Asian stocks kicked off the week on a bullish note to catch up with the American session gains on Friday. Softening oil and commodity prices, combined with the softening University of Michigan expectations on the five-year inflation survey helped explain the part gains in US equities.
Besides the softer energy prices and encouraging inflation expectations, a part of last week’s rally is explained by high volatility, and perhaps a quarterly rebalancing of portfolios where investors bought more equities to keep the proportion of equities stable as a sharp decline in equity prices led to relatively underweight equity in portfolios.
The S&P 500 jumped 3% on Friday, and 6.5% over the week, while Nasdaq rallied 3.49% on Friday and closed the week 7.5% higher.
BUT, the size of the rebound remains worrying, as a 3-4% jump in stocks is a sign that the market volatility remains high, the conditions are choppy, and the gains may not last long.
Escalation in Ukraine
Russia bombed Kyiv this weekend, as a sign of a renewed escalation in the Ukraine war. G7 leaders hinted at more sanctions against Russia. Meanwhile, Russia defaulted on its foreign bond, not because it didn’t have money to service its debt, but because it couldn’t process the payment because of sanctions.
News of further escalation between Russia and the West is pushing oil prices higher this morning. The barrel of US crude is about the test the $110pb mark at the time of writing.
However, the upside potential could remain limited, as the recession talk will likely keep the oil bulls relatively on the sidelines. Prices above $120pb weigh on demand prospects and have an immediate cooling effect on prices.
OPEC meets on June 29 and 30, and is expected to stick to its plan to boost output by around 650,000 barrels a day. But even if OPEC pumps more, the refining capacity remains limited, which means that a higher oil supply will not necessarily lead to lower oil prices in the medium run.
Attention to shift to earnings
We had a couple of rough weeks, that started with a US inflation print which showed that inflation in the US made a U-turn and printed a fresh 40-year high, which then led to a 75bp hike in the US, which also triggered a set of unexpected and surprise rate hikes from the central banks around the world. Then, Jerome Powell hinted at the possibility that the US may not make a soft landing as the Federal Reserve (Fed) is stepping on the gas to fight back the soaring inflation. The mix of bad macro news pushed the global yields higher, and the stocks lower.
Investor attention will slowly start shifting to the second-quarter earnings to give a better idea of how the Fed tightening and persistent inflation impacted the company earnings in the latest quarter.
Nike (NYSE:NKE) and Micron (NASDAQ:MU) will be in focus this week, as US banks are due to release earnings in about two weeks.