A1 Trading Company

Ticker tape by TradingView
Surprising PPI Numbers Today

This morning at 8:30 am Eastern Time, the Bureau of Labor Statistics revealed the latest figures for a key measure of inflation in the United States. The Producer Price Index (PPI), which tracks changes in the prices of goods and services sold by producers, was expected to increase by 0.4% month-over-month in October; instead, it only rose by a mild 0.2%. Likewise, Core PPI (which excludes volatile food and energy prices), was forecast to increase by 0.3% month-over-month, but remained static, changing exactly 0% instead. These surprising PPI numbers today offer yet another instance of American inflation dropping following the recent low CPI report, building a bearish case for USD and a bullish one for stock market indices as the need for a hawkish Fed ostensibly lessens. However, I am personally skeptical of this development as many underlying economic fundamentals have not changed, as we will discuss below.

Markets to Watch

My bias remains bullish on USD, and bearish on the US stock market, for three primary reasons: A) None of the crises the world is contending with have evaporated: an energy crisis still looms with winter around the corner, and many markets are still hot with artificial demand following quantitative easing mid-pandemic. B) The Democratic Party in the US, which tends to be seen as a pro-stimulus party, recently outperformed expectations in last week’s midterm elections, which I predicted could create short-term rallies in the stock market (but longer-term bullishness for USD). C) One month’s worth of data on inflation is not enough to mark a trend; October’s low numbers could easily be outliers, perhaps due to tapping into oil reserves to alleviate cost-of-living increases.

For those who remain bullish on USD and anticipate the Fed further hiking interest rates at a historic pace to quell high inflation, the following markets will be key to watch. They are listed below with their respective EdgeFinder ratings, signals/biases (which diverge from mine), and corresponding charts.

1) EUR/USD (Receives a -2, or ‘Neutral’ Signal)

Surprising PPI Numbers Today
Already struggling with double-digit inflation exacerbated by Russia's invasion of Ukraine, Europe's economic predicament could grow worse as winter approaches, likely increasing demand for energy and driving up oil and gas prices amid low supply.
Surprising PPI Numbers Today
Despite the strong breakout to the upside, key resistance has been encountered, and Keltner Channel walls suggest overbought conditions.

2) US30 (Receives a 4, or ‘Buy’ Signal)

Surprising PPI Numbers Today
Although the Dow Jones Industrial Average's month-long rally has been historic, most institutional traders are still going short.
Surprising PPI Numbers Today
On one hand, a year-long downtrend has been disrupted with a breakout to the upside. On the other hand, key resistance is near, around 34000.

3) USO (Receives a -5, or ‘Sell’ Signal)

Surprising PPI Numbers Today
Despite the strong downtrend, lower supply due to wartime conditions and OPEC+ restrictions on production, in conjunction with higher demand in wintertime, could cause prices to soar in the near future. Also, nearly 80% of institutional traders are still going long.
Surprising PPI Numbers Today
Although resistance was encountered at the 92 level, it appears an uptrend could be beginning to form.
How to Trade the OPEC News

On Wednesday, October 5th, the multinational group known as OPEC+, which consists of the OPEC member countries plus a selection of non-member allies (including Russia), made a shocking and controversial move. They decided to collectively scale back their oil production, which currently amounts to approximately 40% of the world’s supply, by 2 million barrels per day, or 2% of global output. This policy agenda comes on the heels of several months of declining oil prices, with brent crude oil falling below $95 a barrel from this recent summer’s highs around $125 a barrel. As the Economist describes, this organization operates in a manner comparable to an international central bank, with the goal of keeping oil and gas prices high and stable. These production cuts will surely be felt by consumers and investors around the world, which is why we ought to discuss how to trade the OPEC news.

What Exactly is OPEC?

The Organization of the Petroleum Exporting Countries, or OPEC, is an intergovernmental organization that plays a weighty role in influencing oil and gas prices on an international scale. Consisting of thirteen member countries which meet regularly, not only do they contribute well over a third of the world's oil supply, but they also own over 75% of the world's oil reserves. OPEC+ also includes ten additional countries which participate in OPEC’s plans, and whose sizeable global authority grows exponentially larger amid an energy crisis, particularly one primarily created by Russia, an OPEC+ participant.

Why Are These Output Cuts Significant?

These cuts, which could likely become more severe than expected given OPEC+’s reputation for failing to meet production goals, guarantee a smaller energy supply available within the global markets short-term, which necessarily creates higher oil and gas prices. This reduced supply and higher prices could not come at a worse time for many internationally speaking: European countries are already grappling with the consequences of underdeveloped energy sectors due to years of reliance on Russian exports, and many lower income countries are struggling under the burden of painful US Dollar-denominated debts and energy prices. This is a devastating economic blow to billions of people around the world, and it will reflect as such across financial markets.

Could Rising Oil Prices Be Mitigated?

Unfortunately, there does not appear to be much that can be done in the short-term to resolve this situation, at least on a multinational level. US President Biden announced a plan to release 10 million more barrels of oil from the US Strategic Petroleum Reserve in the month of November, in addition to the 180 million barrels already released since Spring of this year. While this may help cushion some of the initial blow for consumers, it is purely palliative, and unsustainable given the reserve’s limitations and the potential longevity of this energy crisis. Norway, now the EU’s largest supplier of gas, announced plans to use ‘joint tools’ to boost exports for Europe amid crisis, but precise details about this arrangement are currently few. It could take a grueling amount of time for the world’s countries to expand energy grids and develop diplomacy strategies to mitigate damage.

How Have Forex Fundamentals Changed?

Due to oil’s now artificially exacerbated scarcity, and its aforementioned effects on various economies, this news has certainly influenced market fundamentals, including within the forex market. For commodity traders, fundamentals appear to be quite bullish for US Oil into the near future and may continue to be so until global oil output returns to previous levels. For those trading currency pairs, this news is likely bullish for the Canadian Dollar, a ‘commodity currency’ since oil and gas production and exports are central for Canada’s economy. By contrast, this news offers further bearish potential for the Euro, since this current energy crisis has been catalytic in sending EUR to historic lows against other currencies, especially USD.

Three Trading Possibilities

The EdgeFinder, A1 Trading’s market scanner tool which offers traders holistic supplemental analysis for a variety of pairs and securities, corroborates the fundamentals mentioned above. The following three possibilities are viewed favorably for traders, and are listed with their respective ratings, biases/signals, and a chart which lists the specific factors the EdgeFinder takes into account.

A) USO - Earns a 7, or ‘Strong Buy’ Signal

How to Trade the OPEC News
How to Trade the OPEC News

B) EUR/CAD - Earns a -2, or ‘Neutral’ Signal (personal sell bias)

How to Trade the OPEC News
How to Trade the OPEC News

C) EUR/USD - Earns a -7, or ‘Strong Sell’ Signal

How to Trade the OPEC News
How to Trade the OPEC News
Home
Edgefinder
VIP
Menu
homesmartphonelaptopmenu linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram