Pressure on Oil and Emerging Markets Spark Flight to Quality Trade

Equities pushed firmly negative Friday led down by oil and emerging markets, while investors have flocked to the perceived safety of Treasuries today.  Overnight, the People’s Bank of China allowed the yuan to fall the most since its August devaluation to a 4.5 year low.  The PBoC posted an editorial stating the yuan would be better measured using a basket of currencies as opposed to solely pegged to the dollar.  There is no set timetable for a permanent shift in methodology, but the editorial was enough to catch the attention of market participants concerned with the implications of such a move.

Oil continued its freefall with oversupply concerns dragging down crude prices to new 7-year lows.  The International Energy Agency said the global oil surplus will remain in effect into late 2016 as demand slows and OPEC continues to show “renewed determination” to maximize output regardless of market prices.  The Saudi-led strategy of maintaining consistent production appears to be forcing the hand of non-OPEC suppliers to cut back production at the fastest pace since 1992.  Despite the forecast production cuts, inventories are still expected to rise further once Iran restores production after the nuclear program sanctions are lifted.

The US data calendar today was robust, but largely overshadowed by emerging markets and oil.  The outlook for consumer spending improved after core retail sales increased 0.6% in November after gaining 0.2% in October.  Additionally, the University of Michigan’s consumer sentiment index rose to 91.8 from a reading of 91.3 in November.  A boost in retail sales and increase in consumer sentiment bodes well for consumer spending in the 4th quarter data.  T minus 2 ½ trading days till Fed lift off?  Have a great weekend.