Overnight Points of Interest


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team Graham Parlane

15 December 2014

Posted by Graham Parlane on 15 December 2014

Good morning


# The continuing rout in crude oil prices remains an unsettling force in global equity markets with the current conclusion being that a distinct lack of demand is a big contributor to the declines. Thoughts therefore turn to the credit worthiness of highly leveraged shale oil producers, and the possible contagion to the broader credit markets. This thinking saw a new level of ‘risk aversion’ sweep through the markets Friday. The Stoxx600 fell a not insignificant 2.58% whilst in stateside trade the S&P500 fell 1.62% despite a very strong UoM confidence survey. For the week the Stoxx fell 5.45% and the S&P 3.53%.

# The International Energy Agency’s monthly report compounded the demand concerns prevalent in current market thinking. In its report the agency cut its forecast for global crude oil demand for the fourth time in five months. WTI crude closed 3.6% lower at $57.81, while Brent’s slide was more modest, down 2.9% at $61.85. The levels being new 5 year lows.

# The University of Michigan’s consumer confidence survey for December blew away expectations with a very strong reading of 93.8, the highest reading since January 2007 (8 year highs) and above the median forecast of 89.5. Lower gasoline prices, a buoyant labour market and the prospect for higher wages all at play here.

# Despite the amazing confidence reading U.S. wholesale interest rates fell as the broader risk aversion theme swept markets. The U.S. 10 year bond yield fell to 2.08% from 2.16% prior and a high of 2.31% earlier in the week. We consider the bond markets the smartest of markets and thus one can only draw the conclusion, that with the FOMC meeting due later this week, the ‘smart’ players do not see the prospect of a hawkish Fed despite all the talk of them removing the ‘considerable time’ phase.

# Japanese PM Abe’s coalition swept back to power over the weekend making big gains and maintaining at least a 2/3rds ‘super majority’. Many had expected the JPY to weaken sharply in the wake of the victory as Abe’s mandate to continue his reforms is strengthened but for us nothing has really changed and risk aversion may be the bigger factor in today’s trade. Japan will be an interesting watch today!

# Ratings agency Fitch downgraded France’s sovereign debt from AA+ to AA citing a weak economic outlook which will impair the stabilising of the public debt ratios. Meanwhile S&P affirmed the UK’s AAA rating with the outlook stable. S&P went on to say that they expect fully fledged QE for the common zone in the beginning of the new year. Despite the double lick of negative European news and the monster U.S. confidence number the EUR/USD ended the day (& week) higher. This combination brings to mind the old adage ‘that which doesn’t react bearishly to bearish news is therefore not bearish!’ Look for EUR/USD to thus move higher this week as year-end squaring on mammoth USD longs takes place.

# The VIX index soared 78% last week its biggest one week move since May 2010 and only 1 of 2 closes above 20 in the last 2 years.

# While crude continued to slide other key commodities were relatively stable on Friday. Copper closed up 0.19%, gold eased $5 to 1,222 and iron ore eased 10 cents to 68.70. For the week NYMEX Crude fell 12.20%, Copper edged 0.72% higher; iron ore fell 3.10% while gold rose 2.55% due to safe-haven flows.

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