The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Crude oil
Problems in the crude oil market are spilling over. US Treasury yields climbed again, and the US stock market faced pressure too. The conflict with Iran, with its many ebbs and flows, is re-pressuring crude prices. West Texas Intermediate is over $96 a barrel and Brent is over $101. The S&P opened today’s session down about 20 points and wandered around a bit lower than that for the day. Capital flow was light again, 83%.
At the onset of the war with Iran, markets were quite fearful of the consequences of higher oil prices. That fear subsided quickly though and was essentially gone by June, when oil prices collapsed and some kind of path to peace seemed imminent. Conflict sadly continued and escalated, and oil prices climbed again, but both the Treasury and stock markets ignored the climb in crude for a couple months. That is no longer the case.
Maybe the fresh highs in crude have snapped investor attention to the negative consequences of high, prolonged crude prices. Here’s a graph of October WTI. The September climb, now with consistent prices above $90, seems to mark a material change in the investing landscape.
The inflation data tomorrow and Friday is still very important for the next short-term trend in stocks but there’s a new influence at work. Crude prices are now significantly influencing both stocks and bonds.
We already know that anything but cooling inflation prints will push the Fed to hike. Will higher prices in crude over the next few sessions influence the Fed via inflation transmission in the coming months? Will crude prices fall enough to undo the damage is has been doing in the last month?
I think it is a tall order to expect crude to trade below $80 a barrel anytime soon. Maybe crude helps the equity market and drops to the high 80s soon…. But will that really help much, other than causing a relief rally for a session or two? God forbid crude go about $100 for an extended period, but that certainly seems a reasonable risk. What do yields and stocks do in that world?
Crude’s climbing price has not been hidden but it snuck up on the narrative of the market quickly. Now it’s a front-burner issue and it doesn’t seem like it will do anything but be a negative influence for a while.
Advantage bears, for a while.
See you tomorrow.
-Mike
Visdom Market Commentary
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