Tuesday 26 January 2016

Stocks follow oil down as latter follows pattern of subprime crash

Markets ended a rally on Monday as both stocks and oil fell.

Asian stock markets rose early in the day following the strong US market performance on Friday. The MSCI Asia Pacific Index gained 1.1 percent.

However, the STOXX Europe 600 fell 0.6 percent and the S&P 500 tumbled 1.6 percent as oil turned down.

West Texas Intermediate crude plunged 5.8 percent and Brent crude lost 5.2 percent.

Monday followed the recent pattern of oil and stocks moving together. According to The Wall Street Journal, the correlation between daily moves in the price of Brent and the S&P 500 stock index over the past 20 trading days is at 0.97, higher than any calendar month since 1990.

That correlation could prove ominous for stocks.

Analysts at Bank of America Merrill Lynch think that there is a parallel between the subprime mortgage crash in 2007 and the recent disorderly fall in the price of oil. Via Bloomberg:

The pattern of the decline in the price of oil that began in mid-2014 is remarkably similar to the 2007-2009 pattern of the price decline of ABX, the credit derivative index that referenced subprime mortgages... The ABX history suggests that oil will see more declines in the next couple of months and find a floor somewhere in the low 20s in the March-April time frame...

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