Crude oil crashes, Fed speakers point to December hike

Quick Recap

We had a great week in risk assets last week. Emerging market currencies rallied strongly, the Australian dollar is opening above 73 cents for the first time in almost 2  month, zinc ripped higher after Glencore said it was going to make some big cuts to production and of course oil crashed up through $50 in Nymex terms at one point Friday before running into solid resistance.

That helped, reinforced, or was caused by the rally in stock markets around the world with the Dow and S&P both up more than 3%. Europe was a bit more ebullient across the week with the FTSE and DAX ending the 5 trading days up 4.67% and 5.69% respectively.

Of course what is really happening is that we are seeing a reversal of the acute weakness in August and then the consistent and constant pressure that markets were under in September. The fact that with the exception of the DAX, CAD and maybe USDSGD and then only briefly, markets held above the August lows conveyed a powerful message to traders and their algo’s.

The message of course was that support was strong at or above the lows and as a result more buyers and buying entered the market and we are now in the rally phase and looking for resistance.

We might have found that in Oil (see Chart of the day) and it’s possible that we’ve found it in the ASX 200 as well as you can see in the chart below.

What’s key to the outlook this week is the raft of data that is due out in Australia including the NAB business Survey, Westpac consumer sentiment survey and of course the labour force data on Thursday.

Equally though earnings season in the US is also important for sentiment about the markets and US economy. But, as I highlighted in my look at the week ahead Brian Belski, BMO Capital markets chief investment strategist, the man who back in late September gave 4 reason to be bullish stocks, said in a note Friday that a large number of client conversations are being dominated by negative sentiment about earnings. But Belski says:

we firmly believe near-term earnings growth will wind up being much better than expected when all is said and done. In fact, a more comprehensive look at the earnings picture and trends in corporate guidance and earnings quality likely set the stage for another surprisingly resilient reporting period, in our view.

If he is right this rally in markets will have considerable legs.

It might also bring back fear of the Fed though.

The overnight scoreboard (8.39am AEST):

• Dow Jones Industrials +0.2% to 17,084
• Nasdaq Composite +0.41% to 4,830
• S&P 500 +0.07% to 2,014
• London (FTSE 100) +0.65% to 6,416
• Frankfurt (DAX) +1.04% to 10,096
• Tokyo (Nikkei) +1.64% to 18,438
• Shanghai (composite) +1.28% to 3,183
• Hong Kong (Hang Seng)+0.46% to 22,458
• ASX Futures overnight (SPI December) -18 to 5,248
• AUDUSD: 0.7323
• EURUSD: 1.1360
• USDJPY: 120.19
• GBPUSD: 1.5310
• USDCAD: 1.2953
• Nymex Crude (front contract): $49.63
• Copper (US front contract): $2.4170
• Gold: $1,157
• Dalian Iron Ore (January): 381.5(denominated in CNY)
• US 10 year bond rate: 2.09%
• Australian 10 year bond rate: 2.71%

On the day

On the data front today it’s a fairly quiet start to the week. Japan, Spain and Canada have public holidays and the only major events are speeches by The Fed’s Lockhart and Evans while Bank of Canada Governor Stephen Poloz is also speaking on his day off.

CHART OF THE DAY: US Oil 

We have now found significant resistance at the 200 day moving average.

That’s because the price of Crude, in MT4 terms, has not been above this moving average for well over 1 year. many traders see the 200 ma as the indicator of bull/bear demarcation.

My expectation now is for a move back toward $47 a Bbl.