Daily Market Color

Supply Concerns Continue to Put Pressure on Crude

Volatile oil prices continued to be a prevailing theme with equities, Treasuries, and the dollar all seeming to be responding more to oil price volatility than their own fundamentals.  Equities opened higher with merger talks between Dow Chemical and DuPont a key highlight, before turning negative with crude prices, while Treasury yields and swap rates had been 2 – 4 basis points higher, with pressure from both corporate ($15 billion Visa deal) and government ($21 billion 10-year auction) supply.

Markets also continued to closely watch the health of China’s economy and the impact of the world’s second largest economy on global growth.  News overnight included Chinese CPI beating estimates (1.5%a vs. 1.4%e) while the Yuan set at its lowest fixing since 2011.  U.S. data released this morning showed a decline in wholesale inventories for the month of October, which indicates inventories could be a drag on Q4 GDP.  September inventories were also revised down to a 0.2% increase versus the 0.5% gain previously reported.  Inventories are said to have subtracted roughly 0.5% from the GDP growth reported in the third quarter.

While oil prices and growth concerns in China have dominated trading so far this week, attention is expected to shift focus to next week’s FOMC meeting.  Trading in Fed Fund futures currently indicates an 80% chance of a rate hike next Wednesday, and anything other than a 25 basis point hike accompanied by non-committal future rate increase talk, would likely cause significant market reaction and readjustment.

 

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