Crude oil to be watched closely after hitting a low close to $87

Market Review

Yesterday’s market saw the equity sell off continue, after a brief respite on Friday after better than expected Non-Farm Payrolls. The fall was intensified as worries surrounding the German economy reached new highs after German industrial production slowed further, and crashed to -4.0% versus expectations of -1.4%. Arguments may increase towards quantitative easing in the eurozone, although the other side of the argument is that within Germany voices are calling for more isolation over integration to protect German workplaces. In the long run we believe this is being overdone, and although the economy is slowing, it is unrealistic believing a one direction market. Remember the positives; yields in the peripherals are on all time lows, the ECB have launched several measures to revamp the economy, and unemployment as a whole is heading lower. Although not integrated in to the currency union, EU member UK is also powering forward with good data. With this we want to remind the bears that although the equity markets are selling off and Germany is slowing down, does not necessarily reflect the reformations currently ongoing in Europe.

Today's Fundamental View

This morning has seen more volatility than earlier in the week, which may be an indication towards a more eventful session going forward. Crude oil should be watched closely, as the extension lower has hit a low close to $87, with some analysts saying there will not be a natural floor in crude until we hit $80 – as large companies like Royal Dutch Shell at this point will halt investments and expansion which will naturally support the price by halting supply. The move lower is evidence that the US is becoming a larger player on the supply side, disrupting decades of Middle East monopolistic dominance in price setting. The shale boom means developers in these areas cares less about price and more about producing as quick as possible, which means unless this being offset somewhere else, the price naturally heads lower. While the situation in Ukraine continues to loom with shootings being reported, a currently much more interesting situation is developing in the Syrian/Turkey border area where fighting is ongoing between IS and The Kurds, with the Turkish military currently not intervening, despite authorisation from the parliament last week to launch operations in Syria and Iraq. There is also massive upheaval within Turkey as Kurds are calling for the government to help those in need, and on the internet you may find video’s depicting these activities rather accurately. With religion being a big part of the unofficial Turkey, many are also concerned about the number of people from this area having actually joined or sympathise with IS. The data calendar is light today, although as mentioned with crude we are expecting inventories numbers from the Department of Energy. The independent API numbers overnight showed a higher number, and hence we believe the direction will continue lower. European monetary policy may be a key driver of today’s session, being a very large variable dictated by what sides takes the stand. Shy of news from the areas discussed above today’s session may be slow. Today’s strategy is short all assets but US10Y.

Alternative View

No news may lead to low volume and adverse market conditions. Monetary policy will be dictated by arbitrary speakers which can alter direction of the market.