DF: Crude, Gold Suffer Biggest Losses in Weeks as G20, European Troubles Weigh
Without a sense of exaggeration, crude plummeted on Friday. While technically this was only the largest percent decline since October 19th, its performance was made all the worse for the fact that the drop can be construed as a potential major reversal. After weeks of choppy advance (on a close-to-close basis, the market has only fallen two out of the past ten active trading days), the explosion in volatility and subsequent shift in direction paints a far more meaningful picture of the market. We could simply chalk the session’s performance up to risk aversion – certainly the benchmark equity indexes were on the lam. However, this would attribute the day’s move to the wrong catalyst and could subsequently guide us down the wrong path in analyzing the move from here.
To benchmark Friday’s performance, it is certainly important to reference the health of other risk-sensitive assets. The S&P 500 fell 1.2 percent on the day, high-yield currencies eased back and the Markit Liquid High-Yield Index dropped to its lowest level in over a month. However, these pullbacks were nowhere near as a severe as the 3.3 percent collapse in US oil prices. Aside from the basic concern over risk appetite, we note that Europe concerns are at the top of the chart for uncertainty. Through pure supply-and-demand concerns, the European 3Q GDP figures were weaker-than-expected across the board. For energy consumption, it was the 0.7 percent performance from Germany for the month that softened the tone. More important though is the discussion of financial crisis in the region. With growth numbers softening, the struggle the more troubled EU members are having with fighting deficits while supporting growth all while yields are surging to record highs is put under severe scrutiny. In fact, talk of an impending bailout for Ireland clearly escalates the issue and acts to recall crude’s reaction to the Greek crisis back in May. Should there be a second wave to this lasting fundamental problem , energy traders could be in for a frightening bout of volatility. This is made even more threatening considering the buildup in capital markets over the past few months was heavily based on speculative interests and leverage found in stimulus funds.
Aside from the troubles in Europe – and the financial implications it could potential hold for global growth – it is reasonable to be concerned that policy makers will attempt to kill speculative influence in the energy market. At the G20 Italian Prime Minister Silvio Berlusconi called on his fellow leaders to require investors put up 50 percent margin to trade oil futures. And, while this didn’t seem to gain traction, the recent change in margin for other futures means some level of change is not far-fetched. For trading activity, volume on the December contract rose 27 percent to 434,542 contracts; but open interest is quickly rolling over to January.
