Daily Market Reports | Mar 26 2012
By Greg Peel
Outside of standard global supply/demand, the price of oil has this year been under the influence of geopolitical tensions with regard to Iran's nuclear aspirations and the West's determination to thwart them. Sanctions have now been placed on the importation of Iranian crude by several nations and there has been much talk that in retaliation Iran may close the Straits of Hormuz and block a huge slice of global crude supply.
This talk has largely been dismissed on the basis Iran would simply be shooting itself in the foot given its reliance on oil revenues, notwithstanding the belief Iran would be unwilling to take on the might of the US Navy in any confrontation. Then there's unpredictable Israel, who many worry may decide to preemptively attack Iran. Meanwhile, Saudi Arabia has suggested it has enough crude reserves to cover the shortfalls from sanctioned Iranian exports. And it is assumed that if necessary, sovereign strategic oil reserves will be released to counter any supply squeeze.
Amidst all of this, traders have been trying to figure out what the price of oil should be. Oil prices have been volatile of late on intraday movements while still managing largely to jog on the spot. On Friday it was revealed that as a result of the sanctions, Iran's oil exports have dropped as much as 14% in March. This figure is unconfirmed, but oil traders finally have something more concrete to respond to.
The response on Friday was to buy, with Brent rising US$1.99 to US$125.13/bbl and West Texas rising US$1.52 to US$106.87/bbl. Price gains were assisted by a fall in the US dollar, with the index dropping 0.5% to 79.34 on a stronger yen and slightly stronger euro. The greenback has also been rather volatile lately in a tight range. Price gains helped send energy stocks higher on Wall Street on Friday, leading indices higher after an otherwise dour week.
Higher oil prices obviously benefit the large US energy sector but the lingering question will always be: at what price does the cost of the biggest input to global production weigh on stock prices of other sectors? Wall Street seemed unconcerned on Friday, with suggestions bargain hunters were mostly behind the smallish gains after a week of general weakness. The Dow closed up 34 points or 0.3% while the S&P gained 0.3% to 1397 and the Nasdaq added 0.2%.
The S&P is sitting just under the 1400 level but the Dow has held 13,000 (closing at 13,090) and the Nasdaq has held 3000 (3067) and it appears that if those two psychological levels are threatened to the downside there are buyers ready to take advantage. It is not unusual for markets to “do some work” around such levels before moving on once more. As to whether the Wall Street rally can regather momentum from here will be a bit unclear this week as we approach the end of the March quarter on Friday. Those fund managers well-positioned in equities will be looking to lock in gains before starting again and those underweight equities will be looking to show their investors that they are not being left behind. So there could be some argy-bargy.
The other issue outside of oil which has the world a little concerned at present is the slow but persistent rise in Spanish and Italian bond yields. A just over 5%, the yields on both sovereign benchmark ten-years are well below previous highs above 7% seen last year when European contagion fear was all the rage and Mario Draghi was yet to arrive on the scene with his printing press, but high enough to cause unease and concerns that the Greek resolution was not the end of the story.
US bond yields have responded by finding a little more favour, with the US ten-year falling 4bps on Friday to 2.24% despite the rise in equities. Such a combination is in contrast to the last couple of weeks which have seen an apparent switch out of bonds and into equities as stock prices rise and bond prices fall (yields rise). But the VIX remains at 15 in the US suggesting there is not a lot of real concern just yet. Let us not forget that the Greek general election is due to be held in April or perhaps May.
Gold has been in the doldrums lately on new-found risk appetite and the Fed's apparent back-down on QE3 but managed to rise US$20.00 on Friday to US$1663.30/oz on the weaker dollar and possibly the inflationary implications of a higher oil price. Base metal prices were mostly stronger in London but only by small amounts. The Aussie also found some support after having fallen in a Chinese hole last week. It's up 0.8% to US$1.0460.
The SPI Overnight lost 9 points or 0.2%.
Amidst all that is going on is the simple story of a US economic recovery, and there are a few important data releases this week. Tonight sees the Chicago Fed national activity index and pending home sales, Tuesday brings the Case-Shiller house price index, consumer confidence, and the Richmond Fed manufacturing index.
On Wednesday it's the all important durable goods orders and on Thursday the final revision of the December quarter GDP is released. Final, that is, until a possibly dramatic revision on the release of the March quarter first estimate. Expectations are for no change from the previous 3.0% revision. Friday wraps up with the Chicago PMI, personal income and spending and the the fortnightly consumer sentiment read.
The UK will also provide a revision to its December quarter GDP number this week, on Wednesday, while in Europe Germany's influential IFO survey is out tonight.
It's a very quiet week in Australia economically, with the only highlights being the release of the RBA's Financial Stability Review on Wednesday, and private sector credit and new home sales on Friday.
There is a smattering of ex-divs again this week as we start to ramp up the AGM season for those companies having just reported full-year results. Nufarm ((NUF)) will be the only company reporting earnings this week, on Tuesday.
Rudi will appear on Sky Business at noon on Thursday.
For further global economic release dates and local company events please refer to the FNArena Calendar.
