Oil inventories in driver’s seat as geopolitics secondary

The macroeconomic data out of both China and Europe were mostly positive yesterday and pushed global equity prices higher with both Europe and the U.S. hitting all-time high levels. Global equities have been a supportive price driver for oil prices but as I mentioned above oil has not reacted very strongly to the equity rallies over the last several days.

In contrast to yesterday's positive data out of Europe today's release of fourth quarter EU GDP data showed Europe slipped deeper into recession compared to just the third quarter. GDP declined by 0.6% in Q4 and 0.9% for the year. Germany and France also saw a larger contraction in Q4 with Germany's construction PMI coming in at 43.8 for February compared to 47.7 in January for the eleventh month of declines in a row.

It is still difficult to get too excited about any major economic recovery in the EU just yet. Tomorrow the ECB meets with most market participants expecting a status quo outcome keeping short term interest rates at current levels. With the EU continuing to contract I would expect the ECB to lower short term rates sometime soon if not at this week's meeting. Even though European equities are now at 4-1/2 year highs the economy is not growing and thus oil demand is not growing either in Europe, thus contributing to the muted reaction we have seen in oil prices during the most recent run-up in equity values.

Today the ever important monthly jobs data cycles gets underway in the U.S. with the release of the ADP private sector jobs report followed by the weekly initial jobless claims tomorrow and the main event on Friday... nonfarm payroll data and headline unemployment number. The market is expecting a modest increase in jobs on Friday of about 170,000 new jobs with the unemployment rate holding steady at 7.9%.

The U.S. employment situation has taken on an elevated level of importance by the market as the U.S. Fed has linked much it its monetary policy — including their massive money printing operations — to the state of the jobs market. Any sign that the jobs situation is improving at a faster pace than the market is currently forecasting would likely be interpreted by market participants that the Fed might potentially end its quantitative easing program sooner than originally expected. If so the U.S. dollar would rise and oil and most other commodity prices would likely decline further from current levels.

Global equity markets have continued to rebound this week as shown in the EMI Global Equity Index table below. Only Brazil continues to struggle as it declined yesterday while every other bourse in the Index added value. The Index is still slightly lower for the week by 0.1% with the year to date loss currently at 0.2%. Japan's equity market is continuing to soar with its year to date gain now at 14.2% as a weaker yen adds support to this export oriented economy. Australia is also now showing double digit gains for the year as its economy continues to expand. Overnight the latest Q4 GDP was released for Australia showing a gain of 0.6% even as its main export customer China has experienced a slower growth pattern than several years ago.

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