Oil is in a free fall ?

It feels like oil is in a free fall, after prices dropped to 126 dollars per barrel in late New York trading. Most traders are selling the black gold, after a slow down in demand was seen from the US consumer over Memorial weekend. It seems like the 4+ dollars per gallon has consumers saying no more. We are expecting oil to fall below 125 by the end of Friday.

The FTSE is currently indicating a slightly higher open, mostly on the strength of the Japanese markets. We are expecting a low volume trading day, as most of the important economic announcements were already released this week. The only thing of note is at 12.30 GMT when US releases its Personal Consumption numbers. There is risk that they will come in lighter then expected, this will result in a sell off on the US equity side.

Oil is Relaxing & Gold might start rising

Oil spent another day retreating from its recent record price of $135 per barrel. Currently the WTI crude oil is trading at 130.20, and traders are expecting oil prices to fall further as demand is slowing down. Gold which has been trading in a tight range is going to be getting a lot of attention today, when US releases its GDP numbers. While most analysts are expecting inline numbers, there is a risk that a weaker then expected number will push gold higher as traders will be selling US equities and buying gold.

The FTSE is currently quoted up 20 points, and will probably stay that way mainly because there are no economic news out of the UK. This all will change when US releases its GDP numbers. There will be lots of volatility when those numbers are posted, mainly because most traders are split on where the number should be.

Weekly Briefing

Contents This Week:
Economic calendar for week 26th - 30th May 2008.
Commentary: The week ahead.
Economic Calendar for week 26th - 30th May 2008

PLEASE NOTE - All times GMT not BST. BST is +1 Hr.

Monday May 26h:

UK - ALL - Holiday: Spring Bank Holiday.
US - ALL - Holiday: Memorial Day.
GE - Tentative - CPI M/M.

Tuesday May 27th:

GE - 06:00 - Consumer Confidence.
GE - 06:00 - Final GDP Q/Q.
US - 13:00 - National HPI Composite-20 Y/Y.
US - 14:00 - New Home Sales.
US - 14:00 - Consumer Confidence.
US - 14:00 - Richmond Fed Index.

Wednesday May 28th:

UK - Tentative - Nationwide House Prices M/M.
GE - 07:55 - Unemployment Change M/M.
EU - 08:00 - Current Account.
US - 12:30 - Core Durable Goods Orders M/M.
US - 12:30 - Durable Goods Orders M/M.

Thursday May 29th:

EU - 08:00 - M3 Money Supply Y/Y.
UK - 10:00 - CBI Distributive Trades Realized.
UK - 12:30 - Prelim GDP Q/Q.
UK - 12:30 - Prelim GDP Price Index Q/Q.
US - 12:30 - Unemployment Claims.
US - 14:30 - Crude Oil Inventories.
US - 14:30 - Natural Gas Storage.
UK - 23:01- Consumer Confidence.

Friday May 30th:

EU - 09:00 - CPI Flash Estimate Y/Y.
EU - 09:00 - Consumer Confidence.
EU - 09:00 - Unemployment Rate.
US - 12:30 - Core PCE Price Index M/M.
US - 12:30 - Personal Spending M/M.
US - 12:30 - Personal Income M/M.
US - 13:45 - Chicago PMI.
US - 13:55 - Revised Michigan.

EU - Europe wide
FR - France
UK - United Kingdom
US - United States
GE - Germany

The week ahead.

Until last week, there have been two stories running in parallel. The first story is of rampant inflation fuelled by the price of oil making record new highs every week. The subtext to this story is the dawn of a difficult decade. The second story is of a stock market that believed inflation would be contained and that the worst of the credit crunch is behind us. Last week these two stories collided with the end result being a sudden realisation that were not quite out of the woods just yet.
According to Michael Cartine of Thomson/ Reuters The danger from inflation comes in from its inherent volatility; when prices rise 3% the first year, 5% the next, 10% after that, but then stagnate or even drop for a year before trending higher again. This type of environment becomes increasingly difficult to make economic decisions in. Market participants around the world will certainly attest that the last year or so has been a particularly volatile time.
The FTSE sold off hard, falling further than most other global stock indices on the week. UK top tier stocks, led by banks and real estate shares, fell on fears of negative equity in the UK housing market leading to trouble for banks and consumers. Retailers including Marks and Spencer were being punished as UK shoppers face the prospect of not being able to bank on further house price rises to fuel further spending. The bricks and mortar ATM is no longer paying out.
The plight of UK equities was not helped by that fact that even with oil hitting $135; UK oil stocks were strangely subdued towards the end of the week. Oil & gas stocks make up nearly 20% of the FTSE by market capitalisation. The question remains whether this relative weakness is the start of a rotation out of this sector, or whether it is just a couple of days profit taking. Markets gave us a significant tell on Thursday as equities spiked following a natural gas inventory report which indicated increased levels of storage. Oil fell back and stocks surged in the opposite direction. Unfortunately, the rally didnt last as crude reaches back to previous highs. However, the way that markets reacted was certainly telling and could be an indication of how things will play out when oil finally stops going up.
Crude oil has now accelerated by 30% in under two months and 80% in a year. It is little wonder that the MPC voted 8-1 to keep rates on hold with inflation running so high. However, there are some potential weaknesses in crude which are worth pointing out. According to Mike Rothman of ISI, global demand growth for oil is now well below last years increase. In addition there are reports of the Gulf being crammed with oil tankers chartered by oil producing nations to hold oil they cannot sell. This suggests there are no buyers at this price and when this happens, the laws of supply and demand come into effect. Goldmans Analyst Arjun N. Murti recently predicted that oil could hit $150-$200 in the few years. While this prediction may still come through, there are increasing signs of this oil bubble over stretching.
With bank holidays in both the UK and US, it is a quiet start to next week on Monday. The most notable release on Tuesday is the US new home sales data which is expected to show indicated further pain for US home builders. The only question is the degree of acceleration in this decline, as is expected to be the case with the UKs Nationwide House Price index released some time on Wednesday morning. The weeks top announcement though is likely to be the US GDP figures on Thursday as the US economy weighs up the benefits of the Bush tax rebate against the rising cost of oil.
After experiencing a much needed sell off, there is the potential for the FTSE to stabilise over the next week, especially if (big if) oil manages to go a week without making a new record high. With that in mind a bull bet on the FTSE to be higher than 5900 on the 9th of June could yield around 19%.

Oil - Another Record!!

Oil has hit another record price, closing at above 129 dollars per barrel for the WTI crude. T.Boone Pickens was on CNBC yesterday predicting that oil is on its way to 150 dollars. Sadly this is not the guy to bet against. Gold was up in yesterdays trade, mostly on the weakness of the US dollar, traders are indicating that this weakness is going to continue, with the British Pound revisiting 1.98 by Thursday, and the Euro visiting the 1.59 area again.

Later this morning, we have the release of the minutes from the last MPC meeting with a vote to hold of 8-1 the most likely action from last time round. We see little potential upside surprise from this release. With the key inflation driver, oil pushing further towards $150, the MPC have little choice but to stand firm on rates for the foreseeable future. Manufacturers are having to cope with extreme inflation in the cost of raw materials and are faced with two difficult options: They can raise prices, or eat into their profit margins on behalf of the consumer. However since most of the consumers are already stretched to the limit with higher prices at the fuel pump no savings, and homes that are worth less then the mortgage, most companies are looking at other alternatives before forcing the consumer to pay the higher price.

The week ahead.

Better than expected could apply to many features of the market last week. Firstly, stock markets themselves have been performing better than one would expect with the constant stream of negative headlines in the media. There's a feeling that the bad news on the credit crunch is out now, and things are not as bad as feared. More than any thing, markets hate uncertainty and whether it is good news or bad, the fact that the surprises are thought to be behind us has a positive impact. Whether the bad news is really behind us is another matter.

Better than expected inflation figures from the US managed to pull the FTSE up by its bootstraps midweek. The UKs leading benchmark index was down 80 points before the US CPI figures came in and managed to push back into the black going into the close. Unfortunately, there were no positive surprises coming from the MPC last week, just more bad news on inflation and growth prospects for the UK economy. With the prospects of further bank boosting rate cuts diminished, there was an unwinding of positions in financial stocks. Barclays, HBOS, Lloyds and RBS were amongst the biggest fallers last week as mortgage rates continue to rise. The MPC looks to be continuing its tough line on inflation and consequently investors may view the upside for the financial sector as severely limited in relation to the downside risk. Traders punished Barclays primarily due to the indecision over a potential rights issue. Banking stocks might be seen as cheap at the moment in relation to their dividend yields, but investors are still mindful of how cheap Northern Rock and Bear Stearns looked before they went to the wall.
Oil stocks led the markets higher last week as oil touched another record high in excess of $127. The Nasdaq also performed well over the week with Blackberry maker Researching In Motion announcing it will be releasing a challenge to the Iphone. Yahoo was also in play on the news of a potential boardroom battle which could put the Microsoft deal back on.
Next week is relatively light on the data front with nothing of real note until Tuesday when we receive German sentiment data and US PPI figure around midday. Wednesday sees the release of the minutes from the last MPC meeting; analysts and home owners alike will be keen to know just how close last weeks decision to not change rates actually was. The release of the minutes from the last FOMC meeting will have an even greater impact as the housing market continues to slide.
The news is still bad from the US housing market with a bottom nowhere in sight. Construction of single family housing in April dropped to its lowest level in 17 years. Jason Goepfert recently highlighted a couple of indicators that point to the potential upside for US equities being limited from here.
One factor may be the unusually low levels of volume on the US markets. Monday the 12th had the lowest volume for 2008 on the New York Stock Exchange. Since 1980, the lowest volume days usually happen in the second half of the year, especially summer as traders take their holidays. In fact, the lowest volume day has occurred between January and June just twice since 1980 and on both occasions the market made no further progress for at least 9 months. Secondly sentiment studies indicate high levels of dumb money buying into this rally. While this alone doesnt signify a crash, it may at least indicate that the upside may not be spectacular from here on a 1-5 month basis.
With this in mind, the following trade may be valuable. Placing a No Touch trade on the S&P 500 not to touch 1580 within the next 120 days could return 14%. This places the no touch level above the high from last year, while providing room for some upside.

UK Financials were among the worst performing yesterday and this morning that trend is set to continue after US financials fell off sharply yesterday afternoon. Energy stocks should stem the extent of any selling on the FTSE after oil traded as high as 127 dollars per barrel in New York trade. Saudi Arabia has gone on record to announce that they will be increasing output by 300,000 barrels, however traders are skeptic if this will be enough to have any effect on the per barrel price. Currently the FTSE is indicated lower.

The British pound is up this morning, after some traders felt that yesterdays more then a penny drop was over done. The pound has been stuck in a range for the last few months as economic data from both UK and US has indicated a slow down for both economies. The only saving grace for the Sterling Pound is that the BOE is not cutting interest rates, like the US Federal Reserve has done over the last year.

Morning Update

With earning season in full swing, the excitement is in the air. British Airways which has been in the news a lot the last few months for things they would rather not repeat again, is rumored to post a profit for the latest quarter. This would send the stock higher, as most analysts have downgraded the sector, which has been struggling from skyrocketing oil prices. The FTSE is currently indicating a higher open.

Gold has been in a range trade for the last few weeks, stuck in between 850-900 dollars. While there does not seem to be an immediate reason to break out of that lull, some have noted that the pair is trading in a smaller range every week. This leads us to believe that a break out is coming in the next couple of weeks. The longer the range trade, the stronger the move will be.

Afternoon Report

It has been an eerily quiet day on equity markets today with global indices making little significant progress in either direction. There have been several economic announcements this morning, most have had little impact on market sentiment. The more recognisable reports have also caused little reaction as their results were in step with expectations. There is a positive bias on US markets on news of restructuring at one of the world’s largest company and a potential boardroom battle at Yahoo which could put the Microsoft deal back on.

The key inflation driver, oil is doing a good job of refusing to die down and consequently energy stocks such as BP and Shell are the better top tier UK performers today. With inflation still on the rise in the UK, traders are buying into oil stocks as an inflation hedge not just as an oil play. The financial sector is again under pressure as traders punish Barclays primarily due to the indecision over a potential rights issue. With tomorrow being options expiry Friday, we expect volatility to pick up again as we end the week.

The Week Ahead

Sell in May says the old stock market adage, but the bulls were in no mood for old wives tales last week. Markets were in rally mode after the better than expected US jobs report, and news of more liquidity injections from the Federal Reserve. The Federal Reserve did what most traders were expecting them to do in cutting rates another quarter percent down to 2%.

" The worst is behind us rhetoric continues to flow from central bankers on both sides of the Atlantic. Markets held the previous weeks gains to close the week higher for the third week in a row. The FTSE rose 2%, but the biggest gainers were tech stocks with the Nasdaq 100 putting on 3% for the week. Volume has been healthy and the twin inflation evils of Gold and Oil are continuing to deflate from their highs. Oil dropped down to near $110 at one stage, but recovered to finish the week down around $3.00 a barrel. Gold faired the worst of the pair, closing at its lowest levels for 2008, just above $850.

It wasnt plain sailing for all of last week. Banks again gyrated as Mervyn Kings testimony before The Treasury Select Committee, provided a steady flow of warnings about the UK economy. Any home owner hoping for a return to attractive rates of recent years will be disappointed after King made it clear that the Bank of Englands recent liquidity plan wasnt aimed at kick starting British Mortgage lending. With UK house prices showing their first year on year decline for decades, and US house prices down 12% by the same measure, it is only going to get worse for house building stocks. UK home builders such as Persimmon and Barratt Homes stemmed the flow last week with small losses, but they may have much further to go if the US housing stocks and dramatic house price collapse are anything to go by. Indeed last week more data was released supporting anecdotal evidence that the housing slump has indeed started.
After the deluge of data that hit last week, the forthcoming week is at least reduced in its intensity. The stand out announcements come on Thursday from a European perspective with the Bank of England announcing their latest interest rate decision. Analysts are expecting the MPC to keep rates on hold as they balance the tricky terrors of inflation and an economic slow down. The ECB are also holding a press conference an hour and a half after the MPC announcement.
If we take a step back from the euphoria, there is certainly room to question the bullish case from here. The jobs numbers were not as bad as expected, but the figures still make for grim reading. Private payrolls have fallen for five straight months, and weakness in the goods producing sector is intensifying. The overall trend of an increasing weakness in US job creation remains.
The VIX Options Volatility Index, a good measure of market fear and complacency, now stands at levels not seen since late December 2007, around the time that the Dow Jones fell nearly 2000 points in less than a month. While another 2000 point drop may not be in the offing, there are growing indications of complacency in this rally.
One rather speculative trade may be to place a one touch bet that the S&P 500 will touch 1350 in the next 16 days. This trade could return 160% if markets pull back significantly from their current levels.

London Index Slowing down

For the third day straight, the FTSE finished the trading day virtually unchanged, with financials slowing down the London Index. A string of negative news came out in the last 24 hours, from the worse then expected employment numbers to the comments from BOE governor going on record stating that they are almost finished with the interest rate cuts, and are turning their attention to fight inflation.
Currently the FTSE 100 is indicating a loss of 11 points at the open.

Gold has gained more then 31 percent last year, on the back of a weak dollar and soaring inflation concerns. The metal has dropped 16 percent from a record $1,033.90 an ounce on March 17. There are speculations who are expecting the yellow metal to fall even lower, testing the 850 level before the month is out. Oil which took a break from setting daily record highs on Wednesday is ready to retest the record it set on Tuesday.

US Inflation - Better than Expected

Better than expected inflation figures from the US managed to pull the FTSE up by its bootstraps today. The UKs leading benchmark index was down 80 points before the US CPI figures came in and managed to push back into the black going into the close. Unfortunately, there were no positive surprises coming from the MPC today, just more bad news on inflation and growth prospects for the UK economy. Last week we noted that further rate cuts were less probable than people were starting to price in to the markets.

Today were seeing an unwinding of these positions as fund managers pull out of financial stocks. Barclays, HBOS, Lloyds and RBS were amongst the biggest fallers today with credit agency Experience down over 3%. We continue to see the MPC taking a tough line on inflation and consequently view the upside for financial sector as severely limited in relation to the downside risk.

Banking stocks might be seen as cheap at the moment in relation to their dividend yields, but investors are still mindful of how cheap Northern Rock and Bear Stearns looked before they went to the wall.

Oil ticked lower

US markets began their day positively after a better than expected retail sales report and some rallying talk from Fed Chairman Bernanke. Stocks started well as oil ticked lower, but sentiment has now turned decidedly negative. One factor may be the unusually low levels of volume on the US markets. Yesterday had the lowest volume for 2008 on the New York Stock Exchange, which could be an indication that the recent rally has run out of steam or worse, was built on flimsy foundations. Since 1980, the lowest volume days usually happen in the second half of the year, especially summer as traders take their holidays. In fact, the lowest volume day has occurred between January and June just twice since 1980 and on both occasions the market made no further progress for at least 9 months.

The FTSE continues to be the sick man of Europe as poor housing data combines with 3% inflation to create the haunting spectre of a return to 1970’s style stagflation. The pound is slipping fast to the 1.94 level against the Dollar, a key support level for the last 12 months. Any drop below this point could be bad news for UK tourists as the holiday season approaches.

The Week Ahead

The past week had the potential to be explosive. Central bank meetings in the UK and Europe had traders licking their lips with anticipation for the possible outcomes of the meetings and the potential volatility they could bring. Sadly for volatility lovers, the week came and went with little significant turbulence. The FTSE ended the week up almost 150 points. The Dow Jones Industrial Average was not so lucky, losing more than 250 points; most of it on Friday afternoon, when the world largest insurance company AIG announced it will be seeking more then 12 billion dollars in new capital.
The new week brings with it a slew of data from UK and Europe; the common theme being inflation. From Consumer Price Index to Producers Price Index, traders will be looking for a number that’s on the higher side of expectations, as oil prices are at an all time high and largely to blame for the inflation run. As it was mentioned last week in the EU bank speech that accompanied the rate decision, the main reason why the decision was taken not to lower interest rates, was the great concern that doing so would cause inflation to spiral out of control. On the US side, the data will focus more on retail sales and the health of the manufacturing industry. Last week, Wal-Mart and a few other big box retailers announced that their ‘same store’ sales were higher, possibly indicating that consumers are shopping more. If this is the case then perhaps this could be the stimulus that the US president was talking about, or maybe it could be explained by consumers hitting the shops to spend their tax refunds.
Last month the Euro/Dollar hit an all time high near 1.60, since then the Euro has been in a freefall situation, giving back more then 5 cents. Some research among retail foreign exchange merchants shows that the Speculative Sentiment Index is now showing more of a lean towards a weaker Euro. This is the 3rd week that the SSI has been indicating this.
With that in mind, the play of the week is as follows:
We are looking for the Euro to weaken further against the US dollar, or at least not test the all time high levels hit earlier last month. A no touch on the Euro/USD maturing May 29th 2008, with a strike price of 1.60 could return 10% ROI.

Bank Of England's Next Move

This is the week when all traders who are interested in what the Bank of England does next should pay attention. We are expecting the number to be higher then expected, which should help the GBP/USD, which has fallen to below 1.9500.

London's property market is declining

London's property market had the worst price declines in at least 14 years last month as the slump in financial services deepened and banks curbed lending. This had no effect on the FTSE, actually the market is currently quoted higher by more then 20 points.

This morning everyone will be focusing on the UK Consumer Price Index, which is rumored to come in higher then expected, especially after yesterdays PPI numbers. While the door has been shut on the next interest rate cut, a number which is in line with expectations will mean that producers are not passing on their extra costs to the consumer, this could hurt earnings and the broader FTSE index.