Markets retreat as oil prices fall - 16.12.2014

Falling oil prices dragged US stocks lower on Monday weighing heavily on investor confidence. The dollar rose against the euro ahead of the Federal Open Market Committee two-day meeting starting on Tuesday as the data indicated industrial production in US grew 1.3% in November against 0.9% forecast, the biggest increase since May 2010. Dollar rose notwithstanding the Empire State disappointing report on regional manufacturing index, indicating it fell to negative 3.6 from positive 10.2 in November, to mark the first negative reading since January 2013. Today at 14:30 CET Housing Starts for November will be published. The forecast at 1.04m is higher compared with the previous months figure at 1.01m indicating improving housing market and continued US economic recovery and we expect the report will contribute to further US dollar strengthening.

European stocks fell also as the sell-off of energy and mining stocks continued. The Stoxx Europe 600 fell for the sixth session in a row. Today UK CPI y/y will be released at 10:30 CET with 1.2% forecast against 1.3% level previous month. We believe this will contribute to weakening the British pound. At 09.:30 CET Markit Germany Services PMI, Eurozone PMI data and at 11:00 CET German ZEW Economic Sentiment will be released, the tentative outlook is positive. We believe the single European currency will strengthen on investor expectations of improving eurozone economic outlook.

Asian stocks fell as falling oil prices reinforced investors’ concerns about weakening global economy and HSBC’s preliminary report indicated contraction in manufacturing activity in China in December. The preliminary reading of manufacturing Purchasing Managers’ Index in China fell to 49.5, a seven-month low. The sell off resulted in strengthening of safe-haven yen. Commodity prices fell on signs of falling demand with slowing Chinese economic growth. Copper, nickel, aluminum, zinc and lead declined on the London Metal Exchange.

Oil continued to fall as West Texas Intermediate dropped below $55 for the first time in five years. Crude oil slumped about 45 percent this year. After OPEC decided not to reduce its output of 30 million barrels a day at a November 27 meeting it was evident that OPEC prepared to defend its market share as other major producers like Russia and US increased their output on the backdrop of weak global demand. The 12-member group, led by Saudi Arabia, pumped 30.56 million a day in November, exceeding its target for a sixth straight month. US shale oil producers do not show signs of reducing output with falling prices, as a report by Goldman Sachs Group Inc indicated US drillers are benefiting as costs fall almost as quickly as prices. The Energy Information Administration report showed production expanded to 9.12 million barrels a day through December 5, the highest rate in weekly records that started in January 1983.

Gold continues falling fifth straight session on Tuesday. Though increasing uncertainty in global economy usually increases the demand for gold as a store of value, investors are cautious ahead of the Fed’s new policy statement and updated economic forecasts that will be released tomorrow after the Federal Open Market Committee meeting. It is widely expected that the central bank officials will decide whether to start hiking interest rates sooner based on improved US economy performance.