The Return Of Risk Appetite And Correlation - All Within A Day

The extent of the move in equities was highly impressive, and even more so when it was done on pretty much no major news. The theme from yesterday (Monday) continues into the morning here in London, risk assets seems bid (equities, GBP, AUD, BRL, Oil) while risk averse assets stayed sideline (Gold, JPY). The move yesterday on no news perhaps shows investors/traders afraid to sell into a market which has hurt sellers for much of this quarter. Though the week is still young, the precedence has been set and if we do not somehow end lower, more people will throw in the towel and SFOT fears we see an overshoot of an even greater magnitude.

Oil prices at $60 now certainly will not help a global economy looking at a L-shape recovery, or does it not matter anymore? The recent rise of crude oil prices have collapsed refining margins globally and had Gasoline not been so strong, margins would have been even uglier. The best example is shown in the sour crude market, where its own strength has brought margins down to almost nothing. Crude prices simply cannot have a lot more upside unless product demand increases and feeds into higher product prices globally.

If Oil is going to play a major part in global recovery, price has to stabilize for a sustained period, and not go up in a straight line, or 40% in 2 months. However, the return of high positive correlation between oil and equities is certainly going to create continuous daily noise, and if the overshoot in equities continue, perhaps we may be talking about a W-shape recovery soon.

Brent-Dub diff

Oman Crude ref margin

Front line Brent

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