Yemen Disintegration Sends Oil Soaring

Analisi Giornaliera - 26/03/2015

Crude Gains as Saudi Arabia Begins Military Campaign to Restore Order to Yemen

The flight of President Hadi from Yemen has seen sectarian violence spin out of control in Yemen, prompting neighboring Saudi Arabia to initiate a bombing campaign to undermine the advances of the Houthi rebels. Saudi Arabia will be aided by Egypt with the US also extending assistance in the form of military and intelligence assets.

Oil Rises as Yemen Descends into Chaos

After weeks of setbacks for the Mansour Hadi Government which fled the Yemeni capital of Sanaa in September, the battle between sectarian groups has seen the nation descend into chaos. The Iranian-backed Houthi rebels have made many strategic gains with the US completely abandoning its military presence in the nation which was heralded by US President Obama as an Arab Spring “success” story. Overnight news of Saudi Arabia embarking on a bombing campaign against its southern neighbor sent oil prices rocketing higher, gaining over 7% since the announcement. With Yemen sitting at a strategic choke point for Gulf oil exports, the situation has become very serious, with the US and Egypt assisting in the Saudi bombing campaign to restore order in the nation. The operation will involve land, air, and sea units with tanks supposedly crossing into Yemen from Saudi Arabia overnight.

Buyback Halt Sees Stocks Fall

Aside from the breakout of a new conflict in the Middle East, stocks suffered one of their worst declines of 2015 with major benchmarks giving back all post-FOMC gains. The Nasdaq Composite led the drop, plunging -2.37% followed by a -1.62% loss in the Dow Jones Industrial Average. The Dow Jones is now trading in negative territory year-to-date while the Nasdaq has managed to hang onto some gains. One of the factors increasing pressure on equities is fading corporate buyback activity. Stock buybacks have recently contributed to a large portion of gains in the US equities as retail investors exit and companies repurchased stock at the fastest pace on record in February. Part of the recent losses can be attributed to the beginning of earnings season which sees companies facing a 5-week buyback blackout period ahead of their respective earnings date.

Dollar Weakness Persists

The US dollar continues to lose ground against peers as setbacks for the US economy mount. The drop in corporate earnings, mixed housing data, and weak durable goods orders show that the economy is not expanding at the pace necessary for an environment of higher interest rates. With annualized inflation at 0.00% and no imminent rebound forecast, the case for a weaker dollar prevails in the near-term. The losses in the dollar have seen gold prices gain for 6-straight sessions, presently trending above the $1200 handle while similarly adding to momentum in other commodities like crude oil. The USDJPY currency pair is experiencing the brunt of dollar losses, falling -0.70% on the session. EURUSD and GBPUSD are notably higher, trading higher 0.30% and 0.27% respectively. USD momentum lower will likely accelerate as hard economic data reduces the prospect of a change in monetary policy.

EURUSD Ascending Triangle Technical Pattern

With Greece granted an additional 5 days to present a comprehensive reform plan for the European Commission to unlock the next bailout tranche, relieved markets have seen positive sentiment flow back towards the Euro. Losses in the dollar continue to contribute to the rise in the EURUSD pair as a weakening in the outlook sees a further pullback to nearly 8-months of momentum higher. While a weaker Euro is helping the European recovery along temporarily, the underperformance of US macro data is driving the pair higher in the near-term. The ascending triangle setup in the EURUSD pair has a bullish bias, bound by a near-term uptrend line begun last week and resistance at 1.1042. Any move above the resistance level should be treated as a breakout with subsequent targets of 1.1114 and 1.1183.