Oil Price Rules Equities And May Be Ruling The Next Fed Meeting

The current relationship between the price of crude oil and pricing levels of world equities is more than confusing. It is particularly intense when it comes to American equities, which have many huge energy companies as components of their special index.

The Dow is particularly heavy in energy stocks. The S&P lists a large number of companies involved with oil or gas production. While NASDAQ is a bit of an outlier, state of the art technologies are required for almost everything that happens on the way to, right at, or beyond the oil patch.

Transportation, heavy equipment, hi-tech control systems, marketing, sales, and so forth all play a part in oil’s economic web.

So, at least for now, as oil goes, so goes Wall Street, the FTSE, the DAX or Hong Kong, Shanghai and Tokyo. 

What we are really looking for, however, is stability in pricing. Both Brent North Sea and West Texas Intermediate are up about 2.2% on the session. We wouldn’t bank on crude staying up. Fundamentally speaking we’re estimating that oil is headed to at least $25 per barrel before a turn around. It could go lower.

We have sketched out in prior fundamentals portions of the Gold Forecast how cheap oil is a benefit to so many other sectors. (More consumer disposable income is chief among them.)

On today’s news that oil was up and pulled equities along, go retreated drastically, down almost $18.00 and ounce in mid afternoon trading. Proportionally, silver was hit even harder, falling 2.5%. Platinum sank, but dear, hard-luck palladium was miraculously up about 0.4%.

Some of the depressed pricing in precious metals is due to a modest bit of dollar strength. Most of it is due to regular trading that viewed risk-on bets as a better idea than haven plays.

Another safe haven – U.S. Treasury bonds – saw yields rise and face cost drop. That indicates risk-on strategies.

Shanghai seemed unduly optimistic today about the prospects for its equities. We think traders are misguided and that the fall is will be extended. The Nikkei and Hang Sen seem to be in our corner on that view.

The Nikkei was particularly battered today, off by almost 2.7%. Hong Kong fared a little better.

We will soon hit two important events. In January we will begin to see more and more earnings report, which should help drive the stock markets. And, at the end of the month, the Fed will meet again (as in a cowboy movie).

Federal Reserve Bank of St. Louis President James Bullard, a voting member the FOMC, the Fed’s rate policymaking body, has been one of the most hawkish members in the last year or so.

Bullard sounded a more cautious note Thursday, however, stating unequivocally that the latest decline in oil prices may delay the return of inflation to the central bank’s 2.00% desired level.

“With renewed declines in crude oil prices in recent weeks, the associated decline in market-based inflation expectations measures is becoming worrisome,” Bullard, who votes on policy this year, said in a speech in Memphis.  

Ah yes, Goldilocks… inflation must run not too hot, not too cold, but rather, just right.  Wishing you as always, good trading,