Equity and Oil market analysis: Mixed performance for US markets

Market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi,

US equities had mixed performance overnight having spent most of the session wallowing in the red. Still, stocks have lingered around record highs in recent days.

But with no updates on stimulus measures amid the absence of significant macro developments to change the mood music, investors have little cause to chase any market. 

US CPI came in lower than expected but was taken pretty much as a look through as vaccine distribution promotes a return to offices and travel, so the monthly readings should pick up again.

Ignoring much of the good news on the virus front this week and despite President Biden signaling support for a swift passage of the stimulus deal, investors continued to focus on whether the proposed stimulus package risked being too big.

All the while, those omnipresent nagging concerns about when governments will eventually lift pandemic restrictions continue to cloud the view.

Markets even failed to get a lift after US Fed Chair Powell attempted to rekindle the golden age of capitalism by pleading with the private sector to step up to the plate and create more jobs through reinvestment (I assume as opposed to investing in the markets and profiteering from stock buybacks).

Indeed, it is hard not to disagree with that call which in the past has been a proven unemployment cure-all and precisely what the recovery doctor ordered.

And understanding the delicateness of the raging market discussion around the US stimulus package, he wisely deflected any question about whether the deal was too big. Still, he noted fiscal policy had been an essential pandemic tool to date while simultaneity asking Congress for more doubling down on the wartime economic theme.

With upcoming news flows around vaccination programs speeding up and Covid-19 -related hospitalisation, additional buying can be expected from corporates and risk control types heading out of blackout periods if realized interest rate volatility sets in.

Indeed, this has been pretty much the thesis I have been running with into and throughout this week. In the absence of any significant tier one economic data to steer the good ship “Recovery” investors and active managers could be sitting tight allowing the macro backdrop to shine a bit more brightly before getting their toes wet again on the “bigger and more expensive” ticket items.

Oil prices take a breather

Despite finding support from the large draw in the US crude stockpiles today with excess inventories almost entirely gone now just 26mb (2%) higher than the same point last year, oil prices couldn’t hold into its gains possibly on the expectation that Saudi Arabia could roll back their unilateral Feb/Mar production cuts and that OPEC could signal more production coming back online at the March meeting given the sizzling recovery in oil prices.

But taking note of the pause in other markets, the mild price reversion could be nothing more sinister than the oil rally pausing for a breath after hitting new 12-month highs, with Brent over USD61/b suggesting profit-taking set in. Fundamentals remain supportive as viewed through the lens of a surprisingly big US crude draw.

There is no reason to doubt that fundamentals will justify further recovery in oil prices to long term equilibrium of USUSD65/bbl and likely beyond by year-end.

Geopolitical risk factors are on the rise again, with press reports suggesting Iran is defying US sanctions. It has aggressively ramped up oil production and exports this year, in an early test of the Biden administration’s resolve. The probability of an agreement between Iran and the US that would lead to a lifting of sanctions seems low at this time this is a risk that is worth following.

The prospect of oil production returning to normal for Iran, implying ~1-1.5mbd of production upside, could put a cap on oil price upside this year.