The morning catch up: April expected to be bullish for the ASX as OPEC+ cuts output

April is expected to be a bullish month for the ASX with the local bourse expected to open higher today ahead of tomorrow’s Reserve Bank of Australia (RBA) meeting.

ASX 200 futures are 0.6% higher at 7,236.

IG Markets analyst Tony Sycamore writes, “On Friday, the ASX200 added 55 points (0.78%) to close at 7,178. For the week, the ASX200 added 3.2% – an emphatic end to its seven-week losing streak. The bulk of the gains came from the Materials (7.01%), Energy Sector (+2.5%) and Financial (+2.5%) sectors.

“For the first quarter of 2023, the local bourse added 1.98% (excluding dividends).

“It’s worth remembering that April is the second strongest month of the year for the ASX200, with an average return of 2.65% over the past 10 years. Seasonal strength will also receive support from the M&A flow that has hit the local market this year.

“Takeover targets generally have a strategic element to them. Acquirers are often attracted to companies offering synergies and access to new markets and products.

“Additionally, super and infrastructure funds are searching for assets that generate yield. The Australian market offers well-priced equities representing value for the right buyer – evidence of this is the nine live takeovers worth around $60 billion. Expect more to come in the months ahead.”

A hint of what may be to come for the ASX might be found in the way Wall St closed out March.

Wall Street ended the March quarter on a high after positive US inflation data. The S&P 500 closed 1.4% stronger, the Dow Jones Industrial Average gained 1.3% with the tech-heavy Nasdaq Composite gaining 1.7%.

The energy sector could be the big winner in April after Saudi-led producers agreed to lower output further. Saudi Arabia will cut 500kb/d and combined with additional pledges from Russia and some other OPEC and non-OPEC members, the total production cut is expected to exceed 1.5m/d.

WTI Crude Oil gained 9.25% for the last week of March closing on Friday at $75.70.

Here’s what we saw (source Commsec)

  • While banks fell 0.5%, retailers rose 1.7%, tech shares rose 0.5% and real estate rose 0.4%. Shares in Adidas rose 5% and H&M rose 3.4% on broker upgrades.
  • Eurozone annual headline inflation fell from 8.5% in February to 6.9% in March (survey: 7.1%). French member of the European Central Bank Francois Villeroy de Galhau said the ECB had a “little way” to go with interest rate increases.
  • The continent-wide FTSEurofirst 300 index rose by 0.7% and the UK FTSE 100 index gained 0.2%.
  • The Euro fell from US$1.0910 to US$1.0835 and was near US$1.0840 at the US close. The Aussie dollar held between US66.70 cents and US67.20 cents and was near US66.85 cents at the US close.
  • The Japanese yen rose from 133.55 yen per US dollar to JPY132.62 and was near JPY132.80 at the US close.
  • Equity markets rose on optimism about an easing of US inflationary pressures.
  • OPEC+ oil producers meet on Monday to discuss oil production quotas. The Brent crude oil price rose by US50 cents or 0.6% to US$79.77 a barrel.
  • The US Nymex crude oil price added US$1.30 or 1.7% to US$75.67 a barrel.
  • Over the week Brent rose by US$4.78 or 6.4%. Nymex rose by US$6.41 or 9.3%. Brent fell 5% in the month with Nymex down 2%.
  • Base metal prices rose on Friday. The copper futures price rose by 0.3%.
  • The aluminium futures price lifted by 0.9%.
  • Nickel rose the most, up 2.8%. Over the week aluminium rose 3.5% and lead rose 1.2%.
  • The gold futures price fell by US$11.50 or 0.6% to US$1,986.20 an ounce. Spot gold was trading near US$1,968 an ounce at the US close.
  • Over the week gold rose by US$2.40 or 0.1%.
  • Iron ore futures fell by US37 cents or 0.3% to US$125.64 a tonne. Over the week iron ore also fell by US37 cents or 0.3%.

OPEC supporting oil prices

The rise in the price of oil is expected to continue as OPEC+ hedges against macroeconomic-related selloffs via output cuts.

RBC’s head of global commodity strategy Helima Croft expects OPEC+ to continue to support the price saying: “Today’s move, like the October cut, can be read as another clear signal that Saudi Arabia and its OPEC partners will seek to short circuit further macro sell-offs and that Jay Powell is not the only central banker that matters.”

Reduction pledges from Russia and other members of OPEC, as well as non-members, means that along with the Saudi decision to cut 500,000 barrels per day, the May reduction will, in theory, exceed 1.65 mb/d on top of the 2 mb/d cut announced in October.

“The full extent of the voluntary adjustments are not entirely clear at the time of writing but our initial estimates based on today’s announcements would indicate the real effect could be around 700 kb/d from the OPEC-10 group,” Croft said.

“This decision will certainly not be welcomed by the White House – which had called the move ill-advised – but the bottom line is Washington and Riyadh simply have different price targets for their key policy initiatives.”

OPEC+ has defended the cuts, saying that the move is necessary to ensure the stability of the oil market.

“The latest reductions could lift oil prices by $10 per barrel, the head of investment firm Pickering Energy Partners said on Sunday, while oil broker PVM said it expected an immediate jump once trading starts after the weekend,” Reuters reported.