Oil Intermarket: Oversold safe havens extremely sensitive to oil price action

Traditional safe havens - Treasuries, gold and funding currencies like the Yen and the EUR - suffered sharp losses over the last two weeks on expectations that Trump would pursue aggressive fiscal stimulus expansion policies.

US stocks hit record highs, while Japan’s Nikkei entered the bull market territory. The surge on the Wall Street also ensured the European stocks avoided panic despite heightened political uncertainty.

Consequently, both - overbought risk assets and oversold safe havens/funding currencies - stand exposed to the oil price action.

OPEC needs to deliver

As per an FT report, some of the world’s biggest oil traders have warned that will need to cut in excess of 1m barrels a day to hit its target of 32.5m b/d that was set in a provisional accord in September.

Moreover, after the numerous failed attempts over the last one year, the latest meeting is more of a credibility issue for the OPEC.

However, Saudi Arabia said over the weekend that an OPEC deal may not be required. There is skepticism on whether Iran would be granted exemption.

Inverse correlation between the Yen and Oil strengthens

Thus, oil benchmarks dropped at least 1% in Asia and are already helping the Japanese Yen gain ground. The USD/JPY pair traded 1% lower (Yen 1% higher) around 112.00 levels.

European benchmarks like the mining heavy FTSE 100, the overbought US stocks and the oversold US treasuries risk a sharp pull back if oil price sell-off worsens.

Gold could underperform as a potential drop in oil prices would pull down inflation expectations.