Intraday Market Thoughts

Energy Fever Breaks

by Adam Button
Oct 7, 2021 17:08

A potential blow off top in gas prices could have broader implications. A resolution to the US debt ceiling should take down the temperature in Washington but any extended market response should depend on how temporary the solution is. US weekly jobless claims fell sharply by 38K to 326K last week, following Wednesday's solid ADP report. China returns from holiday.  The FTSE100 long was stopped out at a tight stop of 6980, but those who moved their stop are in the money. Today's new Index trade is +120 pts in the green so far. Below are the Oct 2013-2021 market similarities involving the debt ceiling negotiations/breakthrough and uppcoming Fed tape. 

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Energy Fever Breaks - Debt Ceiling Spx 2013 (Chart 1)

The monumental move in European gas and energy prices ratcheted up to a new level on Wednesday, rocketing 40% higher at one point. However, the move reversed and prices finished 10% lower, in part due to comments from Putin suggesting Russia could add incremental supply.

It's far too early to call a top for certain, but the spike higher and reversal has all the technical elements of a blow off following a parabolic move. A cold winter could ultimately leave parts of Europe in a dire situation but that's undoubtedly priced in already. There's also a fair chance that hedges or a short squeeze added to the move.

Gas prices in Europe and North America, along with oil, all carved out bearish outside days and that rippled through broader markets, leading to a recovery in European equities. German stocks in particular may be a clear beneficiary if energy prices stabilize or decline.

Tail risks also fell in the US as Congressional leaders signaled a short-term truce on the debt ceiling, pushing the deadline to December. That will give Democrats time to add it to a reconciliation bill or we'll do this dance again in two months. In any case, markets breathed a sigh of relief from another manufactured crisis.

Ultimately, it will be the economy that decides were markets go. The ADP employment report has been a poor jobs tracker but it foreshadowed weak non-farm payrolls in August. Wednesday's report showed 568K jobs compared to 428K expected. 


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