Look No Further Than Oil, The Fed, And Summer Malaise

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Crude oil right now reminds us of those apocalyptic movies where an asteroid hurtles toward Earth and everyone watches as it grows bigger and bigger while a countdown to doomsday pops up on every television screen from Siberia to South Florida. Moreover, the general populace engages in antic behavior ranging from screaming at the neighbors to promiscuous sex.

West Texas Intermediate is hurtling alright – and ready to smash to smithereens the $40 per barrel barrier. (Whether it happens today, tomorrow or sometime next week is somewhat immaterial. There may be a few breathers along the way before the $40 level crumbles.)

Brent North Sea, the world benchmark price, is trailing its American brother very, very closely and should fall into the sub-$45 range any day itself.

The WTI pricing fall is exerting a powerful influence on the Dow in particular, but is also ruffling the S&P 500 and collaterally the NASDAQ. It is worth noting again that the Dow is comprised of about 18% energy or energy-related stocks. So, the downward pull of plummeting oil prices upon the Dow is very intense.

Oil has lost about 1/3rd of its value since June due to high U.S. production, record crude pumping in the Middle East (Saudi Arabia was still increasing its output as of July) and concern about falling demand in Asian economies. The Asia situation is particularly troubling for oil because it seems as if China has slashed its importation drastically.

“All main oil futures contracts look to be heading lower,” PVM Oil Associates director and technical analyst Robin Bieber said.

"The trend is down and vicious," Bieber said in a note to clients of the London brokerage firm.

The free fall has brought up a scary word: panic. While the chances of a paper panic liquidation are still well below 50%, the fear factor has been steadily creeping up. It could happen if WTI hits $30.

On to the Fed and gold…

Gold is being supported by the perception – found in the latest FOMC minutes and stagnant inflation data released yesterday in the U.S. – the Fed will not raise rates in September. Short term, that is excellent for gold, although at some point, markets will focus on December as a “must raise” month and gold could fall precipitously.

That would stem mainly from a stronger dollar, which would find its vigor via higher interest rates.

There is continuing support for gold coming from the surprise devaluation of China’s currency, although the yuan effect is dimming a bit now. However, who know what the Chinese may do next? The currency manipulation certainly is adding to fear and thence to volatility. The volatility helps to return gold to its traditional role as a safe haven and store of value.

The performance of the Shanghai index underscores all the topics discussed above. It was down 3.4%. Shanghai helped to drag down Hong Kong about 1.8%. The Nikkei faired better but was also down.

“That summer malaise?” You ask. Local corners of the universe are subject to entropy, even financial markets. The last few weeks of summer – August in the northern climes – are slow, have murky weather and swamped by legions of decompressing traders, investors and analysts.

Fall is the new season. Get ready. Back to school means back to more intense trading.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer