The move lower in Oil benefits consumer stocks

Fundamental Analysis

We have seen a large build up in political headlines in the last 24 hours, most notably surrounding China. The military co-operation between China and Russia poses significant risk to the US operations in the Asia-Pacific region and, although conflict is unlikely, it will keep tensions high in the region with the potential for geo-political risk moves in the medium-long term. The more pressing news from China is their debt crunch risk; as Chinese property prices are falling due to drastic oversupply and therefore the problem of leveraged loans has come to the fore. A weaker China will of course have amplified effects across global markets and with other Chinese data points coming in lower of late and lower than expected Growth, this issue is on par with deflation risk in the Eurozone. The move lower in oil yesterday has aided US consumer stocks to move higher in the short term. Over the medium term, the selloff in oil has aided in lowering fuel costs and with both an easing off in unemployment and rising house prices, consumers have had more available income to spend on non-essentials. Thus majority of consumer stocks have benefited allowing indices to make new highs.

Today’s View

This morning we saw surprisingly hawkish commentary from the Bank of England’s Monetary Policy Committee’s Minutes. The near 100 pip bounce in Cable was clearly driven by the re-pricing of the removal of dovishness that some market participants had been expecting. The majority of focus was on the labour market and the potential for improvement in wage growth, of which we saw real growth for the first time in last month’s meeting. As Wage growth has overtaken inflation, inflation becomes an even more important indicator with regards to the rate hike. The MPC majority stated that there is a risk of inflation overshooting the 2.0% target putting more pressure on wage growth in the near term as it has to consistently outperform inflation before rate hikes can be truly considered. As oil remains low today we will maintain our bullish outlook on equities. This afternoon we have housing data on the wires, with Housing Starts and Building Permits entering the space. Housing starts are expected at 1015k, a build on last month’s reading of 1017k. A second posting above the 1000k mark could see mild dollar strength coupled with equity moves higher. Tonight we are also seeing the minutes from the Fed meeting on October 29th; this will be a main data point for the Asian session and more applicable for tomorrow’s session but still a data point to remain aware of. With the end of stimulus and continually better than expected employment and housing figures, dollar strength is the obvious trade for the afternoon. We are also expecting higher stocks and lower on Treasuries in line with this view. We maintain our bearish view on crude however with DOE due out we have supply risk. API inventories came in with a build of 3700k barrels, up from -1500k last week so we feel the short direction on crude is justified.

Alternative View

Misses on US data in the short term is likely to invalidate the dollar and treasury move, however stocks are likely to hold as it is rate-hike dependent so any worse than expected data pushes of the tightening of policy. Further commentary from central bankers in both the Fed and ECB are likely to effect today’s strategy with some weight.