Oil pressured from China despite drawdown

“Where you begin doesn’t matter. Your willingness to start is what counts.”

Rhonda Britten

EMI QuickView Short Term Market Overview

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Bad news surrounded the global markets over the last 24 hours. The major bad or bearish news that has engulfed the market has been the evolving sovereign debt issues in the EU and in particular Ireland for the last few days and amplified since yesterday as the discussions have heated up in Brussels as to whether or not the Irish government will accept the EU/IMF bailout...similar to the one Greece accepted some months ago. On top of the EU debt issues is the fact that China is likely to tighten its economy as it fights inflation has contributed strongly to the massive movement out of most all global risk assets including all commodities. On top of all of the above there is now talk that the US Fed may hesitate on more easing after critics are questioning its employment mandate. The critics have come from within the US as well as the international community.

On the EU front the work continues on aid for Ireland but has stopped short of an immediate bailout package at the moment. Currently the EU is very pleased with Ireland’s austerity measures much as they were in the early stages of the Greece bailout program. The EU and even the UK currently stand ready to provide financial help if Ireland needs it. More meetings will occur to determine the Irish banking system needs. It is clear that the EU, UK and IMF are not going to let Ireland default as help will be provided... much as what occurred with Greece... if it is required by the Irish government. The markets are rightfully nervous but in the end this problem will pass over the next several weeks as the appropriate measures are taken by the various participating governments. But for the moment it will continue to keep the uncertainty level high and thus pressure on the euro until a concrete resolution is finally agreed upon and announced.

In Asia, China’s equities markets were hit with another round of selling after the Premier said the cabinet is drafting new measures to curb inflation targeted at measures to counter overly rapid price gains. So it is not whether China will act to tighten its surging economy but when and using what measures to do so. They have already tightened banking capital requirements and raised short-term interest rates by 0.25% over the last few months and the economy is still steaming along. The markets are now worried that any new measures could be more severe...like price controls that could result in a serious slowing of the economy which is a negative for oil and other commodity markets.

The evolving situations in both Ireland and China have had a significantly negative impact on global equity markets as shown in the EMI Global Equity Index table below. The Index has continued to lose ground over the last 24 hours with the Index now down by 3.2% for the week narrowing the year to date level to just 1.9% or the level the index was at in the second half of October. Pretty much most of the gains over the last month or so have now been erased. The same six bourses are still in the winners’ column year to date but obviously with much smaller gains than just a week ago. Germany has clearly held up well as the crisis in the EU has resulted in a further weakening of the euro which is a positive for Germany’s huge export driven economy. At the moment the global equity markets are bearish for oil and the broader commodity complex which is consistent with the view coming from the currency markets as the US dollar hovers near the unchanged level.

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