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Do Oil Markets Signal A Downturn?

Over the last few months, market watchers have become accustomed to a situation, or rather a correlation, that makes no sense. Oil and stocks have tended to move in unison. From a basic, fundamental perspective that is patently absurd. Energy costs are an important factor in the overall profitability of businesses and have a big influence on consumer behavior too, so higher oil should be a warning sign, not an indication that everything in the garden is rosy. This week, though, we have seen signs that the correlation is now fully broken. Stocks have recovered rapidly from the Brexit news, while oil has stayed lower. The question, of course, is which is right?

The recent correlation has come about for two basic reasons. Firstly, from these levels even higher oil is still, as compared to the recent days of $100+ WTI, low and therefore nothing to worry about. Secondly the potential negative effects of higher oil have been less important to stock traders than the implications of oil’s movements for global growth. Both of those things still apply to some extent, but the further we move away from $100 oil the less relevant it becomes.

That leaves us with implications for global growth, and in that respect I would say that it is the stock market, not oil, that is out of whack. There is plenty of evidence to support that theory. First and foremost is what other markets are telling us. I probably have a bias due to being trained in a forex dealing room, but I was…

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