‘Computers say buy….sell….buy….sell…’

D'turn 3Oct11.pngPetchem markets are continuing to act as leading indicators for the global economy. The IeC Downturn Alert shows there was no September rebound in orders after the holiday period.

October will have to bring a sudden, and powerful reversal of the downward trend. Otherwise Q4 could be very difficult indeed. Benzene, the blog’s favourite market indicator, is now down 27% since the Alert began 5 months ago.

Equally, crude oil prices are looking very weak, and seem to be heading towards the blog’s $60/bbl target. The damage they have already created to demand means prices could end up much lower.

Meanwhile, financial markets have become dysfunctional under the influence of the super-computers. These now control 60% or more of trading in most markets. They are programmed to:

• Read and interpret financial market headlines in real time
• Issue thousands of buy or sell orders in response to these
• Then close their positions after micro-seconds, and start again

The computers are fine when it comes to reading numbers. But they completely fail when interpretation is required:

• Thus markets soared on Thursday, after German Chancellor Merkel won her parliamentary vote to support the European Financial Stability Facility
• But they then reversed direction on Friday, when new headlines suggested the vote had not resolved any of the Eurozone’s problems.

This demonstrates how financial markets have lost touch with their real purposes – of raising funds to allow companies to expand, and of allowing producers to hedge commodity price risks. High-frequency trading instead simply creates unhelpful market volatility for the profit of those owning the most powerful computers.

Price movements since the Alert’s launch, and ICIS pricing comments this week are below:

Benzene NWE (green), down 27%. “Market values have eroded throughout the past month on continued macroeconomic bearishness as well as slower downstream demand.”
Naphtha Europe (brown dash), down 20%. “Refinery run cuts are reducing supplies…demand remains weak”.
HDPE USA export (purple), down 18%. “Traders said US inventories were building….but very little export activity was yet taking place.”
S&P 500 Index (pink dot), down 17%.
Brent crude oil, down 17%.
PTA China (red), down 10%. “Sellers were forced to offload their cargoes to take in cash ahead of the National Day holiday in China.”