Lagarde To Head ECB

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After days of discussion, outgoing EC President Donald Tusk confirmed last night that European leaders have now made their final nominations.

The nominations for the European Commission’s top jobs for the upcoming term are as follows:

  • Christine Lagarde (France) for President of the European Central Bank
  • Ursula von der Leyen (Germany) for next President of the European Commission
  • Charles Michel (Belgium) for President of the European Council
  • Josep Borrell (Spain) for High Representative for Foreign Policy

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Lagarde to Head ECB

Notably, the nominations include some impressive firsts. Two women have been nominated for the first time for the roles of head of the ECB and head of the EC.

The nomination of Lagarde for the ECB is particularly surprising. This is because Lagarde herself, who currently runs the International Monetary Fund, has always stated she has no intention of running the central bank.

Lagarde would be the first woman to ever run the ECB. She would also be the first ECB president without any prior central bank experience.

Hawk or Dove?

In terms of what Lagarde’s likely stance on monetary policy would be, it is difficult to tell. The IMF head has refrained from any direct comments on ECB monetary policy.

Lagarde is known for her fantastic communications skills. And these would certainly come in handy in leading discussions among the ECB policymakers as well as in guiding the markets.

Market Reaction

The initial market reaction has seen eurozone bond yields falling and European equities rising. This suggests that the market is optimistic that Lagarde will take a dovish approach. The markets also seem to be relieved that the more hawkish Wiedmann has not been selected.

OPEC Extends Cuts

As had been widely expected, OPEC agreed to extend its current production cuts. They came to this decision at the July meeting which concluded yesterday.

However, there was some element of surprise. The oil-producing cartel agreed to extend its current 1.2 million barrel per day cuts by a further nine months. This extension will take the cuts through into the end of Q1 2020. This was much longer than the year-end extension the market was looking for.

OPEC noted that when it meets again in December it will review the decision to decide on the next steps.

Concerns over Demand Remain

The decision to extend into Q1 2020 is based on Q1 typically being a period of low demand. This could lead to inventory build-ups if OPEC began to increase production again.

Indeed, demand forecasts for 2020 are showing uncertainty. The EIA recently revised its 2020 outlook lower to 1.2 million barrels per day from 1.4 previously. Despite the latest truce between the US and China, the prospect of a further escalation of the trade war remains a threat. As does the still record high US crude production which has been continuing to surge higher over the year.

The market reaction will be disappointing for OPEC given the sharp sell-off in crude in response to the meeting. Concerns over the demand outlook for the remainder of the year and into next year, as well as over the ability of OPEC to maintain obedience to the cuts are likely playing a part here. However, over the medium term, the extension should keep crude supported.

Technical Perspective

oil prices

Oil prices continue to trade into the apex of the large contracting triangle pattern which has framed price action over the last two years. For now, crude is caught between support at the 55.87 level and resistance at the 59.98 level. A break back above here will put focus on a run up to retest the 2019 highs. Alternatively, bears will need to see a break below the 51.06 level to confirm fresh downside.

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