Oil prices have continued to slide on Tuesday but stocks appear to be building some reliance to the decline, with European indices and US futures both trading comfortably in positive territory.
This is the second day in which oil prices have continued lower while European indices have headed higher. This is undoubtedly being helped by all the speculation surrounding the European Central Bank and the quantitative easing program is has been preparing in time for the next meeting on 22 January.
While many people may be in agreement that the package will not address the real issue in the eurozone - especially if rumours yesterday that bond purchases will be based on each country’s contribution are true – it is clear that it will prove stimulative for the markets as it means liquidity being poured into the financial system.
Oil fell to a near six year low today as UAE oil minister Suhail bin Mohammed al Mazroui claimed OPEC will not change its strategy on production meaning the game of chicken between it and the US shale industry will continue for some time yet. Mazroui stressed that OPEC will not be meeting before the next scheduled event in June which effectively cements their position until at least that date.
You get the impression that the only way OPEC would be willing to discuss production cuts at this stage is if similar cuts were agreed by the US shale companies. Given the debt levels of these companies and their costs, I would not be surprised if this happened in the coming months.
Until that happens, oil prices could continue to push lower which means inflation in many countries will also continue to head south. The UK is one of those countries that has seen inflation fall rapidly, largely thanks to the fall in oil prices. Prices rose by only 0.5% in December, down from 1% the month before and well below the 2% target set by the Chancellor or the Exchequer George Osborne.
The fall below 1% means that BoE Governor Mark Carney is obliged to write a letter to Osborne explaining when the central bank expects inflation to return to target and what will be done to achieve this.
Food prices also contributed to the decline in prices as the price war continues between Britain’s big four supermarkets in an effort to win back market share after bargain retailers took a significant chunk throughout the great recession. While people will be quick to compare the low inflation in the UK to that of the eurozone, which fell into deflation territory last month, the two situations could not be more different and therefore should not be compared.
While the eurozone is seeing broad based deflation, high unemployment and therefore no wage growth, UK unemployment is very low, wages are already starting to rise – which brings with it inflationary pressures – and the areas in which we’re seeing deflation don’t carry the same threat that others would. People worry about deflation because it encourages people to delay purchases in the expectations that prices will fall, leading to a negative spiral of events.
This would never be the case with food and oil so in fact, all that’s happening is people’s compulsory costs are being reduced leaving more money to spend elsewhere. This can’t possibly be a bad thing.
This afternoon we once again have very little data being released in the US. JOLTS job openings for November could be of interest but with the lag being so significant, you have to question whether the markets are even paying attention to these. Corporate earnings season got unofficially underway yesterday, with Alcoa Inc (NYSE:AA) announcing fourth quarter results. We have a few more big names reporting this week, including some major banks but even this is looking a little quiet today.
The S&P 500 is expected to open 12 points higher, the Dow 107 points higher and the NASDAQ Composite 30 points higher.