Dec 1. The deflation cloud darkens
When black Friday comes, I’ll stand down by the door
And catch the gray men when they dive from the fourteenth floor– Steely Dan
Dec 1. It was a black Friday for black gold as oil plunged after Thursday’s OPEC decision not to cut production ($74 bbl to $64 at the low, in two days). The discussion has now shifted to which projects and geographical regions can stay profitable at this price, and what the impact will be on capital expenditures. According to a report by Goldman, “The Energy sector accounts for roughly one-third of S&P 500 capex and nearly 25% of combined capex and R&D spending,” I saw several articles which noted that many producers are hedged through 2015. But in a world where the financial sector has become as important to monetary policy as the goods producing sector, former buyers are experiencing a world of pain. And the Russian Ruble is at a new low, scarcely pausing at last week’s 50 level to breach 52.
–As an example of the negative linkage between oil and other financial markets, note that hi-yield ETF’s HYG and JNK both had hard tumbles Friday, and that the small cap Russell also took a late hit, dropping 1.5% on the day.
–The Swiss rejected the gold referendum which would have forced the country to hold 20% of its reserves in gold. The price, of course, plunged….but has come right back. Questions about the availability of physical supply and various repatriation efforts have perhaps put a floor under gold. Also note that EURCHF has barely budged off the 120 peg.
–In overnight/weekend news, Moody’s downgraded Japan. China PMI was soft. Also from Reuters on Saturday: “ECB Executive Board member Sabine Lautenschlaeger said on Saturday she saw little room for further easing of monetary policy despite a further fall in euro zone inflation.”
–In terms of interest rates in the US, all eurodollar calendar spreads fell to new lows. Peak one year spread is Dec’15/Dec’16 which fell 2.5 to just 91.5. Red/gold pack spread dropped 1.75 to just over 170. 2/10 treasury spread at new low 171. Ten year yield closed below 220 at 219.4; it doesn’t seem far fetched to consider 2% as an end of year target, a nice round 100 bp drop from the start of 2014.
