The markets are setting up for a macro driven trading session at least for the first part of the US session as all await the latest nonfarm payroll number from the US Labor Department along with the headline unemployment rate. The market is expecting a net jobs gain of about 150,000 jobs with the unemployment rate remaining steady at 8.5%. The data will be released at 8:30 am EST. Last month the data surprised to the upside showing a net gain of about 200,000 jobs but after the latest ADP private sector jobs data coming in less than expected the market is starting to expect a miss to the dowmside this month. Either way this is always a market moving number and will likely impact short term market direction today as most of the other normal prices drivers are relatively quiet so far.

Overnight a decline in China's non-manufacturing sector slowed the enthusiasm that has been in most of the equity markets this week. The disappointing macroeconomic data out of China today has dampened most of the markets and has placed more interest in this morning's US nonfarm payroll number. A better than expected outcome in the US is likely to be interpreted as less reason for the US Fed to embark on another round of quantitative easing and thus a negative for those that have been playing the market from the view that inflation will increase as a result of more QE. This would be bearish for gold and most commodities from a macro perspective.

On the other hand a weaker than expected data point will energize those that are expecting the US Fed to add more liquidity to the market by instituting another round of QE sometime in the foreseeable future. This would bolster the inflation trade and be supportive for commodities, gold, non-US dollar currencies and possibly even the equities market. So bad news this morning could be good news for many risk asset markets.

As I have been discussing in the newsletter oil prices have been driven by a variety of drivers and not solely by the macro or external drivers...direction of USD and equities...that have been the main drivers for an extended period of time. The fundamentals have been playing a larger role as we saw this week after a bearish round of inventory reports oil prices actually declined even as the external price drivers were trading in a direction that was supportive for oil prices. In addition the evolving geopolitical situation in Iran and Nigeria are also impacting oil prices.

In particular the evolving situation in Iran is capturing the headline over the last twenty four hours after a Washington Post article inferred that Israel may be ready to strike Iran's nuclear facilities sometime this spring. This has once again raised the tensions in the region with the back and forth rhetoric increasing. The Iranian leaders have responded with strong talk this morning but so far it only a view about Israel's intentions (not a fact) and just talk coming from the Iranians and oil is still flowing. That said the view and talk has helped to slowly support the growing risk premium that has been in the market and as I have said on many occasions it is acting as a price floor at a minimum. With inventories starting to grow and with demand also slowing absent the geopolitics in the middle east and West Africa I would expect that oil prices would be closer to the lower end of the trading ranges I discussed in yesterday's newsletter.

Global equities have continued to hold the vast majority of their gains for the year as shown in the EMI Global equity Index table below. This sector of the market is continuing to look oversold and susceptible to a round of profit taking selling in the foreseeable future. Markets generally need a catalyst to enter into a correction pattern. I am not sure what the catalyst will be this time but at the moment it does not look like it will be Europe as the EU sovereign debt issues have been slowly moving to background and if the Greek deal gets done in the near future Europe will be less likely to act as a downside catalyst in the short term. The upcoming round of macroeconomic data starting with this morning's payroll data could certainly act as a reason for the short term thinking traders/investors to move some of their cash out of equities and back to the sidelines. For the moment the EMI Index is still up by about 1.9% for the week after gaining almost 0.1% over the last twenty four hours. The Index is showing a 10.3% gain for the year with Brazil, Germany and Hong Kong holding the top three spots in the Index. All bourses in the Index are in positive territory for the year suggesting that the market views the global economy as in the midst of a soft landing...including Europe which was the main negative in the equity markets all of last year. On the Nat Gas front the combination of a net withdrawal from inventory coming in a tad better than the expectations and the fact that the market remains in an oversold state was enough to result in a modest short covering rally on Thursday. I can stretch my explanation a tad by saying that maybe Punxsutawney Phil was doing some buying after he saw his shadow and is now projecting six more weeks of winter or six more weeks that may help in postponing what I still think is the inevitable...Nat Gas trading with a $1 handle.

The surplus of Nat Gas in inventory versus the historical timeframes is still growing and is likely to continue to grow for the foreseeable future. The latest short term weather forecasts are still projecting only normal temperatures for the eastern half of the US and above normal temperatures for the western half suggesting that there will not be any major surge in heating consumption at least through the middle of February (and likely beyond). In addition in spite of the announcement by Chesapeake that they were cutting dry gas production so far there have not been any other announcements of any major cuts in production. So far in a tabulation produced by Reuters about 0.6 BCF/day is being cut out of the approximate 67 BCF per day of total production in the US or about 0.9%...not overly bullish nor nearly enough to really start to have an impact on the growing surplus in inventory.

About the most interesting non- bearish news is still the fact that just about everyone knows the US market is oversupplied and that fact alone is likely keeping many new shorts on the sidelines and thus preventing a major sell-off from current levels. The market sentiment is so bearish or in technical analysis terms so oversold it is pushing the incremental players in the market to continue to position themselves and trade the market with a view expecting additional short covering rallies like the one we have seen today.

The WTI is hovering around the intermediate support level while Brent is in a slowly evolving uptrend. The momentum has changed and continuing to look toppy...especially for WTI. However, I am still keeping my view at neutral (with a bias to the downside for WTI). I am currently expecting intermediate support around the $97.00/bbl area basis WTI and $109.50/bbl level for Brent with resistance around the $104/bbl level for WTI and $113.75/bbl for Brent. I am still keeping my view at neutral and bias at short as once again there is not much supportive indications that Nat Gas is likely to embark on a major short covering rally anytime soon. Today's EIA inventory report did underperform and is bearish even though the market is in the middle of another modest short covering rally. The surplus is still building in inventory versus both last year and the five year average is going to get harder and harder to work off even it gets cold over a major portion of the US and as such for the medium to longer term I am still very skeptical as to whether NG will be able to muster a sustained upside rally over and above a short covering rally.

Currently markets are mostly higher as shown in the following table.

Best regards, Dominick A. Chirichella dchirichella@mailaec.com Follow my intraday comments on Twitter @dacenergy.