Markets Around Globe Pull Back From Recent Highs
The rally is on pause Tuesday as markets around the globe pull back from recent highs, and assess whether or not the recovery in prices has out-kicked the coverage of the recovery on the street.
Oil prices are reacting negatively to the OPEC output cut deal as the details suggest oil production from the cartel will actually increase now that voluntary cutbacks are ending, and Libya – who is exempt from the cuts – is lifting its Force Majeure. This is the first time in eight trading sessions that WTI has set a lower low trade than the previous session, and while the upward trend is still intact, we’ll need to see prices hold above $37 in order to avoid a drop to the low $30's. Refined products are treading similar technical waters, with some signs of topping, without yet breaking the upward trend.
A strong positive correlation between energy and equity markets has returned during the rally of the past few weeks as hope for economic reopening seems to be spurring both asset classes to erase most of their COVID-19 losses. The S&P 500 moved back into positive territory for 2020 during Monday’s rally, something that seemed unthinkable just a few months ago. Volatility in both asset classes has also dropped sharply from the record highs set in March and April, as a sense of uneasy calm seems to be spreading around the world.
The FED starts a two-day FOMC meeting today, and the economic optimism is showing up in the CME Group’s FEDWATCH tool that shows a 16 percent probability of an interest rate increase at this meeting. When the FOMC cut rates near zero a few months ago, this gauge of Fed fund futures showed a zero probability of a rate increase in the next year. As has been the case during the pandemic, interest rates may be an afterthought compared to the other liquidity injections made by the FED that are approaching $3 trillion so far this year, compared to $1 trillion during the 2008 financial crisis.