A bigger decline than expected in weekly inventories sent December Crude Oil sharply higher on Wednesday. The rally was triggered when crude stocks fell by 8.4 million barrels to 343.6 million barrels. This news caught traders by surprise as many were trading the short side of the market following a sharply lower Chinese stock market overnight.
The rally in the crude oil market ignited the start of short-covering rallies in the equity futures markets. Stock traders were pressing the downside of the stock indices early in the trading session because of the bearish move in the Shanghai Index. Today’s bullish crude oil report caught traders by surprise as usually the equity markets lead the energy markets.
The rally in the equity markets fizzled late in the trading session when it became clear that fresh money was not going to chase the market at current levels. Traders will have to decide tomorrow and Friday whether today’s bottom was real or just a reaction to the better than expected crude oil report.
September Treasury Bonds and Notes traded in a volatile manner following the rally then subsequent break in the equity markets. Early in the trading session flight to safety buying was helping the Treasuries rally on expectations of a sharp sell-off in equities. By the midsession, the Treasuries had given back most of their gains because of the rally in the equity markets. When the day finally ended the Treasuries prevailed by posting a modest gain for the day.
The U.S. Dollar was also whipped around on Wednesday in volatile trading. Early in the trading session the Dollar was trading higher because of weakness in the Chinese equity market and following the release of the minutes from the Bank of England’s recent policy meeting. The Dollar quickly reversed trend following a huge rally in crude oil as shorts were forced to cover on the news. By the end of the day the Dollar had regained back some of its losses. The next two days will dictate whether the Dollar will resume its trend or begin another leg lower.
December Gold traders will be watching the action in the Forex markets the next two days to see whether the crude oil news is real or just an aberration. At this time gold is up because the Dollar weakened, but so far there is no solid evidence that the move in the Dollar was signaling a change. Gold traders want to know if they should begin playing for inflation again. News that China may tighten up liquidity could have a negative effect on gold since it will likely lead to a drop in demand.
