US stocks struggled and rebounded into the close, but the reflation rotation has given way to the heated debates around US rates for most of the day.
Stocks are at the brink of moving from the sweet zone into the danger zone as the US Fed rate hikes start nudging towards 2022 and the taper tantrum drum keeps beating in the distance.
With large-scale stimulus amid recovery from the Covid-19 shock, investor attention has focused on potential impacts from rising rates and inflation.
Equities and inflation breakevens have shown a relatively consistent positive relationship. Higher inflation is typically seen as good news for the market. But as the 10-year breakeven pushes above 2.5%, concerns about slower consumer spending and higher input costs begin to weigh on markets. And the equity inflation correlation has turned from sweet to sour.
For now, the Fed has been able to keep the taper genie in the bottle. Still, in a world quick to normalise due to the vaccine with additional fiscal stimulus providing rocket fuel to the inflationary fire, higher rates are on the verge of becoming a consensus view.
But it’s still far too early to draw any conclusions despite my rates bearish bias as life in an orthodox world where too much stimulus leads to inflation and tighter monetary policy. Plus, it’s options expiry day tomorrow, which naturally will bring some dispersion gnarly.
Oil comes off the boil
Oil prices are coming off the boil as the power crisis spurred on by the massive winter storm in parts of the US is starting to ebb.
Brent retreated on Thursday, having earlier hit a 13-month high amid disruptions in the production and refining hub of Texas and other southern US states and bullish API numbers.
The US Department of Energy (DOE) data released today was for the week ending Feb. 12, so excluded the weather disruptions.
There was a large draw in oil inventory coupled with a significant draw in distillates. The much smaller-than-expected build in gasoline stocks was a bit of a surprise still.
The Texas polar vortex, which froze oil pipelines and wellheads and bringing production in the Permian Basin to a standstill is forecast to end Sunday as repair crews rush to brings well back online. And with far too many bullish time spread structures in place, physical traders were forced to duke it out for spot delivery barrels, prices soared.
But now the market is yielding to mother nature’s quick and self-healing principles, which have traders paring worst-case scenario positions that are always first to be skimmed.
It looks like the weather-induced rally this week has peaked, and the market will now be more inclined to shift back to regular supply and demand fundamentals.
That said, prices are unlikely to fall too much given the ongoing evidence of recovery in global demand, mostly good news on the Covid-19 trends and robust economic data allowing oil investors to turn their attention to updates on reopening timelines – especially in the US as cries for a quicker end to mobility restrictions grow more vocal.
OPEC+ meets in the first week of March and it seems likely the group as a whole will begin to ease production cuts.
Oil may cool slightly on this news, but there is nothing here that should be a cause for concern.
Saudi Arabia and OPEC+ will continue to be responsive to macro conditions and manage supply through what remains a period of uncertainty on demand.
Equity and Oil Market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi