Oil is finally beginning to show signs that it is building some upward momentum.
By Peter Martin
Wednesday, February 4, 2015
Following on from yesterday’s healthy gains, US crude oils futures have performed even better today, advancing more than 5% by early afternoon in New York, to break above $52 a barrel.
That has proven to be a big boost to some key players in the Dow Jones, including Exxon-Mobil ($XOM), Chevron ($CVX) and Caterpillar ($CAT), all helping the blue chip index to rise by just over 1% or 177 points to 17,538. The S&P 500 Index’s gains were almost as strong at 0.78%.
The rally comes despite some disappointing data released for the factory sector. Factory orders shrank 3.4% in December, a far steeper fall than the 2.2% decline that had been expected. Furthermore, there was a large downward revision to the previous month’s numbers, amended to -1.7% from the -0.7% that had been originally reported. December’s drop is the fifth consecutive deterioration in this indicator, the worst sequence since the recession. We saw anecdotal evidence yesterday from Markit and the ISM’s respective surveys that the manufacturing sector is facing some headwind, and today’s hard data would tend to underline the difficulties presented by the strength of the dollar and the weakness in oil.
Head of the St Louis Federal Reserve James Bullard delivered a speech on monetary policy at the University of Delaware today in which he expressed the view that the Fed needs to hike rates in the near term before moving to a schedule of gradual rate rises, saying that he would remove the word ‘patient’ from the next FOMC statement in order to afford the central bank greater flexibility in when to tighten. ‘If it was me, I would take it out to provide optionality for the following meeting,’ said Mr Bullard, who is not a voting member of the FOMC this year. While acknowledging that the lower inflation outlook, based in part on the low yield for Treasury Inflation-Protected Securities (TIPS), is ‘disconcerting’, he said that “for now I think we should set the TIPS inflation data aside until after oil prices stabilize’.
In the FX market, the US dollar weakened sharply against the euro and the Canadian dollar. The move against the euro was prompted by developments in Greece: the newly-formed Greek government, headed by the leftist Syriza party, appears to have ditched its aims of a write-down of its foreign debt, a move that has helped to alleviate fears of eurozone instability. EUR/USD gained 1.34% to 1.1493 by mid-afternoon in New York. Just as with yesterday, the Loonie is being lifted by the strength in oil because of the importance of oil exports to Canada’s economy. USD/CAD fell 1.2% to 1.2416.
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