February 11, 2011

Market Wrap For The Week Ending 11-Feb-2011

Weekly Snapshot
• Egyptian president Hosni Mubarak steps down after 30 years in power (FT)
• The U.S. trade deficit increased 5.9%  in December 2010, to $40.6 billion (ESA)
• U.S. consumer sentiment rose to its highest level in 8 months in early February (Reuters)
• 27% of U.S. homeowners with a mortgage were underwater at the end of 2010 (Zillow)
• HK Shares End At 6-Week Low Due To China Tightening Concerns (WSJ)
• The IEA raised its 2011 forecast for global crude oil demand for a fifth month (AP)
• The Bank of England left its benchmark interest rate unchanged at 0.5% (Bloomberg)
• U.S. jobless claims dropped more than expected to touch their lowest point in 2-1/2 years (AP)
• U.S. home foreclosures rose 12% from last month but down 11% from a year ago (Reuters)
• Germany's Deutsche Boerse is in advanced talks to buy NYSE Euronext (Reuters)
• The London Stock Exchange is to buy the Toronto Stock Exchange operator TMX (Reuters)
• China's central bank raises interest rates to 6.06% in fight against inflation (AP)

Market Barometers

st-2011-0211   fx-2011-0211

Chart Of The Week
Egypt cheered on Friday when Hosni Mubarak officially stepped down after 30 years of being the president of Egypt. While Western leaders are now assessing the impact of new political leadership in Egypt, equity and capital markets rallied on the news of Mubarak’s resignation. We noticed an interesting correlation of the events in Egypt with the price of oil.  Light Sweet Crude Oil futures peaked on January 31st just hours before Mubarak announced that he will not run for re-election. From that moment on, oil traders must have seen Mubarak’s resignation as an inevitable outcome as they continued to favor the shorts for the better part of the past two trading weeks. Mubarak’s official resignation on Friday put additional pressure on the price of oil. Much ado about nothing one would think as crude oil is back to square one.

Source: www.finviz.com

Having said that, the European equivalent of the West Texas Light Sweet Crude Oil futures contract, namely Brent Crude Oil, appears to have taken a slightly different assessment of political impacts from the turmoil in Egypt.  Granted, the two futures contracts are not identical and have historically seen price discrepancies before.  But on average, they tended to track each other’s price movements fairly closely.  However, since the beginning of this year, the two oil price benchmarks started to clearly diverge and Brent Crude is currently trading at a more than $15 premium to its US equivalent.

Brent Crude Oil


WTIC Light Sweet Crude Oil

Brent-2hour   CL-hour
Source: www.netdania.com    

Granted that physical supplies of oil in the US are much higher than their European counterparts.  But it is hard to imagine that alone could make up the bulk of the $15 price difference. One could however argue, that European traders were perhaps less concerned about Egypt on its own.  Mubarak’s resignation in itself does not guarantee a calmer political climate. Further still, political movements in other Middle Eastern countries might now be encouraged by the events in Egypt.  The spread of political unrest throughout the region is now looked upon more likely than before. A prognosis of further political changes is outside of my realm of understanding.  However, taking a lead from the continued upward pressure on Brent Crude Oil, I reckon there are a few more surprises on the horizon.


Recommended Read 
It is always good when others remind you not to take yourself too seriously.  That said, among those who make a living predicting future events, economists tend to have a much longer shelf life than the average trader or analyst.  Why is it then that economists get it wrong so often and yet, everyone still listens when they speak?  Please consider
Why do economists get it so wrong? by Tim Weber Business editor, BBC News. Why bother with economic forecasts?

"It's a starting point for analysis or discussion," says the chief executive of a large asset management firm, "but you don't have to believe it... economists are just one input among many."

So how often do the economists advising his firm get it right? He shrugs his shoulders: "Oh, about 3 or 4 times out of ten."

Recommended Video 
Judging from the speed and strength of the (stock market) recovery, the word double-dip recession is no longer in everyone’s vocabulary.  In case you still wondered what a double dip recession might look like, here’s a good explanation from Paddy Hirsch, senior editor of Marketplace.  Come the next dip, at least you’ll know how to spot one now. Enjoy!


Good luck and good investing!

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