Plunge in Crude Sparks Renewed Global Stock Sell-off and Flight to Treasuries

Returning to an all-too familiar pattern, the intensifying collapse in oil prices dragged down global stock markets and boosted demand for the safety of Treasuries.  WTI crude cheapened to $27.05, hovering at the 12-year lows.  Both WTI crude and Brent are currently trading down almost 5% and 4% per barrel respectively, with WTI approaching the $27 mark.  The renewed selling comes off the back of an International Energy Agency report stating the oil market could “drown in over-supply” in 2016.  The IEA report acknowledges that non-OPEC producers will continue to be driven out of the market, but adding Iran’s expected 600,000 barrels per day will further exacerbate the global supply glut.  US stocks sank to the lowest levels in almost two years while Treasury yields fell between 6 and 10 bps across the curve.

Disappointing US economic data added to the day’s bearish sentiment.  The Consumer Price Index fell 0.1% in December after being little changed in November, led by the slump in commodities.  More alarmingly, core CPI, which excludes the volatile food and energy categories, rose only 0.1%, less than forecast and the smallest gain in four months.  The YoY CPI reading experienced a boost lifting the headline rate to +0.7%.  Core CPI reached a 12-month growth rate of 2.1%, above the Fed’s 2% inflation target, but policymakers prefer the PCE price index as a measure of inflation, which is currently running 0.7% slower than CPI.  Other data showed US housing starts and permits unexpectedly declined in December, indicating a slowdown of momentum for the sector heading into 2016.  Starts declined 2.5% for the month, although it was still the strongest year for construction since 2007.

There are no central bank speakers scheduled with the Fed in their blackout period, so markets will focus on oil prices, corporate earnings releases, and stock price action for direction.