SCOREBOARD: Crude moves

Crude continued its recent upward swing and global equities followed a generally positive commodities lead.

While I had been arguing that crude was oversold (for an in-depth discussion see my June 8 Eureka Report analysis), I can’t help but be surprised at the extent of the recent rally. Even last night, crude was up another 2.7 per cent to $92.28.

Now we’re still some way from the lofty heights of February/March when crude was up around the $110 mark, but we’re still talking a $15 move or almost 20 per cent over, what, two weeks. More to the point, last night’s gains came as economic data generally disappointed.

For instance US jobless claims shot up 34,000 to 386,000 in the week to July 14 – which is still comparatively low, so there should be no gnashing or grinding or teeth – but directionally, it’s obviously not very supportive of risk. Then existing home sales fell 5.4 per cent in the month which was much weaker than the plus 1.5 per cent expectation, and the Philly Fed index, while it improved in July, didn’t quite improve as much as punters thought it would. The index went from -16.6 to -12.9 instead of -8 (average 8) as the market thought.

Some of the move can be attributed to Middle East concerns but in general, I think the market is just correcting from what was certainly a very oversold position. The other issue I think is helping the market is a growing sense that, while there are risks to the globe, some of the doom and gloom is overdone. The IMF’s forecasts were a reminder of that – global growth at trend. That’s why I think we saw a broad-based improvement in commodity prices last night – copper was up 1.6 per cent, gold up almost $10 to $1580 and the CRB index overall was about 2 per cent higher.

Then of course corn prices are surging (new record last night given the US drought) and that has led to calls for ethanol use to be reduced, which would obviously lift demand for crude. We need to watch out for the G20 response, though. The US and UK have already demonstrated they are prepared to intervene in the crude market in the market if prices get to what they think is an elevated level. They just jawbone at this point and get the Saudis to talk about how much oil they’re going to pump into the market – but the concern is there as is the effort. Unfortunately, and as is always the case with government manipulation, you never know where exactly the trigger points are. Unless of course you’re a political buddy or a big party donor.

As for equities? Better-than-expected earnings and those stronger commodity prices continue to provide support to the market and eventually offset that weaker dataflow. At the low, shortly after the open, the S&P was down 0.1 per cent. Trading was choppy afterwards but the index managed to close 0.3 per cent higher at 1376 (up 0.5 per cent at the high). The Dow was also 0.3 per cent higher while the Nasdaq closed 0.8 per cent up (boosted by IBM and Google). As for the SPI, the index was little changed – 0.1 per cent higher (4164).

Now over in Europe there was a bit of news and it was mixed. Firstly, the German parliament approved the €100 billion Spanish bailout, and then the Spanish parliament approved further austerity measures in order to cut debt. Equity markets liked all of that, and the mood in the US, and stocks managed to close higher. So the Dax was up 1.1 per cent, the CaC 09 per cent and the FTSE was 0.5 per cent higher.

None of this appeared to have much of an effect on Spain’s debt auction however. In fact debt markets had a better reaction when Spain’s budget targets were extended! Make sense of that. The bottom line is that the Spanish auction was a little concerning. They sold about €3 billion of 2, 5 and 7-year bonds with yields sharply higher than prior auctions. The 2-year, for instance, went out at a yield of 5.3 per cent compared to 4.48 per cent last time while the 5-year yield sold at a yield of 6.54 per cent. Naturally enough in the secondary market 10-year yields shot up – the Spanish yield pushing the panic mark of 7 per cent before settling to 6.97 per cent, or about 7 basis points higher than the previous day. Note that Italian yields actually fell though – about 9 basis points to 5.99 per cent.

Over in France however, their auction was very successful. They sold €8.9 billion with the 5-year attracting record low yields 0.86 per cent, which makes sense given the negative yields the German, Austrians and Fins have on their debt.

Debt markets elsewhere were reasonably subdued. US treasuries sold off a bit and the 10-year yield rose 3 basis points to 1.51 per cent. the 5-year was 1 basis point higher at 0.61 per cent while the 2-year sits at 0.23 per cent. Aussie futures were off 2 to 3 ticks with the 3s at 97.72 and the 10s at 97.155.

Finally for the price action then, the Australian dollar pushed through and looks to have settled above 1.04 at 1.0427. Euro bounced around but was unchanged in the end at 1.2277, while sterling is at 1.5722 (40 pips or so higher) and Yen is at 78.6.

Bits and pieces otherwise. Italian industrial orders rose 1.7 per cent in May, offsetting the 1.8 per cent fall of the previous month. Then UK retail sales were 0.3 per cent higher in June, following a 1 per cent gain in May. Things look like they are improving then in the UK – jobs gains and now continued consumer spending. And the Olympics haven’t even started yet.

A quick look at the calendar shows that we get Australian trade prices today at 1130 AEST. Remember this doesn’t have a great correlation to CPI next week but can give a rough idea as to what upstream tradeable price pressures are doing. This afternoon we get German producer prices and then Canadian consumer prices are out tonight, which I think is about all the data there is.

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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@AdamCarrEcon on Twitter.

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