Crude Oil Finally Made it to US $100, Where Next?
Commodities / Crude Oil Jan 10, 2008 - 05:20 AMBy: Regent_Markets
While the media's focus continues to be on the mortgage and credit crisis, oil has quietly been making its way back up to $100 per barrel. Oil has already passed its inflation adjusted peak of $80. If oil continues to rise, it will be more expensive that at any other time in history in real terms.
The direct effects of this will be felt by the already badly beaten consumers
who have for years supported the US and UK economy at the expense of their
savings, then house equity and now credit cards. There is a huge concern that
this latest rise might be the final straw for consumers in a slowing economy.
Friday's rout was almost a perfect storm. US Payroll numbers were below
expectations and unemployment rose from 4.7% to 5%. Recently bad news has
sometimes been good news for the stock market because of the possibility that
interest rate cuts might follow. Unfortunately, Friday's bad news really was
bad news. It has increased the likelihood of further cuts to US interest
rates, but the Fed may be limited in how far they can go due to the
inflationary effects of a high oil price. With inflating commodity prices and
a potentially deflating economy, the sellers were out in force.
The first hint of this was the US Institute for Supply Management's (ISM)
report that stated that the manufacturing index fell to 47.7 percent for
December from 50.8 percent in November. This sparked concerns that the
economy could be slowing at a quicker pace than some investors had estimated.
A reading below 50 can signal economic contraction, whereas readings over 50
can indicate expansion.
Last week the US Dollar fell heavily against the Yen and ‘safe heaven'
currencies such as the Swiss Franc. It was recently reported that the
Dollar's % share of foreign currency reserves has dropped at the expense of
the Euro, though selling of the Dollar/ Euro exchange rate was relatively
moderate on Friday compared to the falls in US equities.
Aside from US existing home sales on Monday, it is a relatively quiet start to
next week, but momentum quickly builds in the final two days with both the UK
and European central banks releasing their interest rate decisions. The ECB
is widely expected to announce a no change verdict. The Bank of England is
also expected to keep rates the same, but this is less certain and a quarter
point reduction is still possible.
Friday saw some of the heaviest selling since the credit crisis broke with the
S&P 500 now down 3.86% for 2008 with just 3 trading says gone. The Nasdaq
Composite has been the worst hit so far and is down 5.6% in the 3 trading
days of the new year. The Nasdaq 100 and broader Composite are the only major
indices aside from the Nikkei to be trading below their November lows. The
Semiconductor sector, full of stocks like Intel appears to be weighing
heavily on the high tech markets.
According to research from Bespoke Investments and Sentimentrader.com ; last
week was the 2nd worst three day start to the year ever on the S&P 500, the
fourth worst on the Dow and worse ever for the Nasdaq. However, the big
question of course is what this means for the future. According to the
aforementioned research, a terrible start for the year may not mean that 2008
is automatically a write off. When the S&P 500 has stumbled out of the gate
in the past, it gained an average of 2% over the balance of the month and 10%
the rest of the year.
Oil is close to $100 per barrel but according to a Bloomberg survey of
commodity analysts, the average expectation is for oil to be lower from this
point forward. This could possibly be a function of lower US growth creating
lower demand for energy.
The VIX 'fear' index is still below its November peak, which indicates that
there may be more downside to come, however this could fall short of the all
out capitulation many fear.
Therefore, a No Touch lower trade may be the better option for the rest of the
month on the S&P500. The worst performance for the rest of the month
following similar opening drops was -3% back in 1978. A No touch level set
6.5% below Friday's closing price (1320) could return 11% over 30 days.
By Mike Wright
Tel: +448003762737
Email: editor@my.regentmarkets.com
Url: Betonmarkets.com & Betonmarkets.co.uk
About Regent Markets Group: Regent Markets is the world's leading fixed odds financial trading group. Through its main multi-awarding winning websites, BetOnMarkets.com and BetOnMarkets.co.uk, it has established itself as the leading global provider of a unique, powerful way to trade the world's major financial markets. The number, length and variety of trades available to our clients exists nowhere else in the world. editor@my.regentmarkets.com Tel (+44) 08000 326 279
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