By Peter Nurse
Investing.com -- Brent tops $70 a barrel ahead of the latest OPEC meeting, stocks continue to press higher, sterling shows more strength and European economic indicators point to a recovery. Here's what's moving markets on Tuesday, June 1.
1. Brent tops $70 ahead of OPEC meeting
Crude oil prices were sharply higher Tuesday, with the international benchmark Brent topping $70 a barrel, amid optimism over the outlook for demand growth as the global economy recovers ahead of a meeting of major producers.
By 6:30 AM ET, U.S. crude was up 3% at $68.28 a barrel, while Brent was up 2.3% at $70.88, hitting the highest intra-day price since March 8.
China’s May factory activity grew at the fastest pace in 2021 so far, and Europe quickly followed suit, with Eurozone manufacturing activity expanding at a record pace in May (see below), suggesting that the economic recovery in the world’s largest consumers of oil was well on track.
Adding to this, the U.S. driving season got underway over the Memorial Day weekend, with Sunday's U.S. gasoline demand jumping 9.6% above the average of the previous four Sundays, the highest Sunday demand since the summer of 2019, according to tracking firm GasBuddy.
The Organization of the Petroleum Exporting Countries and its allies, a grouping known as OPEC+, is due to meet later in the day. The cartel is widely expected to continue to gradually ease fuel supply curbs as planned over the next two months, particularly after one of its committees estimated that the oil glut built up during the pandemic has almost gone, and that stockpiles will diminish rapidly in the second half of the year.
OPEC+ decided in April to return 2.1 million barrels per day of supply to the market from May to July, and the group’s Joint Technical Committee has forecast that stockpiles will fall by at least 2 million barrels a day from September through December.
The one fly in the ointment is a possible increase in Iranian output, as the Persian Gulf country and global powers continue to negotiate over the steps that Tehran must take regarding its nuclear activities to return to full compliance with the 2015 nuclear pact.
“The market will also be looking for any hints from the group on what they may do with supply after July. Our balance sheet also shows that the group has room to increase output later this year, despite the potential for further Iranian supply,” said analysts at ING, in a research note.
2. Stocks set to start new month positively
U.S. stocks are set to open higher Tuesday, starting the new month with optimism as the global economic recovery strengthens.
By 6:30 AM ET, Dow Jones futures were up 170 points, or 0.5%, at just below 34,700, S&P 500 futures were 0.4% higher and Nasdaq 100 futures climbed 0.4%.
The blue-chip Dow Jones Industrial Average gained just short of 2% in May, while the broad-based S&P 500 rose 0.6%, to mark their fourth consecutive positive month. The tech-heavy NASDAQ Composite gained just over 2% last week to post its best weekly performance since April, but it actually lost 1.5% in May, breaking a 6-month winning streak.
Over in Europe, the DAX in Germany climbed to an all-time peak, while the CAC 40 in Paris reached a 52-week high, as did the broad-based Stoxx 600 index.
Confidence is growing about the strength of global economic improvement, helped by first-time jobless claims in the U.S., the largest economy in the world, falling to a new pandemic low last week.
This puts Friday’s employment report for May firmly in focus, as investors expect this to show that the unexpected weakness seen in April was a one-off, when just 266,000 jobs were created, far short of the one million or so expected.
The economy is expected to have added 650,000 new jobs in May, but the economy is still more than 8 million jobs short of where it was before the pandemic.
The quarterly earnings season is largely over, but Zoom Video Communications (NASDAQ:ZM) and Hewlett Packard Enterprise (NYSE:HPE) are set to report results after the bell.
3. ISM Manufacturing PMI due
While Friday’s May jobs report will be the key economic indicator released this week, and could well set the market tone for June, May’s ISM Manufacturing PMI release, due at 10 AM ET (1500 GMT) will also be studied very carefully.
While the employment recovery is crucial in determining Fed policy, markets have also been rattled by the recent jumps in the central bank’s other mandate - inflation.
On Friday, core PCE climbed to an annual figure of 3.1% in April, way above the Fed’s nominal target of 2%, and this followed the surge in consumer prices to 4.2% the previous week.
Thus, while the headline PMI figure, and the employment component, will undoubtedly be studied, there could be more focus on the prices paid component. This stood at 89.6 in April, a record high and substantially above the previous peaks of the last decade. It is expected to come in at a similar figure later Tuesday, but it has also beaten expectations for the past 13 months.
4. European manufacturing rebounds
Europe may have been hit hard by the Covid-19 pandemic, not helped by the slow ramp up of its vaccination program, but the latest data suggests the region’s recovery is well underway.
Eurozone manufacturing activity expanded at a record pace in May, as IHS Markit's final Manufacturing Purchasing Managers' Index rose to 63.1 in May from April's 62.9, above an initial 62.8 "flash" estimate and the highest reading since the survey began in June 1997.
Germany’s PMI for manufacturing, which accounts for about a fifth of the economy, reached 64.4, below March's record high 66.6, but up from a “flash” reading of 64.0, while France’s equivalent rose to 59.4 from 58.9 in April, hitting the highest level since September 2000.
Disruptions caused by the global coronavirus pandemic are still having a huge impact on supply chains, and the input prices index soared to 87.1 from April's 82.2, easily the highest reading on record.
Still, these inflationary pressures are unlikely to get the attention of policymakers at the European Central Bank, as they might at the Federal Reserve, as inflation levels are still nowhere near their goal despite years of ultra-loose monetary policy.
Adding to the good news, German unemployment fell more than expected in May, dropping by 15,000, as companies hired more staff in light of a recovery in Europe's largest economy helped by an easing of lockdown measures.
5. Sterling soars to 3-year high
The pound is now in demand, after years of being foreign exchange’s unloved child, as traders bet that the U.K.’s impressive Covid-19 vaccine rollout will lead to a healthy and prompt economic recovery.
A deluge of new orders helped to drive a record increase in British manufacturing activity last month, with the IHS Markit/CIPS Manufacturing PMI rising to 65.6 in May from 60.9 in April. the highest level since the survey started in 1992.
The Bank of England said last month that the world's fifth-biggest economy was on course to grow by 7.25% in 2021, its fastest since World War Two, after a near 10% contraction last year.
At 6:30 AM ET (1030 GMT), GBP/USD traded at 1.4188, marginally below the 1.4247 peak it reached earlier in the session, its strongest level since April 2018.
The drop from the high comes after calls to delay ending Covid restrictions in England on June 21 amid warnings of a third wave, with Professor Adam Finn, a scientist advising the government, stating that the success of the U.K.'s vaccination program does not mean that the battle with Covid is over.
That said, while the discovery of a highly transmissible variant of the virus originating from India poses a risk, Prime Minister Boris Johnson has said there is no conclusive reason to delay the easing of the lockdown.