Thursday, June 21, 2012

Today's Major Market Move: Brent Crude Drops 2.4% in Thursday's Session

Thursday was rough day for inflation correlated assets with the majority of equity indexes in the red (254 out of the 312 that we track) and commodities getting hard as well, particularly energy and precious metals. Brent Crude dropped 2.4% on the day and has now broken through the 2011 lows. Brent was trading at $126/barrel back in mid-March but since then has seen a remarkable 29% decline. Here's the line chart going back to the beginning of 2011:

Click here to go to the chart.
The market is expressing a lot of faith that the Germans are going to be able to hold the ECB at bay. Yes, the Euro has weakened against the Dollar in 2012 but only to the tune of 2.7%, just a small portion of the decline seen in oil prices. Here's the USDEUR cross alongside Brent front month futures contracts in % terms starting at the beginning of 2012:

Click here to go to the live chart.
The market displayed some disappointment at the Fed announcement yesterday when US equities closed in the red. Many participants were hoping for more aggressive action beyond the mere extension of 'Operation Twist'. If US equities were to move aggressively southward and WTI remains below $90 / barrel, we feel safe in predicting further market intervention by the Federal Reserve. However in the near term most eyes will continue to be focused on Europe and the ECB. With the recent drop in oil prices, the anti-inflationist stance by the Germans will become even harder to maintain. We would not be surprised to hear the announcement of some type of major liquidity program out of the ECB before the end of the month.

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