Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma-which is living with the results of other people's thinking. Don't let the noise of others' opinions drown out your own inner voice. An most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.
Steve Jobs, commencement address 2005
The strong short covering rally has continued for most all risk asset markets around the world this week. Ahead of this morning's always important and market moving US jobs data WTI has gained about $2.80/bbl or 3.5% for the week while the US Dollar Index is trading slightly above last Friday's close and the US Dow is up about 1.6% on the week. Whether or not oil and other risk asset markets are going to be able to hold onto the modest weekly gains by the end of today's session will be a direct function as to the outcome of the US employment data at 8:30 am EST.
The vast majority of the forecasts for this morning's jobs report are expecting the headline unemployment rate to hold steady at 9.1%. The rate has been above the 9% level of over a year. The market is expecting new net jobs creation to come in around 60,000... above the previous month which saw no job creation but still well below the level that is needed in the US to start chipping away at the 15 or more millions of Americans that are out of work. One of the pre-jobs data points...the ADP private sector report which was released on Wednesday came in slightly better than expected showing private sector job gains of 91,000. If today's data is within the expectations or lower we could see selling quickly hit oil and other risk asset markets. Obviously a better than expected report will fuel the three day short covering rally that has been in place this week. Although some forecasters are expecting nonfarm payrolls to exceed the expectations that has not been the outcome over the last several months as the number of new jobs created has underperformed versus the expectations. One thing for certain today's data will be a market mover in one direction or the other. Keep your seat belts fastened.
Moving back across the ocean the situation in Europe is still continuing to evolve. Yesterday neither the UK nor the ECB lowered short term interest rates but both of them embarked on another round of bond buying or what all like to call quantitative easing or simply QE. With the US kicking off Operation Twist a modified version of QE and with Europe also moving in that direction the two largest economies in the world are forced to once again resort to some form of stimulus to try to not only jump start a very stagnant and contracting economic situation but also to try to prevent a return to a double dip recession. If that was all that was working in the developed world economies it would likely be enough to stop the bleeding and push most risk asset market higher as a QE strategy does have the risk of increasing inflation as countries simply print new money to pay for the bond purchases.
However, the other main factor that is the more dominant factor is the evolving sovereign debt situation in Europe and in the short to medium term how Greece either gets through it or finally defaults on its obligations. The next big time point is likely to come in the second half of November when the G20 meets with Europe on the top of the agenda. In the meantime the 30 second news snippets coming from various talking heads and countries in Europe suggest that the situation is very bad (UK Central Bank head) to both France and Germany still fighting over the little details insofar as exactly how to use the bailout funds in the ESFS. It continues to demonstrate (at least to me ) that the European leaders are still not seeing the forest from the trees and have not yet acknowledged that they have a huge problem that requires a clear cut and long term solution as they should be focusing their attention on the big issues rather than the minutia of the minor details.
The risk asset markets have been in a short covering rally this week with oil at the top of the gainers list on a combination of slightly improved macroeconomic data (so far) and a bullish US oil inventory report. That said there is nothing to suggest that any of the markets have bottomed out and what we are seeing is the beginning of a long road to recovery for commodities and equities. The problems evolving in the developed world (in particular) have not improved as of yet. Those questions and concerns I have raised several times in this newsletter have not been answered with any degree of confidence that the developed world economies have stopped contracting and are now back to an expansion phase.
As such all rallies have to still be categorized as relief or short covering rallies. In addition the markets will continue to experience an above normal level of volatility with a high probability of both intraday and day to day price reversals on the 30 second news snippets hitting the media airwaves as well as the macroeconomic indicator du jour. Traders & investors will continue to trade (not invest) with a very short term time horizon until the growing cloud of uncertainty hanging over the developed world economies starts to dissipate.
The short covering rally has moved global equities into a small positive position for the week as shown in the EMI Global Equity Index table below. Heading into the last trading session of the week in the US and Europe the Index has gained about 0.7% on the week and has narrowed the year to date loss to 19.3% or marginally below the threshold that signifies a bear market is in play. A worst than expected US jobs number will quickly send the Index back into bear market territory. For the very short term (last few days) global equities have been a positive for oil prices as well as the broader commodity complex.
Today and likely into next week the outcome of the US employment data will set the stage as to the short term direction for oil prices as well as all other risk asset markets. Oil fundamentals and just about any other of the normal drivers that impact oil prices will only play a secondary role until the market digests the data.
With WTI now trading above the $80/bbl level I have to keep my bias to the bullish side with a big caution flag that the direction over the last few days can change quickly if any of the looming macroeconomic data (jobs data in particular) due out today and early next week are negative or if any of the 30 second news snippets are bearish. If WTI drops solidly back below the $80/bbl level my bias would quickly be downgraded as well.
With the short term weather forecast a neutral at best and with yet another bearish EIA inventory report I have to keep my drivers at bearish. I know it sounds somewhat boring but it is very difficult to find something overly interesting to suggest the next price direction for Nat Gas for the short term...other than most likely lower. The only potential price driver will be today's weekly EIA inventory injection report assuming the actual data is out of the range of the projections. In fact the spot Nymex contract is now well below it current support level with nothing in between the current price and the next support level of around $3.40/mmbtu.
Currently as a new day of trading gets underway in the US markets are mostly lower ahead of the employment numbers as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy.