Oil price drop fuels global market concerns

As the dog days of summer drew to a close, markets seemed to be steadily coming back into life yesterday, although not in the good way, more in the selloff way.

Source: Bloomberg

The biggest drag on US equities overnight was the energy sector, which lost 2% and pushed the S&P 500 down 0.2%. Oil prices saw their biggest collapse in a month, after US EIA crude oil inventories surged above market expectations. WTI oil dropped 3.3% as oil imports surged to 8.9 million barrels per day.

The oil market is incredibly diversified, but major production regions around the world provide limited data on their production and inventories. Actually calculating global oil supply and demand balances requires a fair amount of educated guesswork. But the large presumed global oil inventories look to be starting to show up in the regular and high quality weekly US EIA data. Declining US shale production is more than being made up for by surging foreign imports. This is a necessary transition for the long term rebalancing of the global oil market, but it is unlikely to be met with relish by the oil spot price as the true extent of global inventories becomes clearer in the US EIA data.

After WTI oil’s big 3.3% drop, it is sitting right on key technical support levels at US$44-45.

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The US dollar briefly rallied 0.2% overnight in the wake of the ADP employment numbers coming in slightly better than market expectations at 177,000 new jobs in August. This obviously briefly raised hopes that a similarly close to consensus figure might be seen in Friday’s non-farm payrolls (NFP) report. However, ADP employment has been a very poor guide to the NFP over recent month, and the US dollar pared back most of its gains later in the session.

The DXY US dollar index ultimately closed down 0.2% for the session, and does seem to be coming into strong technical resistance around the 96 level.

Political risk was in the spotlight overnight as Dilma Rousseff was formally impeached by the senate as President of Brazil, which helped the Brazilian real gain 0.3%. Foreign investors hope that the centre-right Michel Temer, who has taken power in her absence, will be able to push through much needed structural reforms and shore up its fiscal balance sheet.

Spain also saw its fair share of political drama overnight. Centre-right candidate Mariano Rajoy failed in his bid to get a confidence vote through the parliament that would give him the right to govern as a minority government. Another parliamentary vote is set to take place on Friday, but should that also fail, Spaniards will be forced back to the polls for the third time this year. Although analysts are cautiously optimistic that this third election may finally produce a party capable of amassing enough votes to govern. Nonetheless, Spanish ten-year government bond yields rallied six basis points over this political uncertainty.

This is setting up to be another difficult session for Asia-Pacific markets. All of the major markets are currently looking to open down. The ASX in particular looks in for a rough day after commodities took a battering overnight with the Bloomberg Commodities Index falling by 1%. BHP’s ADR lost 3.9% in the US session. Even the Nikkei looks set for a flat open despite the USD/JPY gaining another 0.5%.

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