The markets are a tad less optimistic as Europe... in particular Greece move back into the foreground. Greece is seeking more time to meet targets under its bailout program in meetings today in Europe. Greece's Samaras is meeting with Germany's Merkel today to discuss the bailout program. As attention has turned to Europe once again the markets have put aside (for the moment) the possibility of a new round of quantitative easing in the US as well as the potential for a broader European solution. Next week at the Jackson Hole Symposium both Mr. Bernanke and Mr. Draghi will be speaking with the possibility that either or both of them might lay out their intentions insofar as QE3 for the US and a new bond buying program for Europe.
Economic conditions in the US and Europe continue to look dismal as the US is barely growing while Europe is on the cusp of a region wide recession. Yesterday's US jobless claims increased for the second week in a row suggesting that the faltering job market is still not getting any better. The Fed has focused a lot of attention on the jobs market as it is one of their mandates and cold be a driver in their decision to embark on another round of QE. On the Asian front China is still experiencing a slowing of its economy in spite of some short term interest rate reductions and reductions in bank reserve requirements earlier in the year. The potential still exists for further easing out of China especially since this a power transition year.
Overall the global economy is in stall mode and absent any further monetary or fiscal stimulus this could be the pattern for the rest of the year. That said I still expect something out of Europe insofar as capping bond yields and even a further cut in short term interest rates. This week's FOMC meeting minutes seemed to raise the possibility of a new round of QE from the US but I am still not as certain that it will happen. I am also expecting more easing out of China.
Going forward most risk asset markets are likely to trade around the perception that more stimulus and a European solution is coming and these actions will serve to jump start the global economy. Gold is once again trading at the highest level since early April on the premise that more money printing is on the way. Gold has been a good leading indicator of the market sentiment and expectations for more easing. With the potential for more easing I still expect that risk asset market values will have limited downside in the short to medium term.
Equities have receded and have are now showing a loss for the week as shown in the EMI Global Equity Index table below. The EMI Index is currently lower by 1.1% for the week resulting in the year to data gain narrowing to 5%. Over the last twenty four hours all ten bourses in the Index have declined. However, only China remains in negative territory for the year to date. Equities have been a supportive price driver for oil and the boarder commodity complex over the last month or so. This week they have been a negative driver.
On the oil side there are two additional factors that are serving to support prices in the short to medium term...a possible tropical weather pattern that may be heading for the US Gulf of Mexico and the evolving geopolitics of the Middle East with Iran as the focal point. The rhetoric between Israel and Iran has ratcheted up several notches over the last several weeks with Israel hinting that they are getting closer to military action while Iran continues to counter that they will retaliate very strongly. I do not know if there will be military action in the near term nor do most market participants. However, as the rhetoric increases there will be a reluctance to aggressively sell oil until more clarity emerges. At the moment the geopolitics risk premium is slowly starting to creep back into the market.
The tropics are continuing to be in active mode as there are now three storms working. One for certain TS Joyce is projected to move into the North Atlantic and not threaten US land or oil & Nat Gas producing assets. The path of TS Isaac has shifted over the last few days and is now moving more westerly and on a projected path to work its way toward the oil and Nat Gas producing region of the US Gulf. It is also projected to strengthen to a Hurricane by Tuesday. Whether or not it will shift westerly enough to have a major impact on energy production is still not know but at a minimum I would expect to see producing companies starting to take precautionary measures and evacuating some of the rigs while preemptively shutting some production.
The inventory reports for oil and Nat Gas the week after next could be impacted from the storm as supply of both Nat GAs and oil is likely to be below normal from that region...including a potential slowing of imports. The storm near the west coast of Africa has a 30% chance of strengthening to a tropical cyclone over the next forty eight hours.. As it looks at the moment Isaac has the potential to impact supply operations in the US Gulf at least on a preemptive basis. The other two storms are not currently a threat to the US Gulf regions. As I have been indicating for the last two weeks the tropics now must be on everyone's radar and monitored on a daily basis as the activity level is picking up.
I still think the oil price is overvalued and getting toppy at current levels as it approaches a key technical resistance area. WTI is still currently in a $90 to $100/bbl trading range while Brent is in a $105 to $115 trading range. There are a lot of dynamics that will impact oil prices in the short term and the ranking of the price drivers are fluid and very susceptible to changing. The only constant for oil prices in the short term is above normal levels of volatility. Geopolitics are currently moving back into the foreground and starting to play a role in price setting once again as well as the perception of more stimulus.
I am keeping my view at neutral as the warm weather may be returning and could support prices in the short term. If so the upcoming injections could continue to underperform history and thus result in the overhang of Nat Gas in inventory continuing to narrow as it has been for the vast majority of the injection season to date.
Markets are starting the US session mostly lower as shown in the following table.
Dominick A. Chirichella
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