Oil falls with equities as global economy slows

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The slowing of the global economy continues to be the dominant price driver for the oil complex as well as most all risk asset markets. Yesterday there was a plethora of corporate earnings, revenue and guidance misses that brought even more focus to the simple fact that the global economy is going nowhere quick and now it is starting to be reflected in many corporate earnings reports. This sent the U.S. equity market into a tailspin on Tuesday that subsequently sent the oil complex into a tailspin on concern that oil demand growth is also going to slow further.  The majority of the macroeconomic data  have been pointing to a slow economic growth period on the horizon and now that has trickled down to the corporate sector as many companies are not only missing estimates this quarter but their guidance is projecting further declines in revenue with many of the companies blaming the slow growth global economy.

Today the latest PMI manufacturing data out of Europe and in particular Germany showed another decline. Germany's flash Oct PMI manufacturing index came in at 45.7 versus 47.4 for September. The EU came in at 45.3 for October versus 46.1 for September. Not only do these data points support the slowing economic scenario, but the PMI manufacturing index is an energy sensitive index and directly translates to slower energy demand going forward. Even the main growth engine of Europe... Germany is also joining the rest of the global economies in seeing its economy starting to slow.

On a positive note, China's flash PMI manufacturing gauge actually increased to 49.1 for October versus 47.9 for September. There have been a few data points out of China over the last two weeks that suggest that the main global economic and oil demand growth engine could possibly be in the early stages of bottoming. Today's flash PMI data suggests that even though it is still below the manufacturing expansion threshold of 50. Certainly any signs that China has stopped contracting would be a major support for the rest of the global economies and definitely a positive for the oil complex as well as for the broader risk asset markets.

All of the above said I think it is way too early to conclude that the global economy has stopped slowing or contracting. However, the data out of China is a tad encouraging. Today the U.S. Fed will conclude their two day FOMC meeting. I am expecting the Fed to keep its short-term interest rate policy as well as QE3 and Operation Twist in place with no changes. I am also expecting the Fed to suggest that the U.S. economy is still struggling and the aforementioned Fed policy remains warranted.

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