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Today has turned from just a sluggish Monday to an outright market collapse. Considering that China will be enjoying a week of bank holidays while they celebrate the start of their New Year, equity traders were expecting calmer conditions.
Without Chinese equity volatility to disturb them, traders should have enjoyed an opportunity to attribute a more analytical fair value to both equities and indices. Equities did start off the day on the soft side but things escalated quickly following the morning's weak European Sentix investor confidence figures.
The fresh release of economic data pointing towards a struggling Europe triggered the bears into action. Should the DAX close below the 9000 level, this would be the first time that it has closed this low since the 27 October 2014.
The German equity index has found itself at these levels as the pattern of lower highs and lower lows have seen momentum increase. Of course it is always darkest before the dawn and we could be closer to the end of this run as the price has already been driven into oversold territory.
The bear market squeeze that oil had enjoyed from mid-January, driving US light crude from levels below $28 to an intraday high above $35, has certainly come to an end. The fundamentals of oversupply and struggling demand have trumped hopes of an OPEC meeting that might bring reduced productivity levels.
Even if the OPEC nations can agree to meet they do not have a great track record in making swift decisions and are unlikely to change any time soon especially as Saudi Arabia is the main driver for oversupply.
The current market-thinking by Bank of America Merrill Lynch is that in order to get spot oil up to $70 a barrel, OPEC would need to find cuts of 4 million barrels a day (or 40% of Saudi Arabia’s 2014 production).
As the investment community's confidence is being tested with weak economic data, collapsing oil prices and a US interest rate rise that might have been made a little too hastily, gold has enjoyed a resurgence due to the flight to security.
Gold bugs have had to endure many false dawns over the last five years so it will take more than the last two months move to convince traders they have finally turned a corner and broken the bear trend they have been entrenched in for so long.
Although recent years have seen any bounce in gold gleefully met by the bears ready to sell into more attractive levels, a close above $1200 would cause many to seriously reconsider this mindset and might be the beginning of a bear markets squeeze.