Oil price crash hits US markets

After a mixed European session, US markets were dramatically thrown off course by the capitulation in energy stocks overnight.

Source: Bloomberg

The S&P 500 energy sectors lost 2% overnight, as WTI oil dropped to its lowest level in three months. WTI oil crashed through its technical support levels and briefly touched US$42.00 before closing the session at US$43.05, amounting to a 2.6% decline. Markets are concerned that the growing gasoline inventories during the US’s peak driving season alongside the steady increase in the Bake Hughes drill rig counts are likely to see US crude oil inventories blow out to record levels again in the second half of the year. But the precipitative cause of the selloff overnight seems to have been the release of last week’s CFTC data showing net positioning in crude oil futures were cut further.


CFTC net positioning in non-commercial crude oil futures has continued to decline since peaking in mid-May.


The rising US dollar and collapsing oil price has seen investors increasingly piling into long USD/CAD positions. USD/CAD gained another 0.7% overnight and has gained 2.1% over the past week.


Concerns about the Italian banking sector threaten to rear their ugly head again this week as all European banks undergo stress tests. Concerns about the exceedingly high levels of non-performing loans at Italian banks and the risk that junior bondholders will be forced to be bailed-in to re-right their capital balances saw Italian banks sell off again yesterday. Investors are most concerned by Banca Monte dei Paschi di Siena, whose stock dropped 7.5% overnight, but other elements of the Italian banking sector were less affected with UniCredit only dropping 0.3%.

The miserable data of a post-Brexit UK continues to trickle out. The Confederation of British Industry’s quarterly business confidence survey crashed below the consensus expectation of -15 to come in at -47. This is the lowest reading in the series since the GFC in 2009, and is yet another data point that would be consistent with the UK heading into a recession in the third quarter. Although the pound ultimately was relatively unphased, ending the session 0.15% higher, arguably future rate cuts are already heavily priced in.


The Fed is set to begin their two days of meetings today, just as the US Economic Surprise Index has rallied up to its highest since December 2014. This has seen the bond market implied probability for a December rate hike by the Fed rise to almost 50%. Some are even saying that September is a possibility. I think that is highly unlikely given that the post-Brexit UK and European data is going to continue to be very concerning and it will be in the midst of the US elections, both of which provide a good case for waiting a little longer.

Asian markets look set to open down today after the weak US session. The energy space will be a key drag after the oil price crashed to a three-month low overnight. The materials space is unlikely to provide much lift either after most industrial metals also headed lower apart from iron ore which jumped 1.8%. The yen didn’t know what to make over the report from the Nikkei news agency stating that the Japanese government would be committing to twice the previously reported amount fiscal stimulus. This could provide some help to the Nikkei today, but the yen also seems to be coming under a bit of safe haven buying again which could crimp any potential gains.

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