Oil remains coupled to dollar as focus still on Europe

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The right to do something does not mean that doing it is right.

William Safire

Skepticism over Europe's ability to solve its sovereign debt problems has continued to be the main price driver for oil and most all risk asset markets. Although not much of anything has changed since the meeting in Europe on Friday the market has decided that the risks are higher today than they were a few days ago. In addition when the results of the US Fed FOMC meeting were announced yesterday afternoon the markets also sold off even though the outcome was as expected and was pretty much identical to last month's outcome. In fact the Fed actually acknowledged some minor improvements in the US economy.

I must admit I am out of sync in my thinking compared to that of the market outcome. I viewed yesterday's FOMC results as a neutral to even slightly supportive outcome. I also view the evolving situation in Europe as not getting any worse than it was before the ECB and EU meeting and the basics now seem to be in place for the potential for a slow and tedious recovery. Obviously the markets have been trading with a sentiment that is not in sync with my views. In fact the way the markets have been trading suggests that Europe is on the cusp of collapse and after the sell-off from the FOMC meeting the market traded as if the US economy was back on the cusp of a double dip recession....even though nothing has changed. We will have to see how the markets continue to digest the evolving situation in Europe as well as the US.

The selling has spread throughout the global equity markets as shown in the EMI Global Equity Index table below. Over the last 24 hours the Index lost another 0.3% widening the week to date loss to 2% resulting in the 2011 loss coming in at 15.8%. The US Dow is still in positive territory for the year and that is pretty much where the good news ends. Eight of the remaining nine bourses in the Index are still showing double digit losses with Hong Kong now clearly back in bear market territory with a 2011 loss of 24.7% as well as China which is now showing a loss of 20.6%. As I mentioned above, the markets are bearish and have discounted just about every piece of positive news and have embraced anything bearish. Obviously the global equity markets are a negative price driver for oil and the broader commodity complex.

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