Recap: Week Ending December 12, 2014
Equity markets across the globe sold off for the first time in unison in recent memory last week. The Dow Jones Industrial Average fell 677 points, the equivalent of 3.78% last week. The sell-off was much stronger in Europe where the German DAX fell 492points or 4.88% last week. The sell-off comes as the Volatility Index, also known as the VIX, was trading at multi-month lows as equities slowly crept higher. On Friday, the VIX closed at 21.08, gaining 9.26 points or 78.34% last week. The move lower in stocks can be partly attributed to year end profit taking as both the Dow and S&P500 were making a series of new all time highs. The sell-off is also a reflection of a much weaker crude market. The weakness in oil can be attributed to both weak demand and an oversupply in the market. Weakened demand is a reflection of a cut in manufacturing or production around the world as oil is a dominant piece of the producing world. Equities took a hit when global oil associations cut their daily forecast for crude usage, reflecting a weakened global economy. The supply side has also been a key factor with the US operating currently at all time highs in oil production, flooding the market with an unneeded supply. Such conditions have created the perfect storm for oil which had a terrible week last week, selling off 8.14USD or the equivalent of 12.40%. The sell-off is one of the strongest the energy has seen in recent years, falling about 45% since its highs in June.
The move lower in crude has hit home with the Toronto Stock Exchange, TSX, which fell 741points last week or 5.13%. The sell off its one of the strongest that the Canadian benchmark index has seen in years. Selling comes as many Canadian-based oil producers and refiners are lowering guidance and realizing that profits will be hit hard from the falling price of oil. Many investors are withdrawing their funds from Canada completely with a strong sell off being seen in the CAD. As the price of oil falls and it becomes cheaper for purchase oil from other nations, there will be less demand for the Canadian currency, in turn pushing it lower. The fall in the CAD could not come at a worse time as the USD is relatively strong based on the notion that rates will be rising sooner rather than later in America.
Despite thestrong sell off in crude, golddid not catchmuch of a bid as many would haveexpectedit to as it is a haven asset. Theprice of goldsettled at 1222USD, which is a multi-month highforthepreciousmetal. In recenttimesgold has taken a hit as many global nations, including Canada, havecomeoutandstatedthatinflation will not be near its target, leading to a lack of demandforgold. Asgold is typically a hedge against inflation, it has seenmuchsellingpressure as of late. On theotherhand, the 30 year US treasurybond has seen a strongpresence of buyers, sending its price to new highs forthe 2014 calendaryear. Lastweekthe 30 yearclosedup 2.98%. Asboth of theserisk off assets classescontinue to catch a smallbid, itappears investors are becomingmoreandmorecautious about the global economy, despite thefactthatthe US is looking to raiserates.