Market commentary: Oil, inflation and the Chinese PMI

Equity markets across the globe recorded a negative day last Friday, closing the last day of January in negative territory. European Markets edged lower on renewed concerns over Greece and its ability to navigate a still rather precarious economic equilibrium, with the new anti-austerity government already proving its inexperience in addressing global markets and international counterparties.

On the other side of the Atlantic, disappointing economic data, among which, slower than expected GDP growth, and disappointing corporate earnings pushed US stocks deep in the red on the last trading session of the month.

Overnight, Asian markets recorded a mixed session with Australian and New Zealand markets posting gains while the large majority of remaining Asian’s exchanges closed in negative territory.

The major new opening the week is Germany’s Inflation numbers that show how prices in the largest European economy turned negative, reporting a 0.5% decline from a year earlier, to the lowest rate since 2009. This took place less than two weeks after the ECB formally committed to inject over EUR 1.1 trillion into the economy through purchases of Government Bonds, Asset-backed securities and other assets.

The early markets’ euphoric reaction to Mario Draghi’s announcement has partially been fading away on concerns that any real benefit from a weaker Euro and the actual implementation of QE will most likely be reflected in the economy only in the second half of the year. With the official European Inflation data scheduled for release this Friday, economists are forecasting that the Euro Zone’s inflation will continue to fall at least over the first two quarters of 2015.

In such an environment, highly rated government bonds are witnessing large inflows that led yields from Australia to Germany to US touching multi-year lows, with investors buying these securities that better preserve the purchasing power of their fixed payments in low inflation cycles.

Over the weekend, Chinese PMI data also disappointed, coming at 49.8, below the 50 level indicating a contraction compared to the previous month, and well below the forecasted 50.3.

This news is reinforcing analysts’ view that the recently approved fiscal and monetary measures will prove insufficient and that the Chinese Government will be forced to take further steps, including a possible further interest rate cut. Such concerns will be likely to add downside pressure on equities, while markets are starting to price in the fact that China’s growth target, this year, may be lowered to 7% from last year 7.5% benchmark.

The oil saga has seen a new twist with The United Steelworkers Union, the largest union representing workers in the refinery industry, has called for a walkout strike over the weekend. This came after the union failed to find common grounds in the National Contract’s renewal negotiations conducted with Royal Dutch Shell Plc, representing the Oil and Refining producers.

Experts say that this strike, the first since 1980, could take off line as much as 10% of the entire US refining capacity and it will surely add on volatility and uncertainty around this commodity. This comes after last Friday oil’s price jump of 8.3%, the biggest one-day advance in over 2 and half years.

In electronic trading news, the commodity lost 3.3% on Sunday and it is poised for further drops during the week. Volatility is still the name of the game when it comes to oil, and with some major producers due to report this week, investors will be closely watching whether the pain related to the recent plunges in oil price is being overweighed by an increase in consumers’ spending, driven by Americans having been benefiting by substantial cuts in the gasoline and gas prices throughout the last 6 months.

Finally, this is going to be a rather busy earnings week, with some major names reporting across several sectors such as ExxonMobile, the largest oil producer, Walt Disney Co., Gilead Science, the 2014 biotech rising star and two important consumer discretional brands: Yum Brands Inc and General Motors.

This article was issued by Paolo Zonno Trader/Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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