SCOREBOARD: Crude correction

Oil prices slumped overnight but given the solid data flow, it's hard to see why.

One of the more interesting features of last night’s trading was a big fall in the price of crude. WTI fell about 2.5 per cent to $102, which is the biggest all year. WTI is still above its April lows, but the magnitude of the fall is interesting. Brent followed suit and fell 1.7 per cent to $116.69.

Now the falls occurred around the US open. The only data we saw at that point were jobless claims, which fell almost 30,000 to 365,000 in the week to April 28. A good reversal from the lift in claims we had seen over recent weeks. The only other major event around that time was a press conference by ECB head Mario Draghi (the ECB held rates steady at 1 per cent overnight). The thing is he was pretty balanced, some might even say comparatively upbeat, all things considered. He noted that growth had stabilised at a low level and was expected to recover gradually over the course of the year. I would have thought that is good.

Yet US equities posted another decent fall overnight as well and I’m struggling to see why. Stocks were sold on the open and apart from a brief period of respite, maintained that trajectory throughout the session and closed just off the low.

At the bell we saw the S&P500 off 0.8 per cent (1391), which is a decent fall considering the newsflow. Admittedly the non-manufacturing ISM index fell in April, to 53.5 from 56, but these numbers bounce around and most of the commentary from business leaders was positive, talking about how prospects now were better than last year etc. So I suspect this is just noise.

In any case the index is still showing the services sector grew solidly. Nothing to get all ‘beared up’ about and nothing that, in my mind, justifies a 0.8 per cent fall. Naturally enough, with the big falls we saw on crude, energy stocks were the key underperformers, but they were accompanied by declines in basic materials and financials and most other sectors actually (bar telecoms). The Dow was then off 0.5 per cent (13206), the Nasdaq fell 1.2 per cent (3024) and Australia’s SPI was 0.3 per cent lower (4414).

The other, important thing to note is that Spain and France both auctioned off bonds last night that were quite successful. The French for instance sold €7.4 billion in bonds with a range of maturities, but demand was solid and there was even a slight fall in the yields paid (compared to April).

Similarly, the Spaniards sold €2.4 billion of bonds meeting their target and received solid demand. They paid for it, 4.04 per cent on the 3-year compared to 2.61 per cent in March. Still, a yield of 4 per cent is by no means onerous and compares favourably to history. Elsewhere in the debt space, US treasuries did nothing and are little changed from 1630 AEST yesterday – with the 2-year yield at 0.26 per cent and the 5-year at 0.82 per cent, while the 10-year is at 1.93 per cent. Australian debt futures also did little, with the 3s at 97.15 and the 10s at 96.495.

But you can see why I find the price action a tad confusing. Good jobless claims data, decent bond auctions in Europe and positive commentary from the ECB. Yet risk was generally off. Weird.

As for the remaining price action, we saw euro whip around on the US open (almost a 100 pips range), but then do nothing for the rest of the session. Overall the unit was little changed from 1630 AEST – 1.3151. The Australian dollar, was then about 40 pips lower (from 1630 AEST) to be at 1.0263 and then we saw sterling bounce around but end little changed (1.6181) and it was the same with the yen (80.20).

For Australia today we get the RBA’s Statement on Monetary Policy at 1130 AEST, a document in which they give us the lay of the land the way they see it. I imagine we’ll see modest downward revisions to CPI, but I’ll be surprised if growth forecasts are changed too much. Following soon after we get an estimate of China’s services PMI at 1230 AEST and of course the big one tonight is US payrolls. The market looks for a 160,000 gain in April payrolls while the unemployment rate is forecast at 8.2 per cent. There are a few other data releases, eurozone retail sales etc, but they are less likely to move the market.

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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