Stock Market Today
After recording a stellar rally yesterday, US and European futures are trading almost flat. We have experienced a stunning rally over in Asia today, where the Nikkei index jumped nearly 4%. One of the major reasons we see the positive momentum in the equity markets is that oil prices have started to come off their highs. For instance, yesterday, we saw both Brent and Crude oil prices dropping sharply from their recent high. Traders are still very much in a cautionary mode as it is not clear to them that the current change in momentum or shift in the direction of the oil trend will last. The current bounce in the equity markets may likely turn out to be nothing but a dead cat bounce as the actual fundamentals which drove the global stock markets to their knees haven’t changed. For instance, Russia is still increasing the intensity of its attack on Ukraine, and there are no signs of Russia removing its military from the Ukrainian land. The sanctions imposed on Russia by the US and its allies are still there, and once again, there is no clarity on when the current sanctions will be lifted off on Russia. Stagflation is still an issue, keeping traders up at night as economic data out of Europe, Asia, and the US has started to show weakness while inflation remains very much anchored in its place.
Today is chiefly about two critical economic events: the ECB meeting and the US inflation data. Christine Lagarde has a lot to ponder among higher inflation and heightened geopolitical tensions between the EU and Russia. The war between Russia and Ukraine has made traders scale back on their bullish bets on the euro. Hence, we have seen a serious sell-off in the euro against the dollar and other major currencies in the past few days. Today, the ECB president will need to spill some beans concerning her thinking about the bank’s monetary policy. Higher inflation will be her top agenda and the impact of sanctions imposed by the EU on Russia. The bank will certainly not like to be in a position where it will have to reverse its monetary policy again and adopt a dovish monetary policy again.
At 13:30 GMT, we will get the most essential reading for the Fed in the US. We will likely see another strong print of inflation because of higher fuel and commodity prices. Traders hope to see a softer reading for the US Core CPI data; the forecast is 0.5%, while the previous number was 0.6%.
Brent and oil prices have started to come off from their highs, and yesterday we saw an intense sell-off for both brent and crude oil prices. We saw an intense sell-off in oil prices because speculators believed that the US oil production would increase and it would be able to fill the gap created by sanctioning Russian oil. In addition, there was also some optimism that Iraq would be able to increase its oil production and use its spare oil margin to increase the oil production provided that OPEC+ agrees with that. Furthermore, there were also rumours in the market that the UAE and Saudi Arabia may increase the oil supply.
In reality, we believe the retracement in oil prices was mainly profit taking by oil traders, and they used the opportunity to book some profit after a tremendous rally in oil prices. This is because the reality is that US oil production isn’t going to increase by turning on a switch; it will take a long time for US drillers to complete the operations and explore more sweet oil spots, as we mentioned yesterday. OPEC+ has made it clear that they are very comfortable with their oil production and have no interest in increasing oil prices. If one country in the cartel has shown willingness to increase oil production, it will still be very difficult to get it across the line as their wish will be met with a harsh reality and no success. Hence, the current sell-off is more than likely to be a decent opportunity to bag some bargain while prices are there, as oil prices still have a long way to go for the time being.
Soft and industrial commodity prices are also very much in focus among traders and investors. Suppose we continue to see some gas coming out of the current rally, which is highly likely as the actual impact of sanctions on Russia has yet to materialize. It will take some time for them to materialize. In that case, we could see more confidence among traders. For the time being, the sell-off is nothing short of an opportunity as governments are still very much concerned about the shortage in supply and disruption in the supply chain.
Gold prices have experienced an intense sell-off for two main reasons. Firstly, the fact that traders have started to develop an appetite for riskier assets has taken their focus away from gold’s ultimate risk-off asset. Secondly, gold prices went too far and too quick. Our analysis mentioned yesterday that gold prices near their record might make many traders adopt a more cautionary approach. They may take the option to take some profit off the take ahead of the important US inflation reading.
The US inflation reading is the most critical reading for traders today. The impact of this data on gold prices will be significant, and it is very much going to act like a double edge sword. The reason is that a higher inflation reading may bring more interest in gold among traders and investors; however, at the same time, it also increases the odds of an aggressive monetary policy approach from the Fed.