Oil majors thrashed with oversupply and softening demand; EU labour markets improve; NZD recovers quickly after less-than-expected GDT fall

By Jason Wong

With recent major central bank policy announcements out of the way it was back to oil market watching and the correlation between oil prices and equities was reactivated.

After a strong recovery towards the end of January based on speculation of possible coordinated production cuts, Brent oil prices are already down some 7% for the first two days of February, trading around $33, with WTI closer to $30.  Worries about increased supplies remain the chief concern, with coordinated production cuts looking unlikely.  However, the weaker global growth environment is also a factor – Citigroup’s economic surprise indicator for major economies has plunged this year to reach its lowest level in nearly three years.

Weaker oil prices and some poor earnings results from Exxon Mobil and BP set the tone for weaker equity markets, with the Euro Stoxx 600 index down 2.1% and the S&P500 down 1.5% in early afternoon trading.

The risk-off setting shows up in FX movements, with the Yen and the Euro the strongest currencies and the commodity currencies amongst the weakest.

USD/JPY is down 0.7% to just over the 120 handle.  The Yen strength takes back some of the losses made post the BoJ’s shock easing on Friday.

EUR/USD is up 0.2% to 1.0905.  As well as the currency improving on its safe-haven status, labour market indicators were better than expected, with the euro area unemployment rate falling to a 4-year low of 10.4% and Germany’s unemployment rate fall to 6.2%, taking it to a multi-decade low.

GBP was weaker as the market turned its attention to this week’s BoE policy meeting and inflation report due, but some losses were recovered after a draft report from the European Union was released, aimed at keeping the UK in the EU.  Some policy concessions appear to have been made on welfare for migrant workers and financial system regulation that make the UK staying in the EU more palatable for PM David Cameron.  He is said to be ready to campaign to keep the UK in the Union.  GBP/USD is now only down 0.2% at around 1.44.

The AUD initially rose following the RBA’s policy Statement yesterday, but that didn’t last long and it soon retreated.  The Statement was a complete re-write of the previous one, but the tone remained similar, with the Bank keeping its options open for further easing if deemed necessary. Plunging oil prices and risk-off was probably more of a driver of the AUD/USD’s 0.7% fall to 0.7060.

Reflecting the risk-off mood, the NZD is down about 0.8% to 0.6497.  The NZD dipped about 25 pips early this morning on the announcement of the latest GDT dairy auction showing an average price drop of 7.4%, and whole milk powder down 10.4% to $1,952 per tonne.  But the futures market was pointing to the possibility of a double-digit fall, so that result was no surprise and the NZD soon recovered that loss.

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