Today saw a heavy risk-off day, that started with a round of global weaker economic data, and headlines from Trichet talking about the dangers to the financial system posed by the risk of banks suffering as a result of their debt holdings. From Bloomberg: “European Central Bank President Jean-Claude Trichet said risk signals for financial stability in the euro area are flashing “red” as the debt crisis threatens to infect banks. “On a personal basis I would say ‘yes, it is red’,” Trichet said late yesterday in Frankfurt after a meeting of the European Systemic Risk Board, referring to the group’s planned “dashboard” to monitor risks. “The message of the board is that” the link between debt problems and banks “is the most serious threat to financial stability in the European Union.” Trichet, who chairs the ESRB, made the remarks as European leaders meet in Brussels to discuss how to stave off a Greek default, while preparing a second bailout. The EU is trying to avoid a repeat of the financial crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc. (LEHMQ) and resulted in European governments setting aside more than $5 trillion to support banks.” As we came into NY trading, on top of Greece bailout talks being discussed in during the EU Summit, the effects of Bernanke’s performance yesterday, we had one more surprise that took financial markets for a loop. And that was the very heavy drop in oil prices today as the US administration said it would release some 30 million barrels of oil from its Strategic Petroleum Reserve to help cope with the reduction in oil in global markets as a result of the war in Libya. From Marketwatch: “Crude futures slumped Thursday after the International Energy Agency said it will release 60 million barrels of oil into world markets in the coming month to counteract lost production in Libya. Crude for August delivery dropped $4.54, or 4.8%, to $90.87 a barrel on the New York Mercantile Exchange. It traded as low as $89.69 a barrel earlier. “We are taking this action in response to the ongoing loss of crude oil due to supply disruptions in Libya and other countries and their impact on the global economic recovery,” U.S. Energy Secretary Steven Chu said in a statement. “As we move forward, we will continue to monitor the situation and stand ready to take additional steps if necessary.” The IEA estimated that the civil war in Libya had removed 132 million barrels of light, sweet crude oil from the market by the end of May. Let’s have a look at a daily chart of Brent Crude: As we can see, brent crude took a stumble after Saudi Arabia agreed to increase its production of oil, despite OPEC not agreeing to such a move in unison. From a high near $127 in early April (at the height of the Libyan crisis) we have now moved back down near the early May lows of $105. Price has made a pretty clear break of the medium term 55-ema as well as an upward sloping trendline. The RSI points to loss of momentum, as does the MACD. Key support here will be at the long term 200-ema which is approaching the $105 pivot mentioned previously. Lower oil prices should ease the pressure on inflation in Europe and globally and also give consumers a break on their gas bills. However, part of the reason for weaker oil is that forecasts for global growth are being revised downward amidst strong headwinds. Let’s have a look at the alternative oil price – the “North American” WTI oil chart: First off we see the disparity in prices between the two, as WTI crude never got near the highs we saw in Brent crude. WTI oil had been trading in a range between $103.20 and $95 during the past month and a half, before breaking that range last week. We now retested our old level of support as resistance and with today’s fundamental development that resistance held and oil prices fell down quite sharply. Let’s see if oil can hold below that $95 level in the coming week and weeks, especially if we have more evidence of malaise in the US economy. The sharp drop in oil prices hit US stock markets which were already under strain after the FOMC had lowered its growth forecasts for this year and next, while increasing its forecasts for the unemployment rate. Also, because of a pick up in inflation, and the lack of a threat of deflation from current data, the Fed made it clear that there is a high hurdle for more quantitative easing. That caused unease in equities which saw a sharp fall, extended the decline started yesterday. Here we take a look at the S&P 500: The S&P shed all of its gains from the rally to start the week and we see that risk aversion was back in full force since Bernanke made his press conference. Mid-day we did see some rebound, with the index paring about half of its losses, but this looked more like a short term correction than the start of a new rally. This action in equities helped spur much of risk-off trading we saw in currencies, with the Yen one of the chief benefactors, as well as the USD. Gold was sold off as well, as the USD was stronger, and a drop in oil prices can mean lower overall global inflation which takes some of the inflation hedge out of the price of gold. However, because of the overall uncertainty around government debt and financial stability gold will be bought on dips by those that want a store of wealth that is not tied to fiat currencies. See today’s Technical Update: Gold and Silver Sliding Precipitously Also playing a role, often when stocks are falling sharply then hedge funds would have to liquidate profitable gold positions in order to make margin calls in other markets like equities. There were reports of this happening today. From ForexLive: “Traders report a big fund is liquidating a big gold position. One wonders whether it is John Paulson, the guy who made billions by betting on the housing bubble. He had amassed a huge gold position but recently suffered a high-profile setback when an investment in Sino-Forest went sour. Often times in the fund management game, winners are sold to make up for losers in other markets….: Falling commodities and stocks may be something we see more of if the Fed holds true to not resort to more easing. We should recall that its stocks and commodities which have seen a lot of the benefit from the program and has even been stated by Bernanke several times as part of the beneficial effects of the program. This week’s events could be an important turning point in the fundamental bias of financial markets. The old game of borrowing USD and buying higher yielders and commodities may not be as easy to perform if no more QE coincides with weaker global growth. Therefore we may want to look to the commodity bloc of currencies – AUD, CAD, NZD – with some scrutiny going forward. Lower oil means less export dollars for Canada, and less demand to convert to CAD in order to buy its oil. See Today’s Technical Update: USD/CAD Remains in a Choppy Uptrend For AUD gold has been near record highs recently, but AUD has been trading sideways. That disconnect is interesting and suggests some weakness in AUD. For Aussie prices of coal and iron ore are just as important as that is the raw material it ships to China. A soft manufacturing PMI from China adds a negative fundamental factor to AUD. If the risk aversion from the middle of this week turns out to be more the norm then we can try and look to short these currencies against the safe havens – USD, JPY, and CHF. The USD overall can see some renewed strength in such a scenario, considering it has now moved from a loose monetary policy with easing to a neutral loose monetary policy. Therefore at the end of June we take one negative fundamental factors away from the USD.

Source