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Trader Talk is produced by a team of active traders, analysts and various derivatives professionals from multiple organisations. Trader Talk provides comment on equities, commodities, and other financial instruments based on both technical and fundamental analysis.
Global economic outlook to weigh on oil
A glance at the above chart of the FTSE 100 illustrates the volatile rollercoaster conditions that continue to persist in the market.
The heightened confidence felt from last week’s highly anticipated Eurozone debt agreement began to rapidly unravel as the threat of a Greek exit from the region returned to the forefront. George Papendreou, Greece’s Prime Minister, triggered a sharp rise in risk aversion after announcing earlier in the week that Greece would hold a national referendum on the new bail-out plan. A move that threatened to undermine the very purpose the last month of intense political debate aimed to resolve.
The news angered other EU politicians, causing French President Nicolas Sarkozy and German Chancellor Angela Merkel to delay the next scheduled €8 billion aid tranche it desperately needs to avoid default until the referendum had passed.
Should Greek people vote against remaining in the currency block, the EU/IMF support would cease, plunging Greece into disorderly default that would resound across global financial markets, compromising other precarious economies like Spain and Italy.
Fears about contagion to Italy have already sent Italian Government bond prices sharply lower and pushed the spread on the country’s ten year debt over the equivalent German Bunds to fresh Euro-era highs.
Concerns about the global climate were also reflected by a series of manufacturing reports. European purchasing managers index, an indicator of the economic health of the manufacturing sector, continued to weaken to 47.1 in October from 48.5 in September, considerably below the 50-level that separates contraction from expansion. German manufacturing, one of the main drivers behind the previous recovery in Europe, contracted for the first time since September 2009 and activity in Italy tumbled to its lowest level since June 2009.
In China, the PMI retreated to 50.4 last month from 51.2 in September, defying expectations for a rise and denoting its lowest level since February 2009. US manufacturing growth also unexpectedly slowed in October, as the sector was hit by global uncertainty.
Domestic data showed Britain’s manufacturing sector contracted at its fastest pace in more than two years in October, as new orders plummeted, heightening concerns that the economy is heading back into recession. The services PMI also grew more slowly than expected last month, despite companies lowering their prices in order to attract business.
On Thursday, the European Central Bank reacted to the escalating crisis by cutting interest rates at the November meeting. The decision to lower the headline rate from 1.5% to 1.25% was unexpected and came despite inflation remaining at a three year high of 3% last month, but offered another lifeline of support to the faltering region.
Meanwhile, on a corporate front the bankruptcy of MF Global, a leading cash and derivatives broker-dealer based in the US, was seen as another casualty of the European debt crisis. It marked the eighth-largest ever US bankruptcy, caused after a series of aggressive bets on European sovereign debt resulted in a slew of losses for the company, further eroding investor confidence in financial markets.
Technical analysis shows the sharp move lower of over 400 points in three trading sessions, followed by an immediate 200 point bounce as the volatility intensifies. Support was found at 5405 from the 50-day moving average, with additional support seen at 5300 and 5090.
The oscillators are all trending lower, with the MACD histogram stepping into negative territory, indicating a period of further weakness ahead. A snap back above 5750 would however negate this view and given the current climate should not be ruled out.
In conclusion, news from Greece has undermined European politician’s recent efforts to contain the debt-crisis, which combined with disappointing global economic data, has triggered a fresh wave of risk aversion. The uncertainty combined with the technical picture suggests a period of further downward pressure on equities, but all eyes should be on Greece for further developments.
At its November meeting, the US Federal Reserve slashed its forecast for US growth and increased its expectation for unemployment next year. Projected growth estimates were cut to only 1.6% to 1.7% this year and 2.5% to 2.9% in 2012, around 1% lower than previously expected. Despite this apparent slowdown, the Fed voted to keep interest rates on hold and maintain its bond-buying programme that was announced last month.
In light of the weak manufacturing reports and deteriorating macro-economic backdrop in several economies, I have been focussing on short-term trades that may benefit from a further waning in demand. The US is the biggest consumer of oil in the world, using around 22 million barrels of oil per day, representing over 22% of the world’s daily consumption.
The above chart of Brent Crude Oil highlights the clear downward channel the price has been following for the past eight months.
Since early October, an improvement in the general market has helped Brent gain over 13%, driving it to within close proximity of the upper-band of the channel at $11235, where significant resistance is likely to be encountered. The MACD histogram is also stepping lower into negative territory, indicating a new downward trend could be imminent.
Brent Crude Oil prices are likely to be capped by on-going uncertainty in the global economy, which given the developments this week, I don’t believe will be resolved anytime soon. The risks remain heavily skewed to the downside and with a stop-loss marginally above the upper-band of the channel at $11362, the risk / reward bias of opening a short trade appears favourable.
At the time of writing Brent Crude Oil is standing at $11185 and short-term targets are seen at $10820, $10445 and $9610.
This report was written by Mark Allen – Head of Derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Brent Crude, but client accounts may. The material in this report has come from Simply Charts and Brent Crude’s corporate website.
