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Housing Outlook Remains Mixed

US Real Estate Facing Challenging Environment After Building Permits Plummet

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Although clear signals about the future of the housing market continue to prove elusive, yesterday’s housing disappointments come at a time when price momentum higher continues to decelerate and concerns about affordability grow.

US Building Permits Crash

The recent uptick in US building permits, driven mainly by the growth in applications in the American North East fizzled out with a sharp retreat. Building permits plunged by -16.30% month over month, missing expectations by a record and dropping by the widest margin since 2008 as the number fell to levels last seen in March. The expiration of a tax incentive was widely attributed as the reason behind the recent drop. Housing starts rose modestly, gaining 0.20% month over month even though the print missed expectations of 1.00%. Without further incentives to drive construction, the same sort of explosive growth witnessed in recent months will have been viewed as unsustainable and evidence of a potential pullback in store for the sector at large. Although stocks were initially weaker, they managed to recover modestly, rallying from earlier depths with the Dow Jones Industrial Average just -0.19% softer.

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dow-sep1508192015-1

API Inventory Draw Sees Crude Spike

Crude oil stockpiles fell for a fourth straight week according to the latest data from the American Petroleum Institution, with inventories dropping by 2.3 million barrels. However, higher refinery uptake was not enough to prevent prices from dropping lower after an initial spike to the upside. Crude oil inventory has recent hit the lowest levels since 2009 as concerns about the pace of supply expansion and global growth expectations sap demand for energy. China’s latest devaluation move is also raising concerns that the world’s second largest source of oil demand might be faltering in its efforts to prop up the economy. Additionally, non-OPEC members continue to ramp up production as evidenced by output from Oman which managed to surpass 1 million barrels per day for the first time ever. Oil prices are mostly unchanged after flashing higher during the announcement.

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cl-oct1508192015-2

Copper Crumbles on China

Losses in base metals such as iron ore and steel continue to mount as concerns about the outlook for global trade dent sentiment. In conjunction with the crash in Chinese stocks, copper prices continue to retreat, falling to the lowest level since 2009 as demand for industrial metals collapses. Copper is concurrently facing a supply problem with output outpacing demand by a wide margin. Several years of record low interest rates coupled with mine expansion on the back of the commodity super-cycle have seen production capabilities continue to gain while end-demand has reversed course and shrunk. The sheer amount of spare capacity in the industry and languishing industrial production are contributing to the weakness which looks certain to accelerate as fears of a Chinese unwind in the real economy and equity markets influence prices further.

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copp-aug1508192015-3

FTSE 100 Equidistant Channel Technical Pattern

The UK FTSE 100 benchmark continues to gradually trend lower in line with the developments of global financial markets. Recent weakness in the equity space continues to spread as investors prepare for the advent of higher interest rates in the coming months and Central Bank balance sheet expansion slows. Although the UK economy continues to shine and inflation has experienced a modest pickup, these factors are contributing to an understanding that the equity markets have substantial potential to experience a pullback. The equidistant channel formation setting up in the FTSE 100 index has a predominantly bearish bias with ideal positions taken at the upper channel line targeting the lower channel line. A move above the upper channel line however could be indicative of a potential channel-based breakout to the upside to be accompanied by renewed momentum higher.

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