Early January nerves return

The early January mood looks like returning to stock markets today with investors bracing for further weakness.

Falling oil prices have been one of the key drivers of negative sentiment in stocks. Two days of sharply weaker oil prices have refocussed share markets on the potential problems flowing from the bear market in oil.

Significant cuts in capital expenditure in the energy market are taking their toll on economies. The mood was not helped by news that Exxon will cut capital expenditure to the lowest level in 10 years while BP announced plans for further wholesale job cuts.  Markets are also concerned about the potential impact on credit markets that might flow from bankruptcies in the oil sector if oil prices keep falling.

The stock market mood is pretty brittle at the moment. Many traders saw the recent stock market gains as more likely to be a corrective rally than the start of a sustainable move higher. The rally that followed Bank of Japan’s move to negative interest rates might struggle to develop into much more than a short covering “announcement” effect. Markets are more heavily focussed on the risks associated with low world growth than on the diminishing impact of additional central bank stimulus.

Weaker oil prices have the Aussie Dollar back under pressure. Recent lows in the oil price are likely to be important for market sentiment. If renewed selling in oil takes it below its mid-January lows, we could easily see the Aussie below 68c.