How do you engineer a major drop in oil and gas prices without upsetting the algos? As we discussed yesterday, you feed them something they like just as much — like a 35% plunge in VIX.
From yesterday’s Update on Oil & Gas:
Is it any surprise that VIX is dipping below its 200 DMA as the market is about to open this morning?
Sometimes oil and gas prices drop because of fundamentals. Sometimes they drop because central bankers need them to. With the 10Y still pushing 3%, and the June YoY delta in gas prices pushing 27.5%, something had to give.
For those who haven’t read it recently, this would be a good time to review April’s Oil & Gas, Inflation and Interest Rates: A Delicate Balance or Goal Seeking?
continued for members…
Futures are currently off a whopping 3 points. And, VIX could easily go lower if need be. 
Remember, USDJPY is available if VIX can’t quite do the job.
RB broke below its SMA50 and has clearly reentered the white channel. 
CL has dropped through its SMA100 and is over half way to its SMA200. 
With an FOMC meeting coming up, I think there’s a very good chance that TPTB are panicked over the prospect of putting through another rate hike. I think they’re constructing an exit door as quickly as they can.
Whether they use it this go ’round, or simply demonstrate that inflation won’t be a problem going forward, I can’t say. But, it’s certainly taking on an air of desperation. With the SMA200s so close, now, I imagine that’s the line in the sand.
If the FOMC does decide to deflate the rate hike path, look for some pretty significant moves in TNX, ZN and DXY.
I have to run out for a few hours this morning, should be back by noon.
GLTA.
UPDATE: 3:40 PM
Nothing much to report except COMP made new all-time highs. VIX is still driving SPX/ES. I adjusted the top of the harmonic pattern, but TPTB are being quite stingy with any downside points.
Remember, COMP is sitting at its 1.618 extension (7619.37.) First tagged it on Mar 13, and has now slightly exceeded the high from that day.
Comments
2 responses to “Whatever It Takes”
Hello PW,
I have been following your articles on causes and effect from interest rate, inflation and oil price.
Suppose I am TPTB and I have all the tools. And I want 10 year yield to be back down to 2.52.
Is it really that simple to suppress gas and oil and eventually the 10 year yield will be back down to the optimal level? Am I missing something here?
I know you mentioned the magic number of inflation. So, steps to take:
1. Suppress gas and oil. CPI will reflect the changes.
2. Inflation to be at magic number at 2%.
3. 10 year yield be back down to 2.52
Thank you!
Yeah, pretty much. Of course, there are the complications of what it would do to the US dollar.
As a net importer, the US would face inflationary pressures from rising import prices. And, oil companies, related servicers and their bankers would get dinged – tarnishing the recovery story. Bottom line, it would argue against the reinflation story which has been historically positive for stocks. If the dollar declines, then stocks have two negative headwinds: a falling USDJPY and falling oil/gas.
And, let’s not forget that the Fed would prefer a sizable buffer between current rates and ZIRP for the next time they need to rescue markets.