The Death of the Carry Trade.
The” Carry Trade” just can’t carry the oil market away like it used to, especially with total petroleum inventories at a 20-year high for the month of May. So much for selling the dollar buying the euro and every commodity you could get your hands on, the great carry trade unwind continues changing the way we may view all markets from this day forward.
The global commodity markets are still trying to adjust to the economic problems in Europe and what may or may not happen in China in terms of economic policy. Not only will these issues adversely impact demand but also how the price of oil fits in terms as a hedge against global economic turmoil. As we have said many times before the increase in the price of oil and its fortunes has mainly been responding to the different phases of this global economic drama or as some have dubbed it “the Great Recession”.
With confidence in Europe being shaken and the dogma of ever increasing China demand is being questioned, the fragility of the oil price becomes so very apparent. The price of oil has got a lot of its bullishness not so much from oil demand but as a hedge against systemic risk. The euro has been the oil bull's best friend, not to mention the currency of “super models” but now it seems its fight for survival may have lost its appeal. The truth is that with the bailout of Greece and the purchases of debt by the ECB the euro has changed forever anyway.
Last week the markets went into crisis mode. The VIX volatility or fear index surged and deflationary fear began to appear. Commodity prices fell hard and broke the bulls’ confidence. Bloomberg News reports that, “the VIX jumped 28% to 40.10 last week, extending its increase since April 12 to 157%, according to data compiled by Bloomberg. The index shows investors are paying more to protect against stock declines as governments seek to reduce deficits in Greece, Portugal and Spain. The Standard & Poor’s 500 Index is down 8.3% for May, poised for the biggest decline in 15 months.” Fears about problems in Japan are rising as some say they will be the next country to unveil fiscal problems. Now the market is waiting for the China shoe to drop which could cause the most significant oil price breakdown since oil topped at $147 a barrel.
Make sure you are being kept up to date. We have big daily ranges in oil and all the commodities.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at firstname.lastname@example.org