Rapid decline in oil prices came as a relief to the European stock markets yesterday, yet the lack of diplomatic progress on the Ukrainian war and China’s fresh lockdown to stop the omicron contagion weigh on investors sentiment.
Apple shares dived more than 2.50% on Monday, on news that supplier Foxconn had to stop activity in Shenzhen for at least a week. Amazon and Google lost between 2.5-3%, pulling Nasdaq index into the correction territory.
The S&P 500, on the other hand, stepped into a death cross formation as the 50-DMA sank below the 200-DMA.
Activity in European futures hint at a negative start this morning, although crude oil is down by more than 4.5% at the time of writing.
Hedge funds have reportedly massively cut their bullish oil bets last week, after seeing that the US and UK oil ban failed to push the prices above the $130pb mark – which came as a warning that the recent oil rally was perhaps overstretched.
The crude price plunge below the $100pb came as a relief in the middle of a sea of bad news, but it will certainly not prevent the German ZEW sentiment index from freefalling from 48 to 10 in March.
What’s next?
The downside correction in oil prices is sure a relief when it comes to the inflation expectations, but the new lockdown measures will continue worsening the supply chain crisis and add on the inflation worries. The US producer price data is about to confirm an advance to 10% level in February, as the FOMC starts its two-day meeting today and is expected to raise the interest rates by 25bp for the first time since the beginning of the pandemic. But it will certainly not be the last as the market activity hints at 6 to 7 other rate hikes for the next twelve months in the US.
The US yields are back on track for fresh post-pandemic highs, after we saw a rush to the US papers due to the Ukrainian war over the past couple of weeks. The 2-year yield is back above 1.85% and the 10-year yield is back above the 2% mark.
Gold, on the other hand, gives back the recent gains as the rising US yields increase the opportunity cost of holding the non-interest-bearing gold. Yet successive failures to find a diplomatic solution in the Ukrainian war could overcome the rising US yields and throw a floor under the decline of the price of an ounce near the $1900 mark.
