SCOREBOARD: Slippery oil

Crude prices continued their rapid descent overnight, while US housing looked decidedly brighter.

Day three and the crude route continues – last night’s moves were incredible. WTI was off another 6.7 per cent overnight to stand at $91.72 or a six-week low. Fat finger errors, computer glitches, everything is being blamed on the fall. Throw in rumours that the US will flood the world with oil from the strategic petroleum reserve, and comments from the Saudis and OPEC – there is obviously a concerted and coordinated effort to bring prices down. I’m just waiting for the usual articles to appear on oil sands or whatever. The new crude glut and associated PR.

Following the same script in March, the Saudis – well an unnamed Saudi official – followed up rumours of a strategic petroleum release by stating that oil prices are too high and that they stand ready to produce more oil unless the price comes down. OPEC itself just said that the market was well supplied. Not sure if this is relevant but the Iranians, for their part, reckon oil should be around $150.

The thing is, and as is usual when governments interfere in markets, there has been a swathe of unusual pricing action ahead of publically released information. So just ahead of a US Energy Department release showing a lift in US oil inventories, crude prices dropped sharply. Similarly there have been reports of unusual price action and ‘fat finger errors’ on a number of US energy stocks. This is the market now people, political mates and donors seem to be getting the heads up.

White House officials have declined to comment publically on whether there is coordinated action to bring prices down. They only said that all options remain on the table. Coordinated action it is though and they’re following the same script as in March. So much for the free market. I mean seriously, think about it. The US government is actively manipulating the bond market, money markets, forex markets and commodity markets. They print more money to deliberately target the stock market and are printing money to buy MBS to inflate the housing market. Where is free market capitalism in that? More importantly where is the outcry? Free markets are dead and the silence is deafening.

Anyway, other than the bizarre action on the crude front, we’ve seen three US housing market indicators recently, two overnight, and all three point to, not only continued recovery in the housing sector, but also an acceleration in this recovery. So there were about 750,000 housing starts in August – weaker than expected (767,000), sure but the bigger picture is that starts are up some way from year ago 25 to 30 per cent. Same with existing home sales, although these were much stronger than expected at 4.82 million (4.56 million expected). This is just over 9 per cent higher than at the same time last year and the highest since number of sales in about two years. Add to that the NAHB building index is at a six year high. So things, which have been improving very slowly these last couple of years, are looking decidedly better and it obviously adds to my optimism on the US recovery.

As for the price action, well naturally enough, energy stocks weighed on the broader equity market falling almost 1 per cent. Despite that, the major indices just managed to finish in positive territory the S&P500 up 0.1 per cent (1461), the Dow up about the same (13577) while the Nasdaq was 0.2 per cent higher (3182). The Australian SPI was was down about 0.15 to 4410.

On the rates side, yields dropped despite better data, and the 10-year yield was down about 6 bps to 1.768 per cent, the 5-year was down just under 2 bps to 0.688 per cent while the 2-year is at 0.258 per cent. Australian futures for their part were up 4 ticks apiece to 97.42 and 96.79.

Otherwise in the forex space we saw the Australian dollar rise 30 pips to 1.0481, euro was down about 30 pips to 1.3048 and yen, following the Bank Of Japan’s decision to print trillions and billions, went from 79.2 to 78.37. Currency wars are alive and well.

Bits and pieces otherwise, gold was up smalls to $1772, copper rose 2.4 and for the data, European construction fell 0.3 per cent in July. But there wasn’t a lot of news flow apart from that.

Looking at the day ahead we get New Zealand GDP figures and Japanese trade data this morning, and at around lunchtime we see a ‘flash‘ estimate of the Chinese PMI. Remember these private sector PMIs are of little use, as I have highlighted before, but they do get press. This afternoon we get German producer prices and then the European PMIs are also out tonight. For the US, we see initial jobless claims and the Philly Fed index.

Have a great day…

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

@AdamCarrEcon on Twitter.

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