Oil below $50 and potential Greece exit dominate markets
The first full week after the Christmas period started off with a bang yesterday as equity, currency and commodity markets all posted big moves, as fears surrounding the lower oil price and the political situation in Greece saw traders sell their assets.
WTI crude oil dropped below $50 a barrel for the first time since 2009 before rallying to trade slightly higher than that huge psychological figure. The start of 2014 saw oil prices at around the $105-per-barrel level, but 12 months on the picture could not be any different with the global economy continuing to worry that a lower oil price could hit the larger oil-producing nations.
During yesterday’s equity session European, US and Asian markets all fell sharply with oil and energy stocks leading the major bourses lower. The Dow ended lower by over 300 points with the Nikkei weaker by over 2.5%.
With the new year come the same old problems for global financial markets, with the supply glut and weaker demand for oil causing tumbling prices in both Brent and WTI crude oil. The lower prices could well be driving a lot of oil-producing nations into extremely tough economic times as the current price drops way below the cost price for these countries to extract the oil from the ground. With the likes of Russia and a lot of the Middle East needing oil prices between $105 – $90 to break even, you can see why a lot economies are struggling when the price is barely treading water at $50 a barrel.
Europe is the other major talking point in global markets this week and it feels like we have moved full circle on the eurozone crisis, as markets are again dominated by a potential exit from the euro by Greece. After years of political fighting and billions of euros in bailout money it could be that we are closer to a Greek exit than we have ever been, as the greatest power in the eurozone now sees Greece’s exit from the euro as a viable option for a sustainable and recovering eurozone. German Chancellor Angela Merkel has almost voiced her support for Greece’s exit after years of being totally against it, saying that she now believes the eurozone could cope with an exit.
With elections called for later this month, and populist parties opposed to further eurozone-led austerity measures leading the polls, it is almost a case of who will act first – will it be Greece’s people voting for no eurozone, or will the ECB blink first and call for the change?
Of course Greece isn’t the only story in Europe as the ECB continues its internal fight to see whether the economy needs a full round of government-bond-buying quantitative easing. Mario Draghi has been hinting since last April that QE is something that could be looked at, but over the last couple of weeks we have seen the strongest hints yet that stimulus will be added to the economy to try and boost growth and pull the ultra-low inflation number higher.
Wednesday will be a key day this week as the eurozone CPI reading is released. Obviously a lower oil price is going to affect this reading, but a poor number cannot be just brushed under the carpet due to lower energy prices. The German reading yesterday showed CPI at its lowest level in 5 years and a continued weakness, as is expected in Europe’s number on Wednesday, would be further proof that the full round of QE could be ready for delivery as soon as next week’s ECB rate meeting.
Ahead of the open we expect to see the FTSE 100 open lower by 11 points with the German DAX higher by 8 points.
About James Hughes
James Hughes is Chief Market Analyst at Alpari UK. With over 14 years’ experience in the trading industry his knowledge of the financial markets and retail trading is exceptional. James’ experience has seen him become a regular commentator on many of the major news channels in the UK, including BBC, Sky News, CNBC and Bloomberg, as well as hosting seminars on a number of trading topics at conferences around the world. A keen technical analyst and active trader, James regularly gives seminars and webinars on a wide variety of subjects to Alpari clients. He previously worked as Market Analyst for CMC Markets for nine years. You can follow James’s analysis on Twitter, and Google+ profile.