Feb 23, 2011

Risk on, Risk off

February 23, 2011

Oil soared over 6% yesterday on concerns about growing tensions in the Middle East, and is bid up again this morning after a Libyan oil company producing 100K barrels of oil per day was shut down . Violence in Libya spooked the markets as Muammar Qadafi vowed to fight the rebellion until “his last drop of blood.” Analysts are estimating that oil could move to $220 per barrel should production become constrained or halted by the violence. Libya is the 17th largest oil producer in the world, but concerns about unrest in Iran and potentially Saudi Arabia are also contributing to the oil market concerns.

Equity markets are bid up today after suffering their largest one-day correction since August yesterday. Economic data for the past two days has been in line with expectations as the S&P Case/Shiller Home Price Index fell by 4% in the 4th quarter vs. an expected decline of 3.4%. The Richmond Fed Manufacturing Index for February came in at 25 vs. expectations of 18, and Consumer Confidence came in ahead of expectations at 70.4 vs. 65.5. Bonds actually strengthened in yesterday’s trading as the 10 year yield moved under 3.5%. Given the “risk off” nature of yesterday’s trading, it was surprising to see the dollar didn’t benefit, which could reflect global concerns about the dollar’s status as a safe haven.

The chart below, courtesy of Kimble Charting Solutions, is a composite creating by dividing the Emerging Markets ETF (EEM) by the EFA ETF (EFA). When emerging markets are outperforming, the chart is rising, when they are underperforming, the chart is falling. Kimble’s conclusion is that risk is greater when this index turns down.

Moody’s downgraded its outlook for Japan’s government debt from stable to negative. Concerns about economic and fiscal policies may not be strong enough to achieve the deficit reduction targets outlined by the government.

Petrobras, the Brazilian oil company, is now operating all of its refineries at maximum capacity. CEO Jose Sergio Gabrielli said “not investing in refineries at this moment is long-term suicide.”

According to the Economist, a $1.8 billion ship order by Maersk for 10 new ships will change the container-shipping industry’s economics. They will be the largest container ships in the world, each carrying 2500 more boxes than any ship in service. Additionally, the new vehicles will use 50% less fuel per container than present vessels.

Last week the ECB disclosed it had lent 16 billion euro through its emergency marginal-lending facility without much explanation. Now is has been disclosed that Anglo Irish Bank and Irish Nationwide Building Society moved collateral to the ECB’ overnight-lending program from longer-term facilities. The move will allow the banks to sell assets on short notice. Keep an eye on this one.

APAC markets were weak last night after the weak showing by the US markets yesterday. European markets are down this morning as well.

Have a great day


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