In most financial market contexts, crude oil maintains its position as one of the most actively traded commodities in the world.  In futures markets, light sweet crude oil is the most commonly traded futures contract, and price trends in these areas can be a great indicator of how commodities as a whole are likely to trade in the near-term.  Over the last year, we have seen some historic price movements in oil and precious metals.  Here we will look at some of the factors that

In most financial market contexts, crude oil maintains its position as one of the most actively traded commodities in the world.  In futures markets, light sweet crude oil is the most commonly traded futures contract, and price trends in these areas can be a great indicator of how commodities as a whole are likely to trade in the near-term.  Over the last year, we have seen some historic price movements in oil and precious metals.  Here we will look at some of the factors that have contributed to these market occurrences over the last 6-12 months.

Chart View: Crude Oil

In futures markets, the light sweet crude contract is considered the international benchmark for crude prices due to its high liquidity levels and broad transparency.  After falling to multi-year lows, crude oil has rebound this year.  Many of the same trends have been seen in precious metals, as well.  This is significant because there is a high-correlation between the market price activity that is seen in gold and crude oil futures. External activity shows that fund ownership of Australian company BHP is rising, and this indicates that a growing percentage of fund buying has started to center on the commodities space.

The gains crude oil began after prices hit $36 per barrel at the start of the year and then rose to above $47 per barrel this month. This equates to a massive rally of nearly 30%, and much of this price change can be attributed to some of the following macroeconomic factors:

     * Citigroup has estimated a supply outage of 3.5 million barrels per day.

     * Canada’s Fort McMurray wildfire might have impacted production by as much as 1.2 million barrels per day.

     * Libya’s political unrest led to decline in production

     * A report from Barclays suggests a decline of oil production by 3,00,000 bpd in Nigeria

     * Kuwait’s worker strike brought its production down by 1.7 million barrels per day.

Another factor to take into consideration is the declining oil production that is being seen in the United States. Oil production in the US has dropped from 9179 BBL/D/1K in the month of January this year to 8701 BBL/D/1K in June 2016, supporting the prices and improving the overall outlook for bullish investors.

At the same time, emerging nations like India and China are seeing an ever-increasing demand for crude oil, which is something that fuels the prices even further. China’s oil production did see declines in the month of April, along with a 3.2% increase in crude oil demand when data reports are compared to the previous year. According to OPEC, India’s crude demand rose to 4.4 MMbpd, showing an increase of 15% relative to March 2015. 

At the same time, gasoline demand in the US is on the rise, adding support to the global framework for higher crude oil prices.  Varied macroeconomic factors, reduced industry production and increased demand have fueled the yearly rise in the oil prices over the last few months. Heightened economic volatility and increased geopolitical tension might help these trends to continue support the oil price trajectory but now that the summer months are drawing to a close there is a greater chance that we will start seeing retracements before the end of this year.

The post Which Factors are Fueling Oil Rallies? appeared first on Economy Watch.

During the second bi-monthly monetary policy decision in August this year, the Reserve Bank of India maintained the policy repo rate under the liquidity adjustment facility as unchanged at 7.25%. As a consequence, the reverse repo rate against the liquidity adjustment facility will remain unchanged at 6.25%.

During the second bi-monthly monetary policy decision in August this year, the Reserve Bank of India maintained the policy repo rate under the liquidity adjustment facility as unchanged at 7.25%. As a consequence, the reverse repo rate against the liquidity adjustment facility will remain unchanged at 6.25%.

Similarly, in order to supplement monetary activity, the cash reserve ratio (CRR) was maintained at 4% with a reduction in daily maintenance of CRR from 95% to 90%.  This was mainly aided by inflation rate of 6.07%, which is slightly above the market expectation and this may further increase due to the current upward movements seen in oil prices.  All of these factors combined suggest a greater potential for declines in the Indian Rupee as well as an increased likelihood for disappointing figures in national GDP performance.

Chart Perspective: USD/INR

Chart Source:  easyMarkets

The Reserve Bank has vowed to maintain a steady balance in the cash availability and subsequent transfer of interest rate decreases by the banks. The Reserve Bank was also able to maintain a cash-push stance, owing to the GDP annual growth rate of 7.9% (higher than the expected performance of 7.5%). It is the result of various supporting factors including heavier and longer rainy season that will contribute towards an increase in agricultural production, and this could help to change the outlook if it comes to fruition.

Furthermore, other sectors including automotive industry have also shown improvement, prompting the Reserve Bank to maintain the policy rates rather than initiating downright reductions. This will impact the targeted flow of capital from banks to the most productive sectors. The inflation rate of 6.07% is slightly higher than expected but is still considered by the Central Bank as something that is controllable.

Jobs and Capital Inflows

The unemployment rate, which has already reduced to 4.9%, also affected the monetary policy that was consequently aimed towards increased cash circulation in the economy.  The Indian economy received the equivalent of $200 million during the first quarter of 2016 in the form of capital flow surplus that eased the way for the Central Bank to maintain rates in their monetary policy. Similarly, the bank lending rate remained unchanged at 9.7% as the central bank wanted to avoid any premature changes in rates.

The monetary policy announcement is being viewed as a continued commitment towards fiscal consolidation. It is expected that the rate cut policy will be continued in the future with another decrease in the monetary policy next month.  Most likely, this will result in an inflation adjustment to a lower level, and closer to the targeted level of 6%.

Overall, the Reserve Bank of India had been quite receptive to the demands of the economy and has been relatively proactive in its approach. It is expected that this pattern will continue in future into next year, so we should start to see an impact in currency pairs like the USD/INR over the next few months.

The post Will India’s Monetary Policy Continue to Weaken Rupee? appeared first on Economy Watch.

Over the last decade, we have seen several instances where most market investors have been caught off-guard and surprised by new developments.  Most notably, the stock market events of 2008-2009 were some of the most significant in recent memory — and this has led many investors to feel skittish when looking to establish new investment positions.

Over the last decade, we have seen several instances where most market investors have been caught off-guard and surprised by new developments.  Most notably, the stock market events of 2008-2009 were some of the most significant in recent memory — and this has led many investors to feel skittish when looking to establish new investment positions.

However, it should be remembered that market shocks have occurred in the past — and there are somewhat predictable ways for how the market is likely to respond to times of increased price volatility.  Here, we will look at two of the most important assets involved in these equations: gold and the US Dollar.

Chart View:  Gold and the US Dollar

Source:  DailyForex

In the chart above, we can see how both gold and the US Dollar have performed in relative terms over the last few decades.  It is important to remember here that since gold is priced in US Dollars, the two assets share a somewhat inversely correlated relationship in terms of their own trends.  However, what we can see from this chart is that at least one of these assets (if not both) have shown positive activity during times of increased turmoil in the market.

Traditional Market Viewpoints

On the surface, it might be difficult to understand why assets like gold and the US Dollar would rally during periods of generalized economic instability.  A good portion of the rationale stems from the ways the financial markets have traditionally viewed these assets.  There are not many investment vehicles that have a longer history than gold, and this tends to bring in buyers when the rest of the financial environment appears uncertain.

At the same time, the US Dollar is still the world’s reserve currency and this ultimately means that it is the most liquid currency that is available in the financial trading markets.  This puts the greenback in a unique position in terms of the ways it is viewed by investors, as it tends to be currency associated with stable trend moves (usually avoiding excessive volatility) and low transaction costs.  All of the most commonly traded world currency pairs include the US Dollar. We can see this, for example, in the EUR/USD, GBP/USD, and USD/JPY, so this is likely to be a characterization that lasts for many years to come.

In all, it makes sense to understand which assets are likely to gain when other markets are falling.  In general, assets like gold and the US Dollar tend to rise in value when the stock market is falling — and this extends to commodities assets like oil as well.  So the next time you start seeing surprise declines in global stocks, it makes sense to at least monitor activity in these areas in order to see if the historical tendencies still hold weight.

The post Safe Haven Assets in Financial Markets appeared first on Economy Watch.

Those looking to trade in any of the financial markets will obviously need to have a firm understanding of the basics involved in their chosen asset class.  However, what is likely less obvious is the fact that traders in one asset class should at least spend some time monitoring what is happening to price changes in peripheral markets. 

Those looking to trade in any of the financial markets will obviously need to have a firm understanding of the basics involved in their chosen asset class.  However, what is likely less obvious is the fact that traders in one asset class should at least spend some time monitoring what is happening to price changes in peripheral markets. 

For example, currency traders will likely have an understanding of what is occurring in the economies tied to the United States, Eurozone or Japan.  However, what is equally important is what is currently developing in areas like stocks, gold and oil.  Here, we will focus on a few of these examples and look at the various ways the US Dollar is connected to the gold and oil markets.

Historical Prices in US Dollar, Gold, and Oil

Source:  Atlanta Gold and Coin

In the chart above, we can see the relatively valuations of the US Dollar, gold, and oil over the last 10 years.  This is valuable information for traders because it better enables us to understand how market trends are likely unfold when there are changes in the price levels of other assets.  Both gold and oil price in US Dollars, so these assets have an inversely correlated relationship.  This essentially means that when the price of one asset rises, the price of the other asset is likely falling. 

Looking closer at this chart however, we can see that there is some inconsistency in the trend changes for each asset.  Gold and the Dollar are sometimes thought of as safe haven assets, and this means that many investors will look to buy when there is increased instability or volatility in the global economy.  This can be highly valuable information for those looking for fundamental reasons to establish new positions in the market.

Structuring Your Market Positions

With all of this in mind, it should be clear for modern investors that individual assets do not exist in a vacuum and that no investment market trades in isolation.  When we are looking to structure our position in our chosen and preferred asset classes, it is always a good idea to look at what is happening in peripheral markets so that we can better understand where the trend is likely headed for the asset we are actually trading. 

This does require some extra work on our part.  However, if this extra effort is something that will enable us to avoid unnecessary trading losses, then it is time well spent.  Many of these rules apply to other currencies as well, so even if you are trading the Euro, the Pound or the Japanese Yen, it is important to conduct similar research before placing real money on live market trades.

The post Understanding Currency Correlations appeared first on Economy Watch.

When we look at many of the financial media headlines over the last year, we have seen a good deal of attention focusing on the declining valuation in the Euro.  However, when we take a closer at specific valuations in the Euro, we can see that this is not necessarily the case. 

When we look at many of the financial media headlines over the last year, we have seen a good deal of attention focusing on the declining valuation in the Euro.  However, when we take a closer at specific valuations in the Euro, we can see that this is not necessarily the case. 

Against the US Dollar, the Euro has reached uncharted territory and it continues to hover near parity against the greenback.  As far as the financial media is concerned, this translates to broad weakness in the Euro.  However, when we look at the shared currency against a basket of its most commonly traded counterparts, a very different picture starts to emerge.  Here, we will look at some of the specifics when assessing the true value of the Euro in the current market environment.

Chart Perspective:  Relative Values in the Euro

Source:  FiboGroup

In this visual chart example, we can see that the Euro is actually gaining against the weighted value of its most commonly traded counterparts.  This is significant because it means that the quantitative easing measures implemented by the ECB have not had their desired effect.  Monetary stimulus programs typically bring selling pressure to a currency because there is literally more of that currency active in the financial system. 

If we think back to our ECON101 classes, the rules of supply and demand suggest that more of an item available for public sale should lead to lower market valuations.  In the current environment, this has not been the case and this ultimately indicates that the ECB will need to enact additional measures in order to bring some supportive stability to the region.

Increasing Exports with Currency Values

From a practical perspective, a lower currency is something that can generate larger export sales from foreign consumers.  Therefore, it is not entirely surprising that the ECB would want to enact monetary policy measures that would erode some of the value of the Euro.  This might come as a surprise to some but there are actually some critical advantages involved when central banks are successfully able to lower the value of the regional currency.

When we are assessing the financial media headlines with respect to the Euro, these are the essential factors involved in making an accurate determination.  It can be easy to be caught up in the things being paid most attention by the financial news media.  However, when we look deeper into the data, we can often see conflicting trends.  The way the Euro is currently being viewed would be an example of this, and this is something that is likely to continue for most of this year.

The post Euro Gains despite QE Programs appeared first on Economy Watch.

The US dollar has exhibited one of the most impressive trends that the currency market has seen over the last year, as the greenback has risen close to parity relative to the euro on several occasions.  Since the dollar maintains its position as the world’s reserve currency, this creates ripple effects in a number of different markets.  For investors, this is important because it means not all markets are likely to perform at the same rate into the final months of the year.

The US dollar has exhibited one of the most impressive trends that the currency market has seen over the last year, as the greenback has risen close to parity relative to the euro on several occasions.  Since the dollar maintains its position as the world’s reserve currency, this creates ripple effects in a number of different markets.  For investors, this is important because it means not all markets are likely to perform at the same rate into the final months of the year.

When we look at the commodities space, two of the most commonly traded assets are gold and oil.  These trends events in the dollar have extended into these areas as well.  Both gold and oil commonly trade using the United States currency and this essentially means that these assets have an inversely correlated relationship.  Market situations where dollar is rising tend to mean that gold and oil fall, and this rule has held up under the current environment. 

But the real keys to understanding the intricacies of the market lie in the ways each asset class performs internally and one way of doing this is to compare the relative performance of both gold and oil.

Chart View:  Gold Prices vs. Oil Prices

The post Gold and Oil Reaction to the U.S. Dollar appeared first on Economy Watch.

Stock markets have shown some interesting trends so far in 2015, and most of those trends have been bullish in nature.  However, some stock sectors have benefited more from this optimism than other sectors, and the overall developments might be surprising those most heavily invested in traditional assets.  If we look at the major financial news headlines, most of the attention has been on indices like the S&P 500 or the NASDAQ 100 (which recently surpassed highs not seen since the tech bubble of 1999).  However, when we compared the year-to-date performance of these bench

Stock markets have shown some interesting trends so far in 2015, and most of those trends have been bullish in nature.  However, some stock sectors have benefited more from this optimism than other sectors, and the overall developments might be surprising those most heavily invested in traditional assets.  If we look at the major financial news headlines, most of the attention has been on indices like the S&P 500 or the NASDAQ 100 (which recently surpassed highs not seen since the tech bubble of 1999).  However, when we compared the year-to-date performance of these benchmarks to the small-cap space, those positive headlines seem to be somewhat misplaced.

Specifically, this is because the year-to-date performance in small-caps has far outpaced their major market counterparts:  “When we compare the recent performance in the S&P 500, we have seen gains of roughly 2% for most of this year,” said Michael Carney, markets analyst at Teach Me Trading.  “Things have been more volatile in the small-cap space but we have seen gains of 10% or even higher during some parts of this year.”  This is significant because it has translated to historical rallies in indices like the Russell 2000, which is one of the best gauges for measuring trend activity in the space.  For these reasons, it makes sense to compare recent chart activity in both the SPDR S&P 500 Trust ETF (NYSE: SPY) and the iShares Russell 2000 Index ETF (NYSEARCA:IWM) as this is one of the best ways to compare trends in both sectors.

S&P 500 / SPY – Stock Trading Strategy:  Valuations in SPY have started to stall after hitting resistance in the 212 region.  Slowing momentum could lead to a retest of support at 198.

The SPY is still showing strong long-term momentum but things have started to stall in the shorter-term.  However, the MACD reading is now moving into negative territory and this confirms 220 as strong overhead resistance.  This makes long positions at current levels somewhat dangerous, as there is not much upside expected in the next month.

Russell 2000 / IWM – Stock Trading Strategy:  Trend moves in IWM are looking more constructive as we have already seen a corrective pullback and a run higher.  Upside resistance is now at 128.

Trend activity in IWM is looking more constructive as the ETF has already fallen lower and then began its recovery.  In addition to this, the MACD has moved back into positive territory, which suggests that a rest of 128 resistance is imminent.  This confirms most of this year’s price activity, and suggests that small-cap stocks could continue to outperform their large-cap counterparts into the second half of this year.  There is some evidence that disagrees with this outlook, as the better indicator readings could potentially send prices back toward yearly resistance levels.  Ultimately, we will need to see a clear break here in order to expect any real follow through to the upside.

With all of this in mind, there are compelling reasons to continue monitoring activity in the small-cap space.  To be sure, there is often a greater level of volatility typically associated with the smaller equity companies.  When we combine the technical and the fundamental outlook for the S&P 500 and then compare it to asset indices like the Russell 2000, it starts to look as though investors should broaden the view and start to consider alternative asset classes.  It will continue to be important to monitor activity in the commentary statements made by voting members of the US Federal Reserve, as this will be the best indication of where interest rates head next.  For all of these reasons, 2015 might turn out to be the year of the small-cap stock, so new investors should keep these assets on their radar for the remainder of this year.

The post Small-cap Stocks Still Outperforming S&P 500 appeared first on Economy Watch.