Bears are dominating the markets

The Day So Far

Risk-off has reared it’s ugly head once again this morning following poor Japanese data overnight and the fall in crude oil below the $45 mark. The catalyst for the sharp fall in crude was the Department of Energy’s inventories release, which showed that US output actually rose for the first time in months, demonstrating the resilience of US shale producers even though at current prices many of these wells are unprofitable. Initially, the market responded positively to the headlines drawdown in supply, briefly popping above the $47 handle before collapsing $2 to close the session below $45. So far this morning crude has traded below $45, but good support lies at $44. The implications are clear for equities, as falling crude is being interpreted as a bearish signal for the global economy, rather than what it really is, which is a battle between OPEC and the private producers for market share. Crude oil demand has remained fairly steady in recent months but supply has failed to decline thus far.

The other thing rattling markets is the fallout from the VW scandal, with other European automakers now being drawn in as the likes of BMW come under the microscope.

The Afternoon View

We’ll continue to look for risk-off this afternoon, just initial jobless claims and Durable Goods Orders on the agenda this afternoon and unlikely to hinder the bearish momentum we’ve been building this morning. Short S&P, short crude, dollar strength and safe haven flows into T notes. Janet Yellen will be attempting to justify her very dovish, cautious outlook at last week’s FOMC when she delivers a lecture after markets close. Until then, look for bears to dominate.

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