Oil Prices Surge Amid Mid-East Strife and Speculation of Rate Cuts

Summary

  • Oil prices recorded an increase of over 3% due to ongoing Middle East turmoil and investor anticipation of potential rate cuts.
  • The trading volume was low post-Christmas with several markets, such as Australia, Hong Kong, Britain, and Germany, being closed for Boxing Day.
  • A Mastercard report revealed a 3.1% increase in U.S. retail sales from November 1 to December 24, indicating a stable U.S. economy.
  • Investors are still processing the data released on Friday that showcased a fall in U.S. prices for the first in more than 3 and a half years, highlighting the robustness of the economy.
  • Fed’s signals on the outlook for rates have buoyed stock investors, with a 75% probability of a rate cut in March 2022.

Global Oil Market and Trading Activities

Earlier in the session, oil prices soared above 3%, reaching a month-high, prompted by the persistent Middle East conflict and investor expectation that potential rate cuts could invigorate global economic growth and fuel demand. The post-Christmas trading day witnessed thin trading with several markets such as Australia, Hong Kong, Britain, and Germany remaining closed for Boxing Day.

The Performance of Global Stocks

The MSCI’s indicator of global stocks increased by 0.39%. The Wall Street,, the, and the had gains of 0.43%, 0.42%, and 0.54% respectively.

U.S. Economy Outlook

A recent Mastercard report highlighted the economic stability of the U.S. According to the report, U.S. retail sales accelerated by 3.1% between November 1st and December 24th. Analyst Arun Sundaram from CRFA Research commented that while consumers continue to spend, they remain price sensitive.

Treasury Yield and Currency Markets

The yield on Treasury bonds saw a slight decrease at 3.895%, while the two-year U.S. Treasury yield experienced an increase of 1.8basis points touching 4.3584%.

Oil and Currency Market Dynamics

Oil markets witnessed a 2.1% increase, concluding at $75.12 per barrel and another was priced at $80.66, gaining 2.01% on the day. Currency markets were also in flux, with the losing 0.17% ending at 101.47, barely above the five-month low of 101.42 reached on Friday. This slight decrease in dollar value contributed to the increase in the euro by 0.3% to $1.104.

Inflation and Impact of Fed Policies

Investors continued to assess the data released on Friday, which revealed the first drop in U.S. prices in more than three and a half years, further emphasizing the economy’s resilience. The personal consumption expenditures (PCE) price index, a measure of inflation, dwindled by 0.1% last month.

Prospect of a Santa Claus Rally amid the Turn of the Year

Nicholas Chia, the Asia macro strategist at Standard Chartered, suggested that the reduced core PCE deflator in November might boost the ‘Santa Claus rally’ in equities as the year turns. This corresponds to the trend of a robust period for stocks towards the year-end, commonly known as the “Santa Claus Rally.”

Predicted Rate Cuts Bolster the Market

The market looks bullish with a 75% chance of a 25 basis point rate cut from the Fed in March, based on the CME FedWatch tool, as compared to a 21% chance at the end of November. The sentiment is high, with predictions of more than 150 rate cut points for the next year.

Shifting Rhetoric and Market Reactions

Fed’s softened stance towards slower inflation and rising recession worries have led to a market-friendly shift in rhetoric, confirmed further by Citi analysts.

Asian Market Overview

Asian markets saw a 0.47% dip in China stocks, pulled down by semiconductors, while gaming stocks stabilized with numerous companies announcing share buyback plans. However, Hong Kong markets remained shut. The Asian currency registered a 4% upsurge this month, hinting at a second straight month of gains against the dollar. For the year, though, the yen remains 7.8% down compared to the greenback.

Impact on Forex and Trading

The equity and forex markets will closely gauge the U.S. Federal Reserve’s stance on potential rate cuts in the year ahead. These policies will play a crucial role in shaping the dollar’s performance, impacting forex traders and international investors involved in various asset classes. Other major factors to consider will be the ongoing geopolitical echoes in the Middle East, the fluctuating oil prices, and their broad implications on the global economy.

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