The Daily Prophet: Oil Slump, Dollar Weakness and Stock Cracks

Connecting the dots is global markets.

The oil market bulls are giving up on the prospects for a quick rebound after prices tumbled below $50 a barrel. The latest evidence comes from the U.S. Commodity Futures Trading, whose data show money managers cut bets on a rise in West Texas Intermediate crude by a record amount during the week ended March 14. Maybe more troubling is that wagers by producers on a further price drop doubled.

The rapid decline in the price of a barrel of oil to about $48 a barrel from almost $55 in late February has touched most all assets globally, from bonds to stocks to currencies. During the week ended March 14, hedge funds decreased their net-long position, or the difference between bets on a price increase and wagers on a decline, by 23 percent to 288,774 contracts, the largest decline on record and the lowest level since December, according to Bloomberg News's Jessica Summers. Producers and merchants increased their bets on lower prices to 739,736 contracts, the highest level in a month.

While such extreme positions can be seen as a contrarian signal, that wasn't the case today as the price of crude fell. "It’s sort of a negative feedback loop, where money managers were selling because the price was falling, and the price was falling in part because money managers were selling,” said Tim Evans, an analyst at Citi Futures Perspective in New York.

The wall of worry in the stock market is becoming too big to ignore. The cost of protecting against large market swings has surpassed a peak hit following the Brexit vote, reaching a fresh record. With the Federal Reserve raising borrowing costs and the political environment remaining uncertain, the CBOE SKEW Index climbed for five straight days, its longest streak since June 2016, according to Bloomberg News' Cecile Vannucci. Evidence of sentiment turning low, a higher correlation between individual stocks and the S&P 500 Index, plus tactical indicators showing a drop from "extreme overbought territory" all point to a correction being underway, according to Tony Dwyer, co-head of U.S. equity research at Canaccord Genuity.

While the sizes of the moves aren't shocking, it's still notable that the dollar is in the midst of its longest slump since the week before the U.S. elections. The Bloomberg Dollar Spot Index has fallen for four consecutive days to its lowest since Nov. 11. Part of the weakness can be linked to the drop in oil, which is reducing the outlook for inflation, which in turn is keeping traders from fully pricing in the three-interest rates increases this year being forecast by the Federal Reserve. Currencies are also heavily influenced by trading patterns, or "technicals," and some investors note that the selling intensified after the index fell below its 100-day moving average.

This space has spotlighted in recent weeks the sudden slowdown in credit growth, and the latest data on late Friday showed an alarming drop. Commercial and industrial loans outstanding fell by $18.7 billion, or 0.89 percent, to $2.0767 trillion as of March 8. That was the biggest plunge since 2010 and comes as the expected pace of first-quarter economic growth, as reported by the Atlanta Fed’s GDPNow report, fell to a meager 0.9 percent as of March 16 from its recent high of 3.4 percent on Feb. 1. It's hard to pin an exact reason on the decline in loans, but Peter Boockvar, the chief market analyst at Lindsay Group, speculates it may have something to do with companies getting ahead of the Fed's rate increases by selling long-term, fixed-rate bonds and using the proceeds to paying down variable-rate bank loans.

For a sense of just how hot emerging markets are, consider the South Korean won. Even though an influence-peddling scandal resulted in the impeachment of President Park Geun-hye this month and shook up some conglomerates including the Samsung Group, and recent missile tests by North Korea have injected new urgency into efforts to halt that nation's weapons program, the won has managed to rally to its strongest level since early October. South Korea stands out for its current-account surplus, which is about 7 percent of gross domestic product, higher than China or Japan. That means the country doesn’t need to rely on foreign capital to finance its operations, a plus in times of crisis. The won is the best-performing Asian currency this year, gaining almost 8 percent, as overseas investors snapped up $4.5 billion of stocks, up from $952 million in the last quarter of 2016, according to Bloomberg News' Liau Y-Sing.  

Back in the early 2000s, one big driver of the dollar was the large deficit in the U.S.'s current account, which is the broadest measure of trade because it includes investment. Unlike South Korea, the U.S. can't finance its operations internally, meaning it relies on foreign investment. The problem is, after years of improvement the current account is starting to widen again just as foreign investors are pulling back from U.S. debt. The government is likely to say Tuesday that the shortfall expanded in the fourth quarter by $13 billion to $129 billion. While that's still far from the peak of $216.1 billion in 2006, the gap has expanded from $79.9 billion as recently as 2013.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.