equities.’’

He adds that the prospect of rising wages as the economy strengthens may well squeeze corporate margins, especially for smaller companies. However there is a case for a virtuous cycle whereby higher wages spur greater spending and productivity rises as Capex is boosted.

Can the euro and yen hold the line against the dollar?

A dominant US dollar, supported by rising expectations for a more active policy response from the Federal Reserve in 2017, has registered far and wide across global foreign exchange. Among the majors, the euro has slid 4 per cent from $1.10 to $1.05 since the US presidential contest triggered a sell-off in bonds and propelled US equities into record territory. The yen has slumped more than 7 per cent from ¥105 towards ¥114 over the period.

While the dollar cooled its heels towards the of last week, the monthly US jobs report due on Friday could spur another strong run for the global reserve currency. Having priced in a Fed rate tightening next month, markets also expect a robust jobs number for November after a gain of 161,000 in October.

Marc Chandler at Brown Brothers Harriman says the forces that have driven the dollar higher remain. ‘’One of the most important of these drivers has been the increase in US interest rates.’’ With a two-year Treasury yield of 1.16 per cent, the highest level seen for the policy sensitive benchmark since April 2010, it’s tough to bet against the dollar.

Does an ETF steamroller crush gold bugs?

Back in July all was well in the gold market with the price topping $1,375 an ounce as investors pumped money into exchange traded funds such as GLD. A stronger dollar and rising bond yields since the US election have triggered a big reversal in sentiment for gold, with the potential for a much bigger slide. Gold has dropped below $1,200 a troy ounce for the first time since February as ETF outflows have risen to their highest level since July 2015. As holdings in the funds become unprofitable at current prices, analysts warn the market could see further liquidation as analysts estimate 100-200 tonnes of gold has been bought above current levels. For gold bugs, memories of a year-to-date gain of 30 per cent back in July are fading fast. Gold remains up 11 per cent for 2016.

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