Correlation to Oil
By Dennis Rhee, Managing Partner of Treesdale Partners and Portfolio Manager of the AdvisorShares Gartman Gold/Euro ETF (NYSE Arca: GEUR) and AdvisorShares Gartman Gold/Yen ETF (NYSE Arca: GYEN)
Mario Draghi in his statement on January 21st signaled for more quantitative easing. Excerpts including “no limits on how far to deploy measures” and “ready for extended measures” was the impetus on Thursday for a global equity relief rally. Oil rallied as well. Draghi also stated that “Europe’s correlation to oil prices has increased.” No kidding.
Draghi will not stop the oil debacle by “extended measures.” Oil has fundamental problems with oversupply and lower demand. This will take time to work itself out as will the issues plaguing Europe. What is clear is that oil is currently the main driver of investor sentiment. As oil continues to test new lows, equity markets are vulnerable to a major correction in Europe as well as the rest of the world.
Given Draghi’s inclinations, rates in Euroland will remain low for the foreseeable future. All conditions being equal, the euro should remain the currency to fund asset purchases. If you don’t like stocks, gold seems to be showing signs of life in these uncertain times.