Oil on a slippery slope?

Equities markets dipped on Thursday, as they seemed unimpressed by the Chinese Government’s fresh round of mini-stimulus announced on Wednesday evening. This move will be designed to help ensure they meet their stated target of 7.5% growth for this year. Despite the pick up in economic data that took place in the region in q2, recent indicators such as the HSBC Purchasing Managers Index have disappointed, probably sparking this move.

We suggested yesterday that the European data out over the Thursday and Friday might take some of the steam out of those who are anticipating imminent action from the ECB. On Thursday, both economic sentiment as well as business and consumer confidence for August came pretty much in line with expectations. This coupled with a refocus on the resurgence of uncertainties over the Ukraine meant European equities were hit in particular.

The recent improving outlook for the US economy, which has seen the US dollar rally strongly over past month, continued on Thursday as the economy grew more strongly in the second quarter than first forecast. In a separate report the number of Americans filing new claims fell, underpinning the labour market's improving outlook. Despite the recovering economic data in the US, capital continues to flow into treasuries. 10-year treasury yields have now fallen below 2.35%, down from the 3% they started the year at. This move has defied those experts who believed a combination of the winding down of QE3 along side an improving economy would see yields rise, possibly sharply.

Speculation for why bonds continue to attract investors appears uncertain, the ongoing concerns over the Ukraine seems to be the most popular excuse, and these concerns outweigh the improvements in the economy. It does seem a little incongruous at present that the US equity market continues to rally along with the US dollar and the US treasury market.

We said yesterday that equity markets tend to ignore geopolitical risk that is unless it starts to affect the oil price. Well so far despite the uncertainties over the Ukraine and the possible further involvement of the US in the Middle East far from raising the oil price, it has fallen to 12-month lows. The lack of impact the geopolitical uncertainties have had on the oil price must be welcomed as oil price rises affect input costs and inflationary pressures, sharp rises have led to economic recessions. On the other hand a rising oil price is often seen as a sign of a growing global economy as demand increases. Should the price continue to fall despite the geopolitical risks some central bankers may wonder if this as a sign the global economy is not quite as robust as they think. At the next round of central banker’s meetings in September, the recent oil price weakness and the continued strength of US treasuries may well put a couple of the resurgent hawks back into their trees. 

Posted on August 29, 2014 .