Three reasons to sell Brent | 21 Oktober 2016

Forecast for the week 17 - 21 October:

XAU/USD:

In the first half of the week gold may show weakness against strengthening of the US currency. On Tuesday, the release on US inflation for September will be published, which may encourage investors with strong data as consumer spending grew and manufacturing price index in September rose to its highest level in 20 months. Since gold and US dollar move in opposite directions, gold will be under pressure and may test the level of $1231 per ounce. Then we can expect a corrective upward movement as US stock market will be falling. Reduced "risk appetite" will have a positive impact on the value of gold as a safe asset. Against this background, this week we should open Sell positions on growth of quotations to 1253/1266 and take profit at 1231.

Brent:

We should be selling oil for a number of reasons. The first one: the report was published by the US Department of Energy and it recorded growth of oil reserves by 4.85 million barrels after a 5-weeks' decline of reserves. Baker Hughes reported growth of number of drilling rigs in the United States and Canada by 4 and 3 units, respectively. Thus, in both countries, the number of active drilling rigs is at its maximum level from February 12, 2016. Since the oil futures are now near yearly highs, the oil companies will continue to increase their production capacity, which is negative for oil prices. Second, the last week, the French bank Societe Generale reported its customers actively selling Call options and buying Put options to hedge themselves against a possible drop of the oil price. Oil producers do not believe that growth of quotations would continue in the medium term. Third, strengthening of US dollar in the foreign exchange market is factor for oil, as energy costs are denominated in US currency. Against this background, this week we should open Sell positions on growth of quotations to ​​52.60/54.00 and take profit at 50.20.

S&P500:

There are also reasons why we should open Sell positions this week. Firstly, the first week of the new corporate reporting season could not encourage traders with strong data. 31 corporates submitted their reports and the ratio of better/worse than the consensus forecast is equal. For 5 quarters in a row the US quarterly corporate earnings had been dropping. In the second quarter of 2016 this figure fell by 5.8%. Thus, the US stock market is overvalued. Since the value of shares and profit closely correlate, prices of securities lost its hold from the economy of corporates and return to their original positions is inevitable. Secondly, expectations regarding the raise of the interest rate in the USA enhanced, which is also negative for the stock market. Over the past two weeks, yield of 10-years' treasuries bonds grew by 0.2%, which makes investment in the bond market more attractive and in this regard, the capital may outflow from shares. This is indicated by growth of securities of the "protective" utilities sector, which was among leaders of growth the last week. Against this background, this week we should open Sell positions on growth of quotations to 2135/2153 and take profit at 2109.