Back to enjoying green candles last week on equity markets after investors feel they are out of the choppy waters after several banks faced bank run risks. But this week is starting off rather mixed after oil prices skyrocketed and resurrected fears of growing inflation. Oil was up 7% on Monday on surprise weekend news by several major oil exporters that they would slash production. The reduction in production will be as significant as 1 million barrels per day and will start in May. That’s the biggest product cut since October. So, traders expect oil to stay strong and some even talk about prices as high as 100$ per barrel. Several major economies were taken by surprise and the White House expressed its discontent after the coordinated announcement from Saudi Arabia, the UAE, Oman, Kuwait, Algeria, and Iraq. The US National Security Committee vowed to keep working with oil producing countries to ensure economic growth will be sustained and that consumer prices will remain low. Let’s see how that goes.
A more expensive barrel could cause a major setback to the risk-on mode markets have been enjoying since the beginning of the year. It also has an impact on the Fed’s next move as its mandate is to keep the inflation contained. And the latest PCE, the main inflation indicator for the Fed, came out at 5% in February, well above the 2% inflation target. It’s funny because two weeks ago, we were saying inflation was no longer the focus as we had more urgent issues coming our way. But SVB and Credit Suisse news were digested and the PCE level can go back to be the center of attention.
At least, oil companies are performing well, especially on the Exploration & Production sector.
But overall, even on a first semester where we went through panic in the financial sector, the S&P still performed well with close to 7% and the Nasdaq went up 16% on hopes for lower financing costs. Bitcoin is even up an amazing 70% year to date.
But all this might not last. In the past few days, two major Wall Street strategists warned of a market downturn. JP Morgan sees stocks dropping from here on out, calling the current environment “the calm before the storm”.
Same tone from Bank of America’s well-known Subramanian, who said the sentiment on equities has not been this bad in years.
In this environment, no wonder why gold performs that well. It even broke its 2000 psychological resistance and now sits comfortably at 2020 after a 10% rise since the 1st of January.
Johan Thomyris
