Benchmark oil markets may fall this week as higher bond yields erode confidence in the housing market, undermining the sector's 'multiplier effect' on the broader U.S. economy and complicating efforts by the Federal Reserve to withdraw stimulus.
Though consensus forecasts are calling for the Fed to start rolling back asset purchases at its mid-September meeting, recent negative data surprises suggest that time-frame may not be set in stone. U.S. crude futures rose 1.3 percent on Friday on expectations that the Fed would hold back from reducing stimulus after government data showed new-home sales fell by the most in more than three years.
A headwind for the housing recovery, higher U.S. mortgage rates have reflected a pick-up in benchmark 10-year Treasury yields which have traded at two-year peaks. "The last thing the Fed wants to do is prick the housing market," said John Licata, chief energy strategist and founder of Blue Phoenix in New York, who has a 'bearish' recommendation on oil markets this week.
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"For many, their home values rising have been reasons they have been spending more on retail," he said. "If the Fed tapers too much too soon, declining home prices plus lofty energy costs will make Q4 a miserable time for the stock market."
CNBC's weekly sentiment survey showed 54 percent, or thirteen out of 24 respondents, believe prices will fall this week. Over a quarter, or seven out of 24, say prices will gain while 17 percent (four out of 24) expect the market to trade at around current levels.
"World growth is tepid and risk rises with every basis point hike in world bond markets," said David Kotok, Chief Investment Officer at U.S. money manager Cumberland Advisors, with $2.3 billion assets under management.
Oil market volatility may be heightened this week as investors try to second-guess when stimulus taper may occur as traders scrutinize economic indicators for clues.
Scheduled U.S. data releases this week include July durable goods orders on Monday and the final reading for the Thomson Reuters/University of Michigan consumer sentiment index on Friday. But the highlight will likely be Thursday's latest estimate of U.S. gross domestic product for the second quarter. The data is expected to show the economy grew a revised 2.2 percent annualized rate last quarter compared with a 1.7 percent reading last month, according to economists' forecasts compiled by Reuters.
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Trading action this week may mirror last week's volatile moves, said Kirk Howell, portfolio manager at Allston Holdings, LLC. Last week's strong U.S. manufacturing PMI data helped offset cautious Fed minutes, he said, adding that a deteriorating situation in the Middle East propelled WTI crude off $103.50 though U.S. crude was still down on the week at around $106.30.
"I wouldn't be too surprised if this week we see more of the same kind of choppiness given the added component of squaring the books for the end of month and starting to position ahead of what will be a very busy September" with the release of the official labor report September 6 and the Fed's policy meeting on September 18, Howell said.