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Hot Topic NBR Focus: GMO
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World Week Ahead: Volatility ever present

Traders see oil dropping further

Margaret Dietz
Mon, 21 Dec 2015

Investors will eye a report on US gross domestic product in a holiday-shortened week, while the continuing slide in the price of oil is boosting the potential for some pre-Christmas volatility.

Oil has fallen for three weeks and the end might not yet be in sight, dampening sentiment in equity markets around the world.

"The world economy is slowing and China has taken some of the oil demand off the table so you've seen a huge wipe out in commodity stocks," Bernie Williams, chief investment officer at San Antonio-based USAA Federal Savings Bank, told Bloomberg.

"Investors are wondering if this is really indicative of slowing economy or if there is something deeper here."

Oil dropped on Friday after a report showed that the number of active oil rigs in the US increased last week. US inventories have been taxing storage options for months.

West Texas Intermediate fell as low as $US34.29 a barrel on Friday, the lowest since February 2009, while Brent touched $US36.41, closing in on its 2004 low.

"I'm quietly waiting for a bigger covering bounce that will presage the next leg lower in WTI," Tariq Zahir, a trader in crude oil spreads at New York's Tyche Capital Advisors, told Reuters. He was betting on a price of US$30, or lower.

Noted hedge fund manager and oil trader Pierre Andurand says he sees prices falling as low as $US25 a barrel, perhaps lower, in the first quarter of 2016.

Last week, the Dow Jones Industrial Average fell 0.8%, the Standard & Poor's 500 Index declined 0.3%, while the Nasdaq Composite Index slipped 0.2%.

Four further Fed increases in 2016?
Financial markets will shut early on Thursday, while they are closed on Friday. Trading in New York will resume the following Monday.

A widely anticipated US Federal Reserve interest rate increase, announced last Wednesday, was accompanied by chairwoman Janet Yellen's comments that the path to subsequent hikes will be gradual.

The US dollar strengthened 1.1% versus the euro last week.

On Friday, Richmond Fed President Jeffrey Lacker told reporters that he defined gradual as four similar 25 basis point increases in 2016, which he said would represent half the pace rates were lifted in the previous tightening cycle.

While the Fed's move brought a sigh of relief, questions remain about the global impact.

"It's a confluence of all the factors: oil prices continuing to run down, the Chinese trying to counteract the dollar and everyone is digesting, globally, what the Fed's announcement means for emerging markets and everything else," JJ Feldman, portfolio manager at Miracle Mile Advisors in Los Angeles, told Reuters.

On Tuesday a report is expected to show the US economy grew at a 1.9% annualised pace in the third quarter, according to a Bloomberg survey. It's the final estimate for GDP in that quarter.

Other US data scheduled for release in the coming days include the Chicago Fed national activity index, due today; FHFA house price index, corporate profits, and the Richmond Fed manufacturing index, due Tuesday; durable goods orders, new home sales, and consumer sentiment, due Wednesday; and weekly jobless claims, due Thursday.

For the most part, in the US and elsewhere, there are no major market moving data reports scheduled to be released until the first week of January.

The resilience of the American economy stands in contrast to that of the world economy, which has bolstered the appeal of US Treasuries.

"The result of uncertainty is a better bid for Treasuries," David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors, told Bloomberg. "There's still global economic weakness, and pressure on oil and equities" as well as expectations the Fed will take a gradual approach.

In Europe, the Stoxx 600 Index fell 1% last Friday, lowering its gain for the week to 1.5%.


Margaret Dietz
Mon, 21 Dec 2015
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World Week Ahead: Volatility ever present