Belief that Oil Prices Have Bottomed Grabs Market

January 22, 2016

In this early year of extreme market volatility, movements in oil — mostly downward until now — have dictated the tone in stocks, bonds, currencies and other commodities each day. From as low as $26.19 per barrel (weakest since May 2003) two days ago to as high as 31.04 per barrel today, West Texas Intermediate oil recorded its greatest 2-day rally since August.  Investors are starting to believe that the plunge in energy costs that began in June 2014 may finally have run out of steam.

Share prices this Friday soared 5.9% in Japan, 3.5% in Hong Kong, 2.1% in South Korea, 2.0% in India, and 1.8% in Singapore.  The Chinese, Australian and New Zealand markets each closed about 1% higher.  In Europe, stock market gains so far amunt to 3.4% in France, Greece and Spain, 3.0% in Switzerland, 2.4% in the U.K., 2.3% in Italy, and 2.2% in Germany.

Among 10-year sovereign debt yields, there have been increases today of five basis points in British gilts and a basis point each in Japanese JGBs and German bunds, plus futures point to a further 4-bp rise in U.S. Treasuries to 2.07%.  The yield earlier in the week was as low as 1.96%.

Gold faded 0.4% and is back under $1,100 at $1,097.23 per ounce.

A mixed dollar shows overnight losses of 0.8% against the loonie, 0.7% versus sterling and 0.4% relative to the Australian dollar but advances of 0.5% against the euro and Swissie, 0.4% vis-a-vis the yen, and 0.3% relative to the kiwi.  The yuan is steady.

Preliminary purchasing managers January survey results were released covering Japan, the eurozone, Germany, and France.

  • Japan’s manufacturing PMI edged down 0.2 points from back-to-back readings of 52.6 in November-December, which had been the best outcomes since March 2014.  Output, orders, and jobs grew less rapidly than in December, and prices fell more sharply.
  • The composite eurozone PMI printed a full point under December’s level at 53.5, an 11-month low.  Services and manufacturing fell to respective 11- and 3-month lows of 55.4 and 52.1.  All these outcomes were worse than analysts were expecting.  However, business sentiments among service-sector industries was at the best level since early 2011, and the composite index was still above its 2015 average level.  The data seem consistent with GDP growth this quarter of 0.3-0.4%, not bad considering financial market volatility this month plus Europe’s difficulty handling its flood of middle eastern migrants.
  • Germany’s composite PMI score of 54.5 was a full-point below December’s level.  Both it and the PMI readings from manufacturing and services were their lowest since October.
  • France’s composite PMI rose 0.4 points to a 2-month high of 50.5, still implying a very weak pulse of positive growth.  Manufacturing sunk 1.4 points to a 5-month low, but services recovered 0.8 points to a 2-month high.

British retail sales volume fell 0.9% in December when excluding auto fuel and by 1.0% when including such.  Total sales ended 2015 some 2.6% above their year-earlier level.  Core public sector borrowing of GBP 7.474 billion in December was down from GBP 13.548 billion in November.  The nine-month fiscal year to date cumulative total of GBP 74.2 billion was 11 billion pounds smaller than a year earlier.  Outstanding public debt at the end of 2015 equaled 81% of GDP.

Euroland’s debt/GDP ratio eased back to 91.6% in the third quarter of 2015 from 92.3% in both 2Q and 3Q of 2014.  Individual Euroland members had debt-to-GDP ratios in the third quarter of 71.9% in Germany, 97.0% in France, 134.6% in Italy, 99.3% in Spain, 108.7% in Belgium, 108.7% in Belgium, 171.0% in Greece, 109.6% in Cyprus, 99.4% in Ireland, 85.3% in Austria, and 130.5% in Portugal.  Euroland’s fiscal deficit to GDP ratio in the third quarter fell to 1.8% from 2.2% in the prior quarter, 2.7% in the third quarter of 2014 and 3.0% in the third quarter of 2013.

Business sentiment in China slipped 0.4 points in January to a reading of 52.3.

Irish producer price inflation slowed to 3.6% in December from 4.4% the month before.

Danish retail sales fell 0.8% this month and are unchanged from a year earlier.  Sales dropped on month for the first time in seven months.

Icelandic wage costs jumped 0.9% for a second straight time in December, lifting the 12-month rate of increase to 9.7%.

Canadian retail sales climbed 1.7% in November, eclipsing expectations of a mere 0.2% uptick.  The 12-month rate of increase climbed to 3.2% from 1.9% the month before.  Motor vehicles rose 1.4%, and all other sales increased 1.5% on month.

Canadian total CPI inflation in December of 1.6% and core inflation of 1.9% were each 0.1 percentage point less than forecast.  The inflation rates in December 2014 had been 1.5% overall and 2.2% core.  Consumer prices on a seasonally adjusted basis edged 0.1% higher on month in December following a 0.2% increase in November.

In December when the Federal Reserve Open Market Committee finally got around to beginning to raise the federal funds rate, the Chicago Fed National Activity Index printed below zero for a fifth straight time at -0.22.  Such was weaker than readings of 0.13 at the end of 2014, -0.08 at the end of 2013, and 0.20 at the end of 2012.  Manufacturing has been hurt by a strengthening dollar.

U.S. existing home sales, index of leading economic indicators, and preliminary factory PMI, as compiled by Markit Economics, get reported later today.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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