Equity Market Volatility and Oil

In my update last Monday, I noted that equity markets might stabilise into the end of the

year following the positive news regarding a truce reached between the US and China over

trade. Well, that could be a derailed prospect now and the rally on Monday increasingly

looks like it was just a one shot wonder because over the past few sessions the whole vista

has changed quite dramatically.

The catalyst for the sell-off has seemingly come from developments surrounding Huawei. I

won’t go into detail about all that, but the inference is that this news will have a very

negative impact on US/China trade relations and hence potentially jeopardise the recent

trade truce.

Leaving aside the US equity space for a minute; the DAX has now officially entered ‘bear

market’ territory having fallen more than 20% below its 2018 high set at 13,596. The

German benchmark yesterday traded through the 10,876 level that defined such a

correction and later closed down 3.48% on the day, at 10,811. I suppose with a little over 3

weeks to go now before the year is out; it’s a case of how much of an impact this technically

negative development will have before we move into the new year?

The DAX isn’t alone though because the FTSE also tumbled to fresh 2018 lows yesterday.

Naturally, there’s good reason for that anyway with such Brexit uncertainty still in the air.

Whilst the chances of the FTSE entering a bear market before the year end did look slim

earlier this week, I’d certainly not rule that out now, especially given the 3.15% drop posted

on that index yesterday. Just for your guide the FTSE would enter a bear market if the price

falls to 6322.

I will perhaps touch on that and the pound in a little more detail in Monday’s upcoming

article where I will also be looking briefly at the important ECB policy meeting due next


So, am I surprised by this equity market fallout? Well, not really as it was after all, a

prospect I highlighted in my article back on 8th October when I felt the top for equity

markets was already in place. So, whilst that observation was 100% correct, the suggestion

earlier this week, of a potential Santa Claus rally may not be. However, and looking at the

rebound close last night on Wall Street, the extreme volatility is certainly making any price

prediction very tricky business right now.

Meantime, the FX markets are, by and large continuing to trade sideways, and with nothing

like the kind of implied volatility you’d expect given the current swings in the equity space.

That may change though as liquidity starts to dissipate in the run up to the festive season.

Something to be mindful of when taking FX stability entirely for granted over the coming

three weeks.

For the time being though, the EURUSD is seemingly trapped inside a 1.13-1.15 range, the

USDJPY is holding a 112-114 range and the GBPUSD, give or take, is inside a 1.27-1.29 range.

Naturally, the latter will surely change after the ‘meaningful vote’ next Tuesday- assuming it

is in any way ‘meaningful’ of course!

Now, one other reason for the sell off in equity markets most recently has been placed at

the door of lower oil prices which has led many commentators to conclude this is

portending a slowdown in 2019. That might be the case, but the fall in oil prices could have

just as much to do with over supply as it does demand.

The failure of OPEC yesterday to reach an agreement on lowering output levels should

perhaps be mentioned in conjunction with a not so well telegraphed piece of information

that also came across the wires. That is news from the EIA noting that the US became a net

exporter of crude and refined products for the first time on record last week.

So, given that information maybe it’s not so surprising that oil prices have fallen so much in

recent weeks? Perhaps even less surprising given that EIA nugget; is the apparent lack of

urgency by OPEC to do anything about it.

Whatever cynical conclusion anyone might arrive at from all this; the truth is that US oil

independence has significant long term ramifications for the US economy and the dollar.

Moreover, take that a step further and start talking about sustained US export capability

and its even more significant- not this week, this month or necessarily in the next 6 months,

but further out it could be seismic.

Key economic releases due this week

03/12- 2.45pm November US ISM manufacturing index

04/12- 3.30am Reserve Bank of Australia Interest rate decision- Benchmark rate expected to remain unchanged at 1.5%.

05/12- 9.30am UK November services PMI index

05/12- US markets will be closed out of respect for George Bush senior.

05/12- 3.00pm Bank of Canada Interest rate decision- Benchmark rate expected to

remain unchanged at 1.75%.

07/12- 1.30pm US November monthly jobs report