Oil Price Weakness, Dollar Strength, and the State of the UK Economy
It’s a Happy Easter for the GBP
Crude oil prices plunged leading into the Easter weekend on Thursday, 24 March 2016. The price of WTI crude oil closed 0.83% lower (- $0.33) at $39.46 on the NYMEX, while Brent crude oil closed 0.07% lower (- $0.03) at $40.44 on the ICE exchange. The negative sentiment surrounding crude oil prices is directly attributed to the geopolitical uncertainty as a result of the twin terror attacks in Brussels, increasing US inventory levels, and a stronger USD. The US dollar index is currently at 96.13, up 0.09% (+ $0.09). A stronger US dollar means that dollar-denominated commodities such as crude oil, gold, platinum, copper and iron ore will be relatively more expensive to traders around the world. As a result, demand decreases and prices decline.
Leading into the afternoon trading session on Thursday, 24 March, crude oil plunged 2.2%, with Brent crude oil reaching as low as $39.20 per barrel. A big part of the reason why crude oil prices declined was the release of data by the US government showing that inventory levels had reached 9.4 million barrels on Friday, 18 March 2016. This was a shock announcement for pundits who were expecting three times less than that figure. There is mixed opinion about the upcoming decision between OPEC/non-OPEC member countries about an agreement on capping crude oil production at January levels. Since the vast majority of countries attending the summit are unable to raise production capacity besides for Saudi Arabia, it is a moot point.
Performance of Major Averages Leading into the Long Weekend
The US dollar index enjoyed 6 successive days of gains by Friday, 26 March 2016. This is the clearest such indicator that sentiment has swayed in favour of the greenback as weakness in the euro zone and Japan pervades the markets. However, the turnaround with the USD is contingent upon whether the Fed decides to act by raising interest rates in April. Otherwise, the short-term rally with the USD will be pyrrhic in nature. Here are some of the closing levels of the major US averages and European averages. The Dow Jones Industrial Average is currently trading at 17,515.73 for a gain of 0.08%. The S&P 500 index shed 0.04% to close at 2,035.94, while the NASDAQ composite index gained 0.10% to close at 4,773.51. Overall, the major averages on the US show 2-day declines. In Europe, the FTSE 100 index was trading 1.49% lower at 6,106.48, the German DAX was trading 1.71% lower at 9,851.35 and the CAC 40 index was trading 2.13% lower at 4,329.68.
Winners and Losers in the Lead-Up to the Long Weekend
Boeing shed 1.6% and Goldman Sachs lost 1.9% going into the long weekend. In the aftermath of the terror attacks, airline stocks and travel company stocks temporarily lost ground. However, by the end of the day and towards the end of the previous week they recovered. On Wednesday, 30 March, new economic data will be available vis-à-vis crude oil inventories, and this will give direction to markets that are anxiety-ridden at the moment.