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Risk ON: Crude oil, stocks rebound - start of Santa rally?

Fawad Razaqzada Fawad Razaqzada 01/12/2021
Risk ON: Crude oil, stocks rebound - start of Santa rally? Risk ON: Crude oil, stocks rebound - start of Santa rally?
Risk ON: Crude oil, stocks rebound - start of Santa rally? Fawad Razaqzada
  • Why has sentiment improved?
  • ECB to the rescue
  • Crude oil rebounds sharply ahead of OPEC meeting
  • Hawkish Powell already priced in?
European stocks have rallied so far today, along with US futures, crude oil and risk-sensitive commodity dollars. Is this the start of the so-called Santa rally, or merely false hope for the bulls before we see further weakness?


Why has sentiment improved?

 
There are at least a couple of reasons why the bulls might be regaining the upper hand again. Sentiment has improved towards all risk assets today, with the markets shrugging off Omicron concerns and Powell’s hawkish remarks. Investors know that the vast major of Western adult population are now vaccinated against Covid, and those who have refused to take the shot are being encouraged, fined or forced to do so by governments. Although there are lots of uncertainties about the new variant, for now at least we have not seen any scientific evidence to suggest it poses greater risk of death or that it could definitely bypass the current vaccines. The fact that a growing number of countries were already taking measures to tackle the new wave of Delta outbreak means the spread of Omicron, as well as other Covid variants and diseases, may be slowed down at least. The rebound for European markets may be impressive but have a look at the South Africa 40 index, which has hit a new all-time high – if the new covid variant was a major concern, SA stocks would not be at all-time highs this soon after the discovery of Omicron.

SA40


ECB to the rescue

 
While the recent rise in cases and the emergence of the Omicron variant pose downside risks to the economy, it would also mean the ECB and other central banks in region are going to be even more patient with inflation. Thus, loose monetary policy may remain in place longer than was previously going to be the case. This should help keep yields depressed, keeping equities (and gold) underpinned.


Crude oil rebounds sharply ahead of OPEC meeting

 
Crude oil has also rebounded around 3% so far today, helping to fuel the rally in energy stocks, ahead of the OPEC+ meeting. The last thing the OPEC would want to do is add more fuel – for the lack of a better word – to the fire. They are widely expected to pause plans for additional output increases starting from January. After the recent sharp falls in oil prices, owing to concerns about Omicron causing further restrictions and lockdowns, and therefore hurting demand, the oil cartel and its allies would be keen to help stabilise prices. Opportunistic bulls are undoubtedly taking advantage of the downbeat prices, while bearish oil speculators wouldn’t want to run the risk of seeing another price spike and are buying back their presumably profitable short positions, thus fuelling the kick-back rally even more.

brent


Hawkish Powell already priced in?

 
Gold has rebounded too, although it has been held back after Fed Chair Jay Powell’s hawkish remarks yesterday. Given the rebound in US index futures, though, Powell’s remarks were already priced in by the market and the Fed is always behind the curve anyway. The Fed Chairman said they "can consider wrapping up the taper a few months sooner," as the threat of persistently higher inflation has grown and that it is time to retire the word “transitory.” Yields spiked on the bac of his comments and the dollar surged back higher, gold dumped to a fresh weekly low, and stocks that carry low dividend yield in the technology sector slumped. But today, all those moves were reversed amid a firmer tone towards risk. Still, the dollar may remain supported against weaker currencies like the euro in the slightly longer term outlook.


Coming up from the US

 
Up next, we have ADP Employment report, followed by the ISM manufacturing PMI data and crude inventories numbers. Later, President Joe Biden will deliver remarks on the economy and supply chains.
 
Source for all chart: ThinkMarkets and TradingView.com
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

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Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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