Oil price drop having a strong effect on the markets

The Day So Far

This morning’s price action has been mainly driven by a hang over from yesterday’s moves that saw yet another large step lower for the commodity complex. Crude oil was the leader with a further fall out from Friday’s OPEC meeting and a very important test of the August low at $37.75. Officially yesterday’s low at $37.50 was a new near 7 year low. Industrial metals also took a pummelling resulting in the broader commodity index plumbing new 16 year lows.

The commodity moves carry ramifications for all other assets. This morning Anglo American announced they are suspending their dividend for 2 years resulting in their share price plunging 8% to a new record low and now a staggering 90% off its 2011 highs. This move dragged Glencore down 8% and BHP Billiton down 5% respectively. This has meant the FTSE 100 is underperforming, but the global equity space is lower across the board as a result. There is bad news on the demand side as well with Chinese trade data being announced overnight. Exports dropped for a 5 a row, import numbers were slight better than expected but still showing decent sized contractions compared to 2014.

The commodity price drop also has a strong effect on long duration bonds with yields dipping as medium term inflation expectations drop. Oil prices going even lower and the prospect of prices remaining well below $50 into 2016 means the global disinflation environment is here to stay and this puts down side pressure on T-Notes yields and therefore upside pressure on prices. However there is a counter force to this for US bonds as we are now just 9 days away from the Fed’s rate hike.

The Afternoon View

For the US session we are looking for short entries across all four assets in this report. The S&P was particularly resilient to the oil price drop yesterday with a sharp bounce into the close last night. But we expect the imminent Fed rate hike plus the new muti-year low for crude prices to drive the index lower today. For EURUSD we expect some dollar strength to drive another small pull back from the ECB fuelled giant spike higher last Thursday. For T-Notes we think the oil inspired rally yesterday will hit the rate hike headwind and pull back lower. For Crude oil we are more cautious as the Aug 2015 low at $37.75 is a big technical support. For today we expect more of a consolidation day and look to go short on any bounce to the pivot.

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