The US could be facing some heat due to the Oil bears and the Chinese economy!


The US could be facing some heat due to the Oil bears and the Chinese economy!

This week, markets had to endure Midterm elections and the FOMC meeting. Into Tuesdays votes, equity indices caught somewhat of a big as treasury yield stayed high. The expectations of these elections were that the House turns blue, which did happen. Causing a rally in equities late night. All of this while Trump’s Republicans gained more seats in the Senate. There was a slight risk on appeal in markets after into mid late week. This was off talk of continued deregulation and infrastructure expansion expectations.
The House turning blue placed possibility of a cease in tax stimulus, which could potentially make the Fed hold back on some further hikes that are priced in for the upcoming year.
The FOMC meeting minutes were on Thursday, just two days after the midterm elections. Ultimately the tone was pretty hawkish, and nothing had really changed, according to Powell. There was strong evidence that rates would hike in December and in March. Bond yields grew slightly.

Friday, Treasury yields fell along with stock markets, particularly Nasdaq and the Russel 2000. Emerging markets took a hit as well this week as there are reports that new Mexican President will press congress to collect banking industry profits. This will be done when he takes control in December.

Oil prices continues to decline as this marks their 10th straight day. The oil market is officially in a bear market as prices have dropped over 20%. This is the lowest level in oil since March of 2018. Prices hover under $60.00 per barrel. There is a OPEC monitoring committee meeting set for this weekend which should bring in more volatility to oil markets in the coming week. Equities ended the week positive after a tough October. The rally into the midterm elections helped the equity indices hold gains that we’re disturbed this Friday.

Here is a look of last week’s stock market on a daily basis (red vertical lines split days).

Stock Market and Sector Overview

Here is a break down of the weekly performance in various stock market sectors (top chart):

  • Energy stocks down 1.56%
  • Technology down 1.21%
  • Financials up 0.22%
  • Retail up 0.58%
  • Utilities up 3.18%

Overview of key markets last week (bottom chart):

  • Crude oil down 4.60%
  • S&P500 up 0.53%
  • Silver was down 5.05%
  • Gold down 2.51%
  • US dollar up 1.09%

Oil’s bear market spells bad news.. for the US!

It’s almost unavoidable, its everywhere. Oil prices crashing! The oil market enters a bear market and has a record losing streak. Dropping 10 days in a row to 8-month lows. The Saudis will not be happy about this…

The October 3rd peak is now something so far in the rear-view mirror that it just looks like a spec of dust. Since then, WTI futures have dropped a near 25% (23%).

It looks like Trump could be a little happier, as he was raving about artificially high oil prices not too long ago. Since then, many things have happened in oil. Iran sanctions, the Iran deal getting burned and even the US granting waivers to 8 of Iran’s largest oil buyers. (China, Indian, Japan, Greece, South Kora, Turkey, Italy and Taiwan).

Before there was fears, fear of low supply and too high of demand in oil. Saudi Arabia went as far as to say that they would take over all of Iran’s production. But now that the supply risk is over, the crude shorts have come out in abundance. The US being a huge producer, bigger than Russia and even Saudi Arabia. Having increased output to over 11 million barrels per day.

Looking at the chart below:

This is a daily chart on Oil Futures, in which we are on a great downtrend. The bear market came out hard as we are down over 20% from the peak. We have come into support that was printed in March 2018 at the $60.00. This is struggling to hold, if a break happens, the next longer term support is at $58.00.

Oil Futures on a daily.

We’ve noticed a few things we wanted to share.

The Chart below represents the ES Futures in green in relation to Oil Futures in dark red.

S&P Futures vs Oil Futures

What could this mean for US equities?

There is a correlation between WTI crude oil and the S&P 500, not a +1 correlation but something of sort, a near +1 if you will. As you will notice on the chart below. There is a significant divergence currently between the two. There could be some kind of signal here, sent from crude to equities. We are coming into the “Santa Claus” rally season where we could see some bullishness in US markets going into the new year. But the bearishness might not be over, the past rally we had this week could have just been a retrace for a larger move down.

 

The Chinese Economy could spell disaster for the US.

The Chinese economy has been the center of attention for a while now in recent months, and some have gone as far as to say that economic turmoil is evident. A potential Chinese recession could be imminent.

China has been growing exponentially, and the country has been harboring huge economic leverage which will probably turn into a growth recession. This doesn’t just begin and end in China but will undoubtedly affect the rest of the world. Sparking financial turmoil in the US as well. Or so the IMF says. “pain will be more regionally concentrated and confined than would be the case for a deep recession in the United States”

China’s economic slowdown will share the international capital markets. This will lead to a spread through Asia, which can cause increased real interest rates throughout the world. There could be a huge drawn down of central bank reserves. The increase in interest rates throughout the world is much worse than a slow in Chinese exports, even though both are quite terrible.

How could this effect the US and their trillion-dollar deficit? Glad you asked. If raise would sky rocket due to this Chinese financial crisis, this could “cause debt service to crowd out needed expenditure areas”. Not to mention the trade war that Trump keeps pressing, which could help in the US’ potential downfall.

Not to mention, a potential housing bubble forming in China? How is this even possible, a growing middle class, a massive population, there is no way? Right? Wrong. In China, unlike the US, the ultimate confidence boosting barometer is housing! About 75% of household assets are in real estate in China. While the number is just under 30% in the US with the rest in financial assets.

Image result for chinese housing market 2018

Chinese project development continues.

China has yet to experience a large decline in housing prices, but the time-bomb is ticking. That is because almost a quarter of urban housing in China is not occupied! There are about 50 million empty newly built apartments in China that are uninhabited. This is just parked cash, with undeveloped living areas. (Says Bloomberg) There are so many empty apartments because this keeps supply low, which drives prices higher. (inventory is taken off the market).

Retrospectively, a Chinese economic downturn will undoubtedly affect the rest of the world, with the US in range.

Weekly Economic Calendar

We’ve got a modestly news heavy week ahead of us. There aren’t many high impact events out of the United States. The ones that are present this week will have high impact on US equities as they are both Fed Chair Powell events.
Monday, Veterans day in the US, no major news.
Tuesday, Averages earnings Index out of the UK and Wage Price Index out of Australia.
Wednesday, CPI numbers out of the UK and US in the morning and Fed Chair Powell in the evening, which could move some of the Asian session. Later in the evening there are employment numbers out of Australia.
Thursday, Retail numbers out of the UK and US in the morning. Followed by Fed Chair Powell’s speech just before noon EST.
Friday, one high impact event out of Europe. Which should be watched carefully, keep eyes on the Euro as ECB president Draghi speaks.
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That’s all for this week, good luck and good trading. Manage your risk and trade like a TRADEPRO.

 

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