Unsurprisingly, Monday’s price action was mostly about oil. The barrel of American crude settled around 8% higher than last Friday’s levels after OPEC announced that it will cut production by more than a million barrels per day. WTI closed the session above $80pb.
The latest OPEC decision, of course, boosted speculation that the price of a barrel could extend to $100pb.
Yes, tighter supply from OPEC is a fundamental boost for oil prices; it makes oil scarcer than it already is. Yet a rapid rise in oil prices also puts a brake on global growth, which would then weigh on global demand prospects and limit the potential on the topside.
Therefore, your barrel of oil is certainly not ready to cost $100 tomorrow.
But it will cost more than the previous months. And that’s exactly the boost that the energy stocks needed. BP and Shell jumped more than 4% in London. Eni gained around 4% in Milano, as well, while Total Energies jumped nearly 6% in Paris, Exxon rallied 6% as well in the US, and Marathon Oil really did a nice marathon and jumped nearly 10%.
Thanks to the oil stock rally, the S&P500 eked out a 0.37% gain on Monday, whereas Nasdaq fell around 0.25%.
Note that the rate-sensitive Nasdaq could’ve fallen more – because prospects of higher oil prices mean a certain U-turn in inflation expectations (and inflation), which, in return, means further interest rate hikes from the Federal Reserve (Fed).
But ‘happily’, the rate expectations are not only driven by inflation expectations, but also by recession worries – which increased significantly last month due to the banking crisis.
And yesterday’s ISM manufacturing index, from the US, fell further in the contraction zone in March. The soft data helped tempering the Fed expectations yesterday and kept the Fed hawks at bay.
The US 2-year yield reversed an early increase and slipped below the 4% mark. And that, certainly helped throwing a floor under a broader selloff in equities. Yet gains remain vulnerable to 1. a renewed pressure from Fed hawks on rising inflation expectations due to OPEC cut, and 2. on rising recession odds due to bank stress.
The falling yields weighed on the US dollar. The US dollar index fell, yesterday, letting the EURUSD bounce back above the 1.09 mark.
RBA holds fire, RBNZ is in focus
In Australia, the Reserve Bank of Australia (RBA) decided not to hike the interest rates by 25bp at today’s monetary policy meeting. The latest slowdown in inflation and household spending convinced the Australian policymakers that they could take a breather this month.
Yet, today’s ‘hold’ from the RBA was a hawkish hold, as the RBA didn’t close the door to further rate hikes saying that ‘some further tightening of monetary policy may well be needed to ensure that inflation returns to target’.
Still, it’s the first major central bank to hold fire since the banking crisis.
And with the RBA decision behind us, investors are focused on what the Reserve Bank of New Zealand (RBNZ) will do tomorrow.
Keep in mind that even though the RBA and the RBNZ are nowhere close to the Fed or the European Central Bank in size, they tend to set the tone for the monetary policy cycles. This is especially true for the RBNZ which clearly took a leading role in the actual tightening cycle. Therefore, if the RBNZ announces the end of the tightening tunnel at tomorrow’s meeting, there will be a stronger conviction for the Fed hawks that the US would also follow suit.
For now, activity on Fed funds futures still gives slightly more chance for a 25bp hike at May meeting.
 decided not to hike the interest rates by 25bp at today’s monetary policy meeting. The latest slowdown in inflation and household spending convinced the Australian policymakers that they could take a breather this month.){kind=link}