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The Overnight Report: Oil Tanks

Daily Market Reports | Sep 20 2012

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By Greg Peel

The Dow closed up 13 points, or 0.1%, while the S&P gained 0.1% to 1461 and the Nasdaq added 0.2%.

It began on Monday night, with a sudden US$5 plunge in the price of Brent crude seeing both Brent and West Texas ultimately settle around US$3 lower. It carried through on Tuesday night, as the oils fell another US$2 or so and then last night we saw Brent down US$3.84 to US$108.19/bbl and West Texas down US$3.54 to US$91.75/bbl.

There has been a lot of speculation about what actually happened on Monday night. Was it a computer glitch? Not according to the exchanges. Was it a “fat finger” error? Not according to further weakness on Tuesday. Was it expectation of a US government reserve release? We have no plans, said the government. Then last night the weekly US inventory data showed a much bigger than expected jump in stocks of crude.

The next step was for the US Energy Information Agency to deny that its data were leaked ahead of their release, but in the meantime it has been revealed that the Saudis are apparently selling. OPEC has been concerned with the rising price of oil, and no doubt became more concerned after last week's QE3 announcement, offering up the potential for a weaker US dollar and thus higher nominal oil prices. OPEC gets nervous over US$100/bbl (West Texas), as the organisation knows such prices encourage further shifting towards alternative energy sources.

So there we have it, supposedly. A lot of traders would have been caught long on Monday night as a person or persons unknown dumped a big sell order on the Brent market, given the QE3 impetus for higher prices and that fact oil has become a popular inflation-hedge trade in recent years, perhaps even usurping that role from gold. It took another session for traders to make sure it wasn't just a mistake, and by last night the herd was stampeding.

Lower oil prices are good for the overall global economy, but not so great in the short term for energy sector companies. This balance goes some way to explaining why Wall Street has not gone anywhere much these past couple of sessions. 

Outside of the energy sector impact, last night Wall Street was encouraged by a 7.8% jump in US existing home sales, to the highest level since May 2010. Housing starts – the important number – rose by an annualised 750,000, but while this was a little short of expectations, it was still a 2.3% increase.

And if you can't beat 'em, join 'em. The Bank of Japan unsurprisingly joined the latest round of the printing bonanza by last night announcing an increase in its ongoing QE program of 10trn yen or US$127bn to 80trn yen. Why the increase? Well if the Fed devalues the US dollar the move has a direct offset of inflating the yen and Japan's is an export-dependent economy that suffers directly from a higher currency. Sounds like another economy I know, but the name escapes me right now.

At the end of the day the US dollar index, which includes the dollar-yen, actually slipped a tad to 79.11, but never fear, the Aussie regained 0.3% to US$1.0481.

Ben Bernanke must currently be feeling like the guy who threw a party, but nobody came. Aside from a brief jump, markets have not much responded to much heralded QE3. Obviously there was a lot of anticipation built in, and we've reached the point of “okay now what?” US investor surveys show confidence is building, yet mutual funds are still suffering net outflows. If that turns around, look out, but it seems investors still have to negotiate the fiscal cliff before taking that leap of faith.

We are about to enter the scary month of October, although statistically September is the worst month and so far so good. Will we get a Christmas rally? Well the Christmas rallies of the past few years have started from the low point of third quarter market crunches, affected previously by European woes or US rating downgrades et al. If we don't see a crunch in the third quarter or into the fourth then it's hard to see exactly what will inspire any Christmas rally, but then with global central banks all playing argy-bargy on currency devaluation and “whatever it takes” commitments, it’s difficult to see what could lead markets meaningfully lower, outside of, for example, a nuclear war in the Middle East.

Base metals are thus back to being confused, with prices mixed and moves minimal last night. Despite another member joining the 2012 QE club, gold is steady at US$1770.30/oz. The US ten-year bond yield is similarly hanging about at 1.78%.

The SPI Overnight fell 5 points. Today sees the expiry of the September SPI contract and the expiry of exchange-listed index options. Such expiries can cause a bit of inexplicable volatility on the day. Tomorrow night in the US sees the similar “quadruple witching” quarterly event.

It's otherwise a good day for flashers today, which has nothing to do with warm weather. HSBC will provide its flash estimate of China's August manufacturing PMI today, and tonight will see equivalent estimates follow for the eurozone and US.

After yesterday's retailer nightmare we'll see how Kathmandu ((KMD)) and OrotonGroup ((ORL)) fared with their full-year results today, and we'll also see reports from Brickworks ((BKW)), Bandanna Energy ((BND)) and Gindalbie Metals ((GBG)).

Rudi will appear on Sky Business today at noon and again at 7pm on the Switzer Report.

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