Stock Market Up, Oil Prices Down: Is It Really Over?
Stock Market Up, Oil Prices Down: Is It Really Over?
By:Ilya Spivak
Stocks surged as crude oil sank after US President Trump said talks with Iran are underway. Now what?
- Crude oil prices crumbled amid hopes for an end to the US-Iran war
- Stocks, bonds, and gold prices raced higher while the US dollar fell
- PMI data may revive inflation fears, put markets back on defense
Crude oil prices plunged after President Trump said that talks are underway that might bring the end of the US-Iran war. The benchmark WTI contract fell 9.4%, recording its biggest one-day drop in six years breaking through the bottom of the choppy $91-101 per barrel range that contained price action last week.
The move reverberated across financial markets, putting in reverse the moves playing out since the war broke out in earnest a month ago. US stock market averages rebounded, Treasury bonds rose as the US dollar fell, and gold prices recoiled from eyewatering overnight losses, trimming a drop of as much as 8.75% to just 1.9%.
Oil prices fall, stocks rise amid hopes for ending the US-Iran war
Markets have traded on the premise that Iran’s blocking of the Strait of Hormuz – a vital waterway for shipping energy as well as a slew of other critical inputs, from fertilizer to helium – will stoke inflation and force central banks into a more hawkish posture. Bond yields and the US dollar shot up this month, while stocks and gold have fallen.
With that in mind, Monday’s about-face across major asset classes seems entirely understandable. If an offramp to the war is emerging on the horizon, traders might look ahead to the reopening of shipping lanes in and out of the Persian Gulf and the defusing of inflation risk.
However, last week’s price action already flagged that an inflation shock now seems to be on autopilot. That range containing WTI looks striking compared with the bloodletting that continued elsewhere. The S&P 500 fell to a four-month low, Treasury yields hit a nine-month high, and gold prices lost 10.5%, the biggest weekly drop since 1983.
PMI data may revive inflation fears, spooking markets
Tellingly, a dramatic repricing of monetary policy expectations played out in the background. Traders have abandoned hopes for rate cuts from the Federal Reserve this year. Meanwhile, the European Central Bank (ECB) is seen to be on course for 50-75 basis points (bps) in hikes, having been set for a year at standstill just three weeks ago.
Similar changes have appeared for most major central banks. Year-end policy expectations priced into futures markets for the Bank of Canada (BOC), the Reserve Bank of Australia (RBA), and the Bank of England (BOE) have moved in a more hawkish direction by 31bps, 54bps, and 127bps respectively.
This hints that, even if an imminent end to the war pulls down oil prices, the lingering effects on prices will continue to call for higher borrowing costs, a stronger dollar, and weaker risk appetite. Restoring Gulf throughput capacity to pre-war levels may take months, and there’s no telling how long is needed to calm shippers’ and insurers’ nerves.
With that in mind, the spotlight turns to the March edition of S&P Global purchasing managers index (PMI) data. Traders will parse the figures for signs of sticky price growth. If they find them, stocks, bonds and gold prices may succumb to renewed selling pressure while the US dollar rides rising Treasury yields higher.
Ilya Spivak, tastylive head of global macro, has over 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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