After yesterday’s meltdown in global equities, bargain hunters are helping to put a bid under North American futures and offering some relief for the bulls, though overall sentiment is still shaky as oil prices continue to plunge. The renewed downdraft that has pushed WTI to pivot around the $49 handle was spurred by the latest round of price cuts Saudi Arabia charges for its light oil in the US, driving the West-Texas benchmark to multi-year lows. While we have outlined in this piece previously that the decline in energy prices will boost disposable income for consumers and help lift consumption, ultimately creating a net benefit as wealth is transferred from energy producers to consumers, the market is at times struggling to confirm that narrative, as a prolonged slide in oil prices creates binary outcomes in certain regions focused on oil production. In addition, the failure of oil prices to stabilize causes concern surrounding the outlook for global growth, with the supply-side being slow to respond despite rig counts starting to roll-over in North America. The most inefficient rigs are starting to shutter their operations, but gross output remains high even with steady downward momentum in drilling activity. A stabilization oil prices would help to underpin investor confidence, though the pain from re-balancing is likely far from over.
European bourses are managing to shake off an ugly close in Asia, which saw the Nikkei tank by over 3% in response to yesterday’s sell-off on Wall Street, with the majors trading mainly in the green despite the zone’s final composite PMI reading coming in slightly lower than expected. Though there were some upside surprises in activity throughout the service sector, market participants focused on the disappointing composite number and the possibility that tomorrow’s CPI reading shows outright deflation in consumer prices. The inability of the euro to make any meaningful efforts at a rebound back into the 1.20s during the overnight session sent another wave of selling pressure through the market, culling EURUSD back to the low 1.19s. Tomorrow’s CPI reading will likely drive price action for the euro before Non-Farm Payrolls on Friday, and we already beginning to see market participants positioning themselves for a weak release.
Heading into the North American open, after the consolidation witnessed yesterday, the DXY is moving higher ahead of the opening bell. The composition of the DXY being heavily weighted towards the relative performance of the greenback compared to the euro is the main factor attributable to the DXY’s gains this morning, as the antipodean currency-bloc and the yen are all strengthening against the big dollar. The carry-trade proxy of USDJPY sliding back to the 119 handle has stymied any robust optimism in equity markets, with S&P futures modestly green at the time of writing. The loonie trading with a slight offer tone this morning, but has managed to fend off another dip in oil with USDCAD continuing to pivot in the high-1.17s. Further evidence that inflation will see some downward pressure in the coming months was confirmed by Producer and Raw Material Prices seeing sharp monthly declines in November this morning, though there was little reaction in the loonie as flow-through effects from lower energy prices had been expected. At 10:00EST traders will get a chance to digest the ISM Non-Manufacturing PMI reading for the US over the month of December, which is expected to slip from November’s 59.3 to an even 58.0.
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