Oil reversal smashes data

Multi-year high readings on US industrial production and capacity utilisation initially spurred markets higher in overnight trading. The unambiguous strength in the US economy may give the Fed plenty to talk about at its meeting tonight, but a reversal in energy markets from gains to further dramatic losses soured the session and dragged equities to lows. This turn around, combined with falls in metals prices, will see Australian shares under pressure again at today’s opening.

The falls in industrial commodities and share markets come in spite of improving data from Japan, China and the US. This suggests the main driver is concerns about the effect of withdrawal of the historic monetary stimulus from the Fed. In anticipation of a draining of the global bathtub, investors are locking in share gains and withdrawing from commodity markets. During the height of stimulus, bad news was good news, as investors anticipated further funds injection. Now, good economic news is bad news, as markets bring forward the withdrawal timetable.

Unusually for this time of year, volatility is on the rise. Locally, this is the last full week of liquidity as futures and options expire, potentially exacerbating selling pressure. A full calendar of data releases and a US Fed FOMC meeting tonight mean the holiday season may be cancelled for traders this year.