Perspective: Morning Commentary, 01/20/2016

Wednesday, January 20, 2016

January 20 – The crisis of confidence continues to play out in the markets this morning, with Dow futures currently projecting another session of heavy losses, although well off their lows. A global sell-off was seen overnight as traders worry about the future of the world economy, with the primary focus on crude oil prices. Global production is strong and investors worry that there will not be enough demand to consume it as the world’s economy sputters. Thus far, traders chasing this market lower have not seen anything to prove that sentiment wrong. West Texas Intermediate traded down to $27.32 per barrel early in today’s session and continues to hover below $28 per barrel.

The market is doing its job. It’s the job of the marketplace to stimulate demand during times when confidence in the economy is lacking. That means lower prices to create economic activity. Money is flowing to government securities as well, with interest rates pushing lower, once again to stimulate economic activity. Eventually, the market-induced stimulus will work and the economic engine will thrive again, but that day does not appear to be today.

To be sure, there are signs of economic growth. China’s 6.9% growth is the slowest in 25 years. In reality, it’s probably less than 4%. Yet, it is growth. Yes, China has significant debt and structural issues to work through, but its economy is growing. The U.S. economy continues to “feel” like it is in a recession, but it is seeing growth.

One of the fears in the marketplace is that the major economies of the world cannot survive without a steady flow of intravenous stimulus from their central banks. That stimulus has carried us since the Great Recession and fears are rising now that the Fed has started to slow the flow. Central banks convinced the world that they could save it, but now must convince it that growth can continue without it. But does the economy have unfinished business to correct areas of poor efficiencies that central banks simply prevented it from doing until this point? Therein lies the crisis of confidence currently in the markets.

Data released this morning showed that housing starts totaled 1.149 million in December, down from 1.179 million the previous month and down from market expectations of 1.200 million units. New permits totaled 1.232 million, down from 1.282 million the previous month, but up from expectations of 1.217 million. The consumer price index dropped 0.1% in December, falling short of steady the previous month and expectations of steady for the current month. The CPI was up 0.7% year-on-year, up from 0.5% previously. The core CPI that removes food and energy was up 0.1% on the month and up 2.1% year-on-year.

The Putin watch continues this morning as falling crude oil prices squeeze revenues for Russia and other emerging nations dependent on the black gold for paying their bills. The ruble fell to a new all-time low of 81.1 to the dollar. It is down 10.7% for the month and year so far, down 30.9% for the past three months and down 41.6% over the past six months. Declining revenues and a tumbling ruble make life more difficult for President Putin at home. Historically, he’s had a tendency to initiate military action during such times to boost his popularity at home. In fact, several key oil-producing nations face problems at home. It may cost less than $10 per barrel to pump the oil, but the costs of their social programs in many cases are likely above $40 per barrel. The stakes are even higher, considering that some of these factions are in a proxy war with one another.

The “recovery” in the grains is taking a pause this morning, considering the uncertainty in the outside markets. The markets would like to emphasize increased risk with El Nino waning in 2016, but the outside markets remain a bearish cloud over them.

Unless otherwise noted, the posts on this blog should be construed as market commentary, merely observing economic, political and/or market conditions, and not intended to refer to any particular trading strategy, promotional element or quality of service provided by INTL FCStone Inc. or its subsidiaries. INTL FCStone Inc. is not responsible for any trading decisions taken by persons viewing this material. Information contained herein was obtained from sources believed to be reliable, but is not guaranteed as to its accuracy. These materials represent the opinions and viewpoints of the author, and do not necessarily reflect the viewpoints and trading strategies employed by INTL FCStone Inc. or its subsidiaries. Reproduction without authorization is prohibited. All rights reserved.

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