Risk takes a backseat

The wind in the sails of a global stock rally seems to have lessened lately.

Oil Barrels
Source: Bloomberg

Technical traders might say that some correction is necessary for the rally to continue, but I feel that the underlying factors are beginning to turn its tail.

Much of the stock recovery in the last few months was riding on better sentiments on oil, after the Saudis and Russians raise hopes they are open to a freeze output agreement. Despite the subsequent meeting coming up with empty-handed, oil bulls continue to charge a little more. It took a dose of fundamental reason to rein in the optimists. OPEC raises production in April, exacerbating the global supply glut.

On a brighter note, it seems that non-OPEC producers will be cutting back on output as low oil prices bit, with the IEA expecting US producers to start drawing down on crude stockpiles into the end of the year. Now, it falls down to whether the reduction in US oil supplies and output is more than the increase in OPEC production.

The lack of confidence is starting to show in the markets, while the WTI and Brent prices remained above the $40 mark, getting to $50 a barrel will be a lot more difficult now. That said, there still could be some hopefuls expecting a favourable outcome from the OPEC meeting in June. While I think it is a long shot, market expectations still drive prices in the short term.

Australia surprised the markets with a 25 basis point cut in its cash rate to a record low 1.75%, with the committee wanting to give a little boost to inflation. A few hours later, the government unveiled an expansionary fiscal package, with pledges of tax cuts, although there are some who feel the budget may be in limbo ahead of the July election. The Australia dollar plunged 2.4% but has since stabilised around 0.75.

We are still sceptical of a June Fed hike, although it is plausible that Fed officials would want to prepare the markets for one in the second half of the year. Two non-FOMC voters, Lockhart and Williams were more hawkish in their speeches, expressing support of a June hike if the US economy continues to strengthen.

It is unlikely that the voting committee will be as hawkish. On the other hand, the non-voters are allowed more leeway to express their views, and it makes sense for the voters to let the non-voters do the talking.

 

Yesterday: S&P 500 -0.87%; DJIA -0.78%; DAX -1.94%; FTSE -0.9%

 

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