Author: SondraHunter

Despite lingering concerns in sovereign crisis issues in the Eurozone, market sentiment improved modestly in European and US sessions on anticipations that the Fed would announce additional easing measures after the FOMC meeting. Investors were getting more confident that Greece would meet the requirements of getting the next tranche of funding. Macroeconomic data was not at all encouraging. ICSC weekly retail sales dipped while housing starts unexpectedly plunged.

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Sentiment Lifted on Hopes that Fed will Ease Further

Brent oil prices open today’s trading session hovering around $109 a barrel as Italy had its sovereign credit rating downgraded by Standard and Poor’s, which is keeping the country’s outlook on negative, adding to a gloomier picture in the Euro zone.

Latest Brent Oil Price

In London, Brent crude oil futures for November 2011 delivery was trading at $109.11 a barrel, 07.00 GMT this morning on the ICE Futures Exchange. Brent fell with stock markets yesterday, closing 2.6 percent lower at $109.27.

Italy Downgrade

Standard and Poor’s cut Italy’s government debt rating to A from A+ and said Italy’s economic growth prospects were getting weaker, with planned reforms by the Italian government not expected to help much.

“We believe the reduced pace of Italy’s economic activity to date will make the government’s revised fiscal targets difficult to achieve.” S&P said in a statement.

Italy follows eurozone partners Spain, Ireland, Greece, Portugal and Cyprus in having its credit rating downgraded this year.

Meanwhile, Asian stock markets extended losses as news of Italy’s credit rating downgrade prompted heavy selling in financials and exporters shares across the region.

“Standard and Poor’s surprise downgrade on Italy will likely add to concerns of contagion in the eurozone debt crisis.” noted United Overseas Bank analysts.

Both Brent and WTI oil prices have been tracking stock markets this month as the Euro debt situation evolves into something which could spiral out of control.

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Brent oil hovers near $109 as Italy downgrade adds to Euro gloom

Sovereign debt crisis in the Eurozone remained the main reason triggering the selloff in financial markets. Standard & Poor’s downgraded Italy’s credit rating with a negative outlook and the IMF warned that Greece must shrink its public sector and improve tax collection to avoid default. President Barack Obama’s tax plan was strongly rejected by Republicans but the market has shown little response to it so far. Investors’ sentiment was only slightly lifted in late US session after Greece affirmed that it was close to a deal to get the second tranches of funding.

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Risk Aversion on Lingering Eurozone Debt Crisis

Investors remained disappointed as the ECOFIN meeting last week failed to deliver additional measures to resolve the sovereign debt problems. The euro plummeted, leading the decline in stock markets in Asian session. In the commodity sector, oil slipped with the WTI contract for November delivery falling for a second consecutive day to 86.8/87.0 while the equivalent Brent crude contract dipping to 111.2/111.3. Gold climbed higher after rebounding strongly last Friday.

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Investors’ Fears on European Crisis Return

The major event next week is the 2-day FOMC meeting on September 20-21. According to Fed Chairman Ben Bernanke stated at Jackson Hold Symposium, it was originally a 1-day meeting but was rescheduled to 2 days for discussing ‘the possible costs and benefits of various potential tools’ to stimulate the economy. After pledging to keep the federal funds rate at exceptionally low levels for at least through mid-2013, the remaining options the Fed can take include: lowering interest rates paid on excess reserve, shifting the composition of the balance sheet to longer maturity, formalizing an inflation target, indicating explicit interest rate ceilings for longer-term Treasury debts (with an ingredient of asset buying) and outright bond purchases (i.e. QE3). Notwithstanding oppositions from several hawks, the Fed will likely announce something called ‘operation twist’ -increasing the average maturity of securities holdings by swapping holdings of lower maturities Treasuries with longer ones. While it’s questionable on how much the economy can benefit from such a means, the Fed is not likely to pursue an outright bond purchases given rising inflationary pressures.

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The Market Awaits FOMC Meeting

WTI oil futures open Friday’s trading session firm at $89 a barrel as markets were lifted on news that five of the world’s leading central banks will back unlimited cash loans to make lending easier in Europe.

Latest WTI Oil Price

US Light crude oil futures for October 2011 delivery was trading at $89.43 a barrel, 07.05 GMT this morning in electronic trading on the NYMEX.

Central Bank Dollar Promise

European stock markets gained over 3 percent and the euro rose on Thursday after leading central banks said they would provide unlimited dollars to cash squeezed markets over the next three month period.

“The governing council of the European Central Bank has decided, in co-ordination with the Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank, to conduct three US dollar liquidity providing operations with a maturity of approximately three months covering the end of the year.” the ECB said in a statement.

The news pushed the US dollar lower and oil prices, which are priced in US dollars, tends to rise as the dollar falls and makes oil futures cheaper for investors buying in other currencies.

Greece Default?

The latest in a long series of liquidity pumping exercises has apparently saved all of Europe’s banks and further crushed already miserable short sellers in US stocks and banks, but it may be serving another purpose – Setting up for an imminent default by Greece.

If Greece defaults the first obvious panic will be how do the European banks get funding, especially in US dollars. Well, that question has been answered. The mechanism to avert short term liquidity problems after Greece defaults is now in place.

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WTI oil trading firm at $89 as loan promise to banks lifts markets

While remaining fragile in the medium-term, commodities recovered from losses made in the Asian session as helped by gains in European stocks. We believe any gains in the near-term would be short-lived as the underlying economic fundamentals continue to deteriorate. The ECB said that it will lend $575M to 2 banks in a 7-day USD funding operation. Use of the operation, the first time since August 18, signaled banks are getting more reluctant to lend money to each other and intensified concerns in the region’s money market conditions.

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Global Oil Demand Outlook Downgraded