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It's All About Oil as Falling Crude Leads Equities, Ruble Lower

Image: It's All About Oil as Falling Crude Leads Equities, Ruble Lower
(Dollar Photo Club)

Monday, 25 Jan 2016 07:57 AM

A slide in crude oil prices on continued Saudi investment in energy projects set the tone for financial markets in Europe as stocks and the currencies of exporters were dragged down, while havens, including gold and the Japanese yen, rallied.

U.S. crude fell after soaring 21 percent on Thursday and Friday in the biggest two-day rally since 2008. Stocks in Europe also halted two days of gains. Equity indexes in Dubai, Qatar and Saudi Arabia declined and the Russian ruble fell against all of its 31 major counterparts.

Even after last week’s recovery, crude has fallen about 16 percent this year amid brimming U.S. stockpiles and the prospect of additional Iranian exports volatility. Lower oil prices have amplified concern global growth is slowing as they also point to weaker industrial demand. With energy and commodity companies sliding, a measure of the correlation between global stocks and oil prices over the past 120 days has climbed to 0.5, the highest since 2013.

“The correlation between oil prices and equities has turned positive,” Erik Nielsen, chief global economist at UniCredit Bank AG, wrote in a report to clients on Sunday. It’s “wrong, and therefore temporary,” he wrote. “When oil prices drop, it reduces the transfer of income and wealth from oil-consuming countries, like Europe, to oil-producing regions, like the Middle East and Russia. Since the ‘winners’ in Europe have lower savings ratios than the ‘losers’ this is all good for growth.”

West Texas Intermediate oil slipped 3.5 percent to $31.07 a barrel at 11:47 a.m. in London, with the Stoxx Europe 600 Index 0.4 percent lower. The ruble traded down 2.3 percent and gold advanced as much as 0.8 percent.

Commodities

West Texas Intermediate dropped as much as 4.1 percent. Saudi Arabian Oil Co. is maintaining investment in oil and natural gas projects as it studies options to sell shares in its parent company and refining and chemical operations, Chairman Khalid Al-Falih said Monday. The state-run producer, known as Saudi Aramco, can sustain low oil prices for “a long, long time,” he told reporters in Riyadh.

Aramco, which supplies all of Saudi Arabia’s crude, pumped 10.25 million barrels a day in December, adding to a global supply glut as the Organization of Petroleum Exporting Countries effectively abandoned production limits to defend market share.

Gold advanced as investors weighed the prospects of the metal as a haven. Bullion for immediate delivery rose 0.7 percent to $1,105.99 an ounce, according to Bloomberg generic pricing. The metal climbed 0.8 percent last week as turmoil in global stocks renewed interest in the metal as a store of value.

Copper in London added 0.5 percent to $4,466.50 a metric ton, while nickel dropped 0.6 percent to $8,650 a ton.

Stocks

Total SA and BP Plc lost more than 2 percent on Monday, while Rio Tinto Group dropped 1.5 percent.

Banca Monte dei Paschi di Siena SpA pared a rally in the previous to sessions to 47 percent. Greece’s ASE Index climbed 0.9 percent after Standard & Poor’s upgraded the country to B- from CCC+, with a stable outlook.

Futures on the Standard & Poor’s 500 Index were 0.2 percent lower, mirroring moves in Europe after the open. The U.S. benchmark gauge climbed 1.4 percent last week. McDonald’s Corp., Kimberly-Clark Corp. and Halliburton Co. are among five companies from the index posting reports today.

Tyco International Plc surged 7.5 percent in early New York trading after people familiar with the matter said it’s discussing a deal with Johnson Controls Inc. that would combine their building-control businesses.

Currencies

The yen halted a two-day decline after Bank of Japan Governor Haruhiko Kuroda showed little appetite for an immediate expansion of stimulus as the central bank prepares to set policy this week.

Japan’s currency has gained versus all its 16 major counterparts since the start of the year as a China-led stock selloff and a tumble in oil prices spurred demand for haven assets. Hedge funds and other large speculators raised net bullish yen positions to the highest in almost four years last week. The BOJ is scheduled to meet Jan. 28-29 and announce its monetary-policy decision on Jan. 29.

Kuroda said in an interview on Jan. 22 in Davos, Switzerland, that “we don’t think the current market situation has been affecting corporate behavior unduly.”

The Canadian dollar and Mexico’s peso declined with the ruble as currencies of commodity producers fell with crude. South Korea’s won strengthened 0.5 percent before data forecast to show South Korea’s economic growth quickened.

Bonds

U.S. Treasuries rose for the first time in three days. The Federal Open Market Committee is set to announce its next rate decision on Jan. 27, though traders aren’t pricing in the probability of the next increase until September.

“We saw a pretty simultaneous slump in oil and equity futures,” said John Davies, an interest-rate strategist at Standard Chartered in London. “U.S. Treasury yields took the cue accordingly and the curve has bull flattened in response,” he said referring to longer-dated bond yields falling faster than those on shorter-maturity debt.

The 10-year note yield fell three basis points to 2.03 percent, according to Bloomberg Bond Trader data. The 30-year bond yield declined three basis points to 2.79 percent. The yield on 10-year German bonds was one basis point lower at 0.47 percent.

The cost of insuring investment-grade corporate debt was little changed, with the Markit iTraxx Europe Index of credit- default swaps holding at 93 basis points. The non-investment grade Markit iTraxx Europe Crossover Index rose one basis point to 372 basis points.

Emerging Markets

The MSCI Emerging Markets Index rose 0.9 percent. Benchmarks in Taiwan, Indonesia and the Philippines climbed more than 1 percent while shares in Russia and the Gulf fell with oil.

The Shanghai Composite Index advanced 0.8 percent and the Hang Seng China Enterprises Index of mainland shares in Hong Kong also climbed 0.8 percent. The Shanghai gauge, whose gyrations at the start of the year sparked the global selloff, ended up 1.3 percent on Friday as China signaled it would curb overcapacity in industries such as coal that have been dragging down economic growth.

China has lowered steel production by about 90 million tons “in recent years” and will push to cut a further 100 million to 150 million tons, while “strictly controlling” steel capacity increases and halting new coal mine approvals, according to a Sunday statement on the Chinese government’s website, citing a State Council meeting on Jan. 22 chaired by Premier Li Keqiang. No time line was mentioned.

The Bloomberg GCC 200 Index of equities in the Gulf slipping 0.5 percent. Benchmarks in Abu Dhabi and Dubai lost at least 0.8 percent.


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A slide in crude oil prices on continued Saudi investment in energy projects set the tone for financial markets in Europe as stocks and the currencies of exporters were dragged down, while havens, including gold and the Japanese yen, rallied.U.S. crude fell after soaring 21...
oil, crude, equities, markets
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2016-57-25
Monday, 25 Jan 2016 07:57 AM
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