Oil moves up, equities down - again

In yesterday’s snapshot we were puzzled by the surge back towards ’11 highs the most of key global indices delivered regardless of a little change in the underlying picture. That strike, however, turned out to be preemptive. Oil prices moved up again yesterday, pushed by retaliation undertaken by Gaddafi’s forces and more news about protests in Yemen and Oman. A rise in a price of oil caused a renewed wave of risk aversion sending equities sharply lower.

Since a wave of tension in Africa and the Gulf region seems to be (still) on the rise we think that a further rise in a price of oil in a short term - and thus a continued decline on equities – is a likely scenario. The S&P500 futures are back around 1300 pts., however this time already below a lower limit of the wedge formation (encompassing the index since August!), increasing a likelihood for a larger correction with possible supports around 1262 or even 1225 pts.   

EURUSD – Bernanke overshadowed by tumbling markets

Typically, a semiannual speech from the Fed’s Chairman is a key event for the markets, especially for the forex. This time, it was slightly different, for two good reasons. First, the market was focused once again on oil prices and possible consequences for other markets. Secondly, somewhat unfortunately, the speeches (another one is about to be delivered today, 10.00 ET) come just ahead of the potentially key labor market data (previous payrolls reports were unclear reporting a disappointingly small number of new jobs and at the same time encouragingly large decrease in the unemployment rate) and markets would love to see a reaction from the Fed to the reports. Bernanke said that higher commodity prices may pose a risk to a recovery – which might be seen as another dovish message, but the market impact was hardly noticeable. Thus, the labor market data and the ECB remain possible drivers for the EURUSD, still stuck in a consolidation between 1,3430 and 1,3860.

Events to watch – ADP and fuel inventories

Normally, the ADP report (8.15 ET, 14.15 CET, consensus +175k) is an important gauge ahead of the payrolls report and thus has a significant impact on the market, especially on the dollar. However, both in December and January, the optimistic ADP wasn’t confirmed in the payrolls report, and thus investors are likely to remain skeptical this time. US fuel inventories (10.30 ET, 16.30 CET) might not be the key thing behind developments on the oil market at the moment but with oil prices having such a magnificent impact on nearly everything else, it is worth to have a look at.   

Przemysław Kwiecień PhD, Chief Economist

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