Weak Data from Europe, China Sinks Crude Oil

By FX Empire Analyst - James Hyerczyk
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November Crude Oil futures traded sharply lower on Wednesday after Europe and China reported weak economic data. The reports dimmed the outlook for demand, leading investors to make price adjustments to accommodate higher inventories. Traders blamed concerns arising from Europe’s lingering debt crisis as the main reasons for the weak reports.

It was reported early in the trading session that China’s official purchasing managers’ index for the services sector fell to 53.7 in September from 56.3 in August. Reports out of Europe that the economy would not show growth before 2013 also hurt demand for crude oil. Although it has not been officially reported yet, the reaction to the European data suggests that the Euro Zone may have returned to a recession during the third quarter. Traders cite dwindling new order and faster layoffs as two of the main reasons to believe in an economic slowdown in the Euro Region.

The weakening economy also led to a drop in oil consumption. Retail sales also failed to meet expectations. One clue that traders are bracing for more negative news was the failure of the oil market to rally after the release of friendly employment data from ADP.

Now that oil has backed away from $100 per barrel, it could be destined to test the low end of the trading range with a break to $80 -$70 over the next 6 months. One constant that has been underpinning crude oil has been the possibility of military action in the Middle East. This issue doesn’t look like it is going to go away so oil prices should collapse, but may weaken from here.

The EUR/USD traded lower today. On Monday traders tried to break it to the downside but selling pressure dried up. On Tuesday, an attempt was made to drive it higher, but that also failed. Uncertainty as to whether Spain would make a formal request for European aid is causing the choppy, two-sided trade. Earlier in the week, traders were reacting as if the news was imminent, but these hopes were crushed when Spanish Prime Minister Rajoy said that nothing is expected to be done over the near-term and that there are still differences to be worked out.

The weaker Euro and commodity markets were clear signs that risk was off today. This led to a rally in the U.S. Dollar. The British Pound was also pressured by the lack of demand for higher-yielding assets. Traders were also pressuring the GBP/USD on the thought that the UK Services report would show a weakening economy.

Surprising, December Gold has held firm despite the stronger Dollar. Earlier in the week, the market reached a new high for the year and has held on to most of its recent gains. Speculators and investors are both supporting the market at current levels. Uncertainty about the future of the Euro seems to be the most important bullish factor. 

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