It is quadruple witching day in the markets today and this means that stock options, index options and index futures all expire today, which can traditionally cause some unusually volatile moves in the markets. However, he quadruple witching (which only occurs four times a year) actually has a minimal impact on the markets and the prevailing trend rarely gets thrown off course by this event. When you are up against the Fed, the ECB and now the BOJ not even long-held market superstitions can move the markets the way they used to be able to.

Market jitters

As we head into the weekend there are a few things that have been causing some jitters in the markets: 1, Spain is reported to be planning a potential bailout request and hashing out the conditionality with EU officials. Essentially a plan documenting conditional structural reform to the Spanish economy could be submitted next Thursday ahead of the big EU summit next month and a large bond redemption that Madrid faces in October. 2,Tensions between Israel and its Middle Eastern neighbours. There were reports of clashes between Israeli forces at the Egyptian boarder earlier on Friday; there are also plenty of news reports of protests in the Middle East against the US-made anti-Islam film. This could help crude oil recover after this week’s large declines. Technical factors could also support the oil price today as Brent crude is currently testing resistance at $111.30, above here opens the way for a larger move back to the post-QE3 highs of $115 per barrel. (See the One to Watch below for more)

Europe and the US: unresolved

Investors don’t only have to take into account political and geopolitical concerns, the markets also need to keep an eye on the fundamentals. Increasingly more commentators in the market think that QE is not the answer to the world’s financial problems and it could make things worse – for example, by inflating unsustainable bubbles in the equity markets. However, the Fed is not giving up on this old horse yet, and a number of Fed speakers in the last couple of days suggest that the Bank will have its foot on the accelerator until the US economy starts to recover. Much has been made about how former “hawk” Kocherlakota, from the Minneapolis Fed, said that he wants rates kept at zero until the unemployment rate reached 5.5%. Kocherlakota has been becoming less hawkish for a number of months, but his comments suggest that we could see 0% interest rates in the US for the long-term and well beyond 2015. This comes with many risks including the mis-allocation of resources and potential inflation. But right now the markets don’t want to confront the potential that central banks haven’t taken the correct action to heal the economy’s wounds. However, if it looks like this period of depressed growth could run beyond 2013, some may be wondering why stock markets are at these heightened levels. For now the message remains: Don’t Fight the Fed.

Currency wars: round 2

Elsewhere, Brazilian Finance Minister Guido Mantega launched Brazil’s defence against QE3 from the Fed, when he laid out the steps the government would take to keep upward pressure on the real at bay. He reiterated that the Fed can be blamed for stoking another round of currency wars. He mentioned that the Brazilian government would intervene in the currency if necessary, would tax capital inflows and wanted interest rates to remain low to stem appreciation of the real. This is tough talk from Brazil, and the worry for investors is that other free-floating commodity sensitive currencies like the Aussie and the Kiwi see their governments launch measures to weaken their currencies. If Brazil starts a trend, or a QE3 backlash develops, it could be negative for risk, as it makes the whole FX environment less stable and dramatically increases political risk.

So as we end the week we are looking to see if EURUSD will close the week above 1.30, we are also watching to see if Brent manages to stay above $112 and if Spanish bond yields continue to rise towards 5.9% (at the time of writing they are 5.7%).
Yields could push back towards 6% if Spanish bailout talks end up being nothing.

One to watch: Brent crude oil

Brent crude oil is our one to watch to finish off the week. It had a torrid week, falling almost $8 over the last few days. It has re-couped some losses, but the next few weeks and months could be very interesting for oil as it battles against a few opposing forces. On the one hand you have supply and demand. Issues in the Middle East could keep upward pressure on oil, especially Brent, as investors start to get nervous about supply and worry about the prospects of a prolonged conflict between Israel and Iran/ Egypt etc. after reports of clashes at the Israeli/Egyptian boarder on Friday helped to lift crude off its $108 low. However, this comes up against the large oversupply of oil in the US where inventories are plentiful. This situation favours Brent appreciation vs. WTI in the medium-term. However, a full-blown conflict in the Middle East could cause Brent to break above $120 in our view, which could also push WTI higher.

Investors also need to be aware of the macro back drop. Global growth is still weak, the Eurozone crisis could still impact risk aversion and there is some concern that central banks have lost control of the global economy as the effects of deleveraging render their stimulus measures useless. So how do you trade Brent in these conditions? We would say that a weekly close above $112 today could cause bulls to try and push this cross to the recent $115 highs. We expect range trading conditions to persist in the near term with $115 stemming strength and $106.50 acting as support.

Brent crude oil: Daily chart

Brent