Much of the recent investor attention seemed to be focused on the bond market and rising yields. However, yesterday the oil market made its presence known, serving investors a sharp correction.
Oil prices are trying to stabilize after Thursday's strong rally and seem to be on track for a 7% weekly decline. This could mark the biggest price reduction since October (from around $64.40 to $58.40). Pressure from a stronger dollar, rising U.S. crude oil inventories and concerns about lower demand caused by the pandemic appear to have been behind such a correction.
Increases in COVID-19 infections in some countries and the new restrictions that come with it have dampened hopes for an imminent recovery in global demand. In addition, the International Energy Agency said global oil demand is unlikely to return to pre-pandemic levels until 2023. During the European session, WTI crude oil was trading around $61 per barrel and Brent crude was trading around. 64.3 dollars per barrel. It seems that investors counting on oil demand to increase with the summer season currently, are backing away from such a stance, which may also affect OPEC+'s next decisions on when to increase production.
Meanwhile, the aforementioned U.S. 10-year bond yields are down on Friday to around 1.68 percent from around 1.75 percent, where the paper was yesterday. Yields appear to have been trending up since August, but the pace of their rise has accelerated since mid-January as coronavirus vaccination and further fiscal stimulus support the prospects for a strong economic recovery, although investors are concerned that the rebound could lead to a jump in inflation and debt levels. Fed Chairman Jerome Powell reiterates that any jump in inflation will be temporary and that markets should not worry about a bond sell-off, while reassuring that the Fed will maintain its ultra-loose monetary policy for some time to come. Nevertheless, some could begin to wonder where the money that investors are just getting from selling bonds that have been in a sizable uptrend for decades might flow.
Perhaps with a good economic outlook, there would be a classic rotation of capital from the bond market to the stock market. Before the introduction of non-standard tools in monetary policy more than a decade ago, we could observe the classic stock-bond cycle. Investors could sell safe bonds to buy riskier stocks and vice versa. The introduction of non-standard tools in response to the great financial crisis led to a shift in the pattern to a buy-all or sell-all principle. Back then, it seemed that as bond prices rose, stocks also rose in price, and as bond prices fell, stocks cheapened. The question is whether and when we could return to the earlier traditional relationship, because if it is happening now, it could be good news for the major indices, especially in the US.
Daniel Kostecki, chief analyst at Conotoxia Ltd. (Forex service Cinkciarz.pl)
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