Schwaben Blog – Lot’s of volatility – first in oil now in equities

Schwaben Blog

January 9, 2015

Weekly Statistics:

Today Week Ago Year Ago
09-Jan-15 02-Jan-15 10-Jan-14
S&P TSX 14,384.92 14,753.65 13,747.52
S&P 500 2,045.00 2,058.20 1,842.37
DJIA 17,737.37 17,832.99 16,437.50
OIL $48.19 $52.69 $86.87
USD vs CAD 0.8429 0.8521 0.9159
Gold 1,223.10 1,186.20 1,251.30


The first full week of trading started the year with immense volatility. There were a number of events that contributed to these wild swings. Oil prices have shown no sign of bottoming out. The main benchmarks saw a sharp sell off on Monday and Tuesday and then big rallies on Wednesday and Thursday. The DJIA moved by triple digits for the fifth session in a row. WTI (West Texas Intermediate) oil is trading well below $50 per barrel and went to a low of $46.83 before recovering to its current price of $48.21. According to Bloomberg New Energy Finance, 37 of the 38 US shale oilfields supposedly are below break-even point in other words, 97% of fracking is now operating at a loss at current prices. North Dakota, which relies heavily on fracking will experience hard times in the foreseeable future. December jobs report for US and Canada did not inspire enthusiasm in equity markets. In US 252,000 jobs were added while Canada shed 4,300 jobs. In the US it was mainly the decrease in wages and labor participation rate, which led to downward pressure on markets. Wages in the US decreased by 5 cents, biggest drop since 2006, and labor participation rate went down to 62.5% from 62.8%. Unemployment in the US is down to 5.6% from the previous reading in November of 5.8%. While employment is steady at 6.6%, the economic gap between the West and the rest of Canada will disappear this year.

Western Canada saw a ray of hope in Keystone XL pipeline issue when the US House of Representatives voted to approve the bill however the House’s 266-153 vote fell short of the two-thirds that would be required to override Obama’s veto. Earlier, Nebraska Supreme Court dismissed a lawsuit against the pipeline. This pending lawsuit was one of the main reasons for President’s opposition. The dismissal of the lawsuit may improve the chances that Obama may not veto the bill and clear the path for construction of pipeline. The pipeline is around 1,900 km long and would carry more than 800,00 barrels of oil from Canada to the refineries in US. The parent company of this pipeline, Transcanada Corp, had been waiting for a decision on this issue from last 6 years. The pipeline could increase the demand for oil from the Canadian oil sands.

Internationally, the decline in oil prices has given a real blow to Russia. Russia’s investment rating was downgraded by Fitch to BBB- from BBB, which is just one notch above junk or speculative sta


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