Oil and earnings keep equities at bay

Global investors continue to focus on oil price volatility and the possibility of further event weakness over the next six months as analysts grow increasingly pessimistic about the state of the oil market.

Source: Bloomberg

With oil prices trading where they are and the demand/supply dynamics unlikely to change anytime soon, we are bound to get some aggressive downgrades by analysts at some point. Goldman Sachs reduced its global crude price forecasts, saying inventories will increase in the first half of this year and adding it’ll need to trade near US$40/bbl this year to curb shale investments.

The broker sees West Texas Intermediate (WTI) at US$39/bbl and Brent at US$43/bbl over the next six months. Even more interesting is the fact WTI has been downgraded from US$75/bbl and Brent from US$85/bbl.

While the weaker oil prices continue to wreak havoc in the equities space, it’s important to take a step back and look at the available facts regarding lower prices. Last week’s FOMC minutes showed the Fed saw price reductions as a net positive for GDP and employment growth, dismissing some of the concerns investors have. The Fed’s Dennis Lockhart also spoke, pointing out oil prices will ultimately benefit the US economy.

Focus now switches to earnings after Alcoa Inc (All Sessions) unofficially kicked off the earnings season after market close today and generally impressed. US earnings season is likely to bring some caution as profits growth is expected to have dropped off in the fourth quarter, down from October estimates of 8.1%.

The real concern will be around the energy space and a potential downgrade cycle on the way, given brokers are already slashing oil price forecasts. This week the earnings calendar is heavily populated by some of the big financials, including JPMorgan, Wells Fargo & Co (All Sessions), BlackRock and Bank of America. These earnings will help shape up expectations around the economy.

China trade balance resilient

Around the Asian region it seems sentiment has improved from leads from US trade. Focus has primarily been on China after its trade balance came in at $49.61 billion, better than an expected $49 billion. The primary driver of the reading was a 9.7% rise in exports. Also encouraging was the fact imports fell by less than expected.

It is not a huge surprise that China is heavily reliant on exports as a growth driver at the moment as domestic demand remains fragile. What this means is, while China can maintain steady terms of trade, it’ll still need to work on stimulating domestic demand to keep growth ticking along.

The less-than-expected drop in imports suggests the country may have ramped up imports of key commodities like oil and iron ore to take advantage of the weaker prices. This week we still have foreign reserves, new yuan loans, aggregate financing and money supply data out of China.

With markets in China in positive territory, this has also helped the ASX 200 come off its lows of the day. There are some mixed moves in the materials space, with the bright spots being in the precious metals space and Alumina, which is benefitting from positive Alcoa commentary.

This will underpin the precious metals names. NCM traded at fresh 52-week highs and has managed to squeeze through $13 today. Should it manage to close above $13, the next key resistance is at $14.

Weaker open for Europe

Ahead of the European open, we are calling the major bourses weaker, pulling back after yesterday’s positive performance. Focus will continue to be on the ECB and any potential easing measures, particularly QE.

It also seems like Greek exit fears are somewhat downgraded and this has seen Greek 10-year yields cool and equities rally. On the calendar today we have Italian industrial production along with UK CPI and PPI. The euro remains relatively sidelined but it won’t take much to ignite some risk appetite, given the amount of headline risk Europe continues to face.

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