Oil and Wall Street crash, US dollar climbs as risk-off prevails

Summary:

• US indices ended the Tuesday’s session with huge losses

• Oil prices crashed with WTI trading the lowest since October 2017

• US yields firm, dollar trades slightly lower after gains made on Tuesday

Energy stocks weighed on Dow Jones

Tuesday’s trading turned out to be really ugly for almost all investors from equities to commodities. Wall Street saw substantial falls, a second day in a row, while oil prices crashed and the US dollar climbed meaningfully. So, it seems that the oil market was the major culprit behind woes seen elsewhere. A steep decline came out of the blue and it was retained till the end of the day. While lower oil prices are undoubtedly supportive of the global economy, they also act to the detriment of energy companies which led the yesterday’s rout on Wall Street. Among top losers within the Dow Jones (US30) we may find Caterpillar, Exxon Mobil or Chevron - all of them lost between 2.5% and 3%. The largest loser was, another day on the trot, Apple declining as much as 4.8% and extending its losing streak following revelations regarding the stuttering demand for various products. As a result, the Dow Jones suffered the most and closed 2.2% lower. The SP500 (US500) moved down 1.8% while the NASDAQ (US100) went down 1.7%. In Asia investors do not seem to follow in their US counterparts’ footsteps and losses have been much milder. The Shanghai Composite is losing 0.1%, the Hang Seng (CHNComp) is decreasing 0.3% while the NIKKEI (JAP225) closed 0.3% down. It needs to be said that despite severe declines seen on Wall Street during the two past days the US bond market has been remarkably calm with the 10Y yield sticking to its this week opening level of 3.06%. It shows that the bond market does not act like an automatic stabiliser and potentially it could yet aggravate moods in the equity market.

Technically the Dow Jones could see a rebound in the nearest future as it did so several days ago. The price approached and managed to stay above its crucial trend line and therefore betting on at least a corrective pullback could be reasonable. Source: xStation5

Kudlow reassures investors

It is worth noting that the latest deterioration in the US stock market (and obviously elsewhere as well) triggered some comments from the White House aimed at reassuring investors. Namely, Larry Kudlow, Trump’s chief economic adviser, said on Tuesday that he does not expect a slowdown in growth despite a significant market dip. He added that “corrections come and go” and that he “is reading some of the weirdest stuff how a recession is in the future”, “nonsense”, he concluded. While the White House tries to reassure investors, the Federal Reserve Jerome Powell said a few days ago that the major focus is on the real economy not on the financial market implying the Fed would hike rates despite falls on Wall Street. Is this possible? We doubt so, as there is a channel through which gloomy moods in the stock market may translate into the real economy. Therefore, the more profound falls on Wall Street, the less chance to see the Fed tightening monetary policy at a currently anticipated pace let alone a quicker pace. Note that higher interest rates in the US are slowly biting into real growth which is expected to start losing momentum from the beginning of the next year when a tax cuts’ impact begin fading away.

WTI prices saw another bad day this month and as a consequence it moved clearly below $55 per barrel. From a technical point of view a decrease toward $50 seems to be on the cards. Having said that, the upcoming semi-annual OPEC meeting will play a major role for oil traders and it could be perceived as a chance to see a bounce in the market. Source: xStation5

In the other news:

• The European Commission is scheduled to release its annual review of euro-area nations’ spending plans; the EU should make an announcement a review regarding an Italian budget

• Italy’s finance minister Tria is concerned about a bond yields spread (almost 330 bps this morning)

• Oil prices recover and erase at least a small part of their yesterday’s losses, both grades are up between 1% and 1.5%