The market sentiment is mixed. The Powell boost didn’t last long on the US equities which returned to the reflation setup. Investors sold tech stocks aggressively sending Nasdaq 3% lower during Thursday’s trading session. The S&P500 shed 1.48%, as Dow Jones (-0.46%) remained somehow resilient to Thursday’s sell-off. Banks and consumer staples did better in a typical reflation move.
At this point, we observe two reflation moods. The panic reflation and the healthy reflation. The reflation as a result of a panic move is negative for the investor sentiment as it leads to an aggressive sell-off across most assets. A healthy reflation, on the other hand, encourages a smooth transition from growth to value stocks, avoiding a significant loss of overall appetite, which would prevent reflation-friendly stocks from fully benefiting from the migration. The one we saw yesterday is a typical panic reflation as the US 10-year yield spiked above 1.75%, hinting that the 10-year yield could reach the 2% mark earlier than investors thought.
Equities in Asia were mixed, and activity in FTSE futures hint at a sluggish open in London. The sharp decline in energy and commodity prices will likely weigh on the mining, and energy-heavy FTSE 100 index before the weekly closing bell.
Yesterday’s up to 9% plunge in WTI got the oil bulls out of the dream of seeing the price of a barrel at $100. Right now, we are perhaps at a point in time and at a level in price where the bulls start asking how far they should carry the oil rally. And it appears that the $65/68 area is a make-or-break zone for the foreseeable future. The price of a barrel could soar and consolidate within the $75/100, or it could ease to $45 per barrel, where the 200-day moving average may welcome the bears for the first time since November. My base case scenario is a deeper downside correction to $45 per barrel in US crude, as the price supportive factors tend to remain temporary, such as the weather tragedies, Middle East tensions or artificial support from OPEC’s production curb program that hang only by a thread as each OPEC+ meeting is a source of stress and uncertainty about whether Russians will finally say ‘enough’ and walk away from the deal.
Moreover, the rising tensions between the US versus China and Russia don’t look promising for the future of the global trade war.
Therefore, the end of the pandemic won’t necessarily encourage oil bulls to pop the champagne.
What about energy stocks that should benefit from the reflation trade?
That remains true as oil prices won’t crumble to levels we’ve seen during the pandemic. Therefore, the recovery should continue across energy stocks, as oil prices rebounded significantly faster than most energy share prices. In this respect, there is potential for another 50% rise in BP and Royal Dutch Shell prices that could be unlocked with a solid reflation trade.
A last word on cryptocurrencies. Bitcoin renewed record last weekend, then spent the week correcting and consolidating above $53. Having found a solid ground to the latest sell-off, the door is open for another record weekend. Yet, fundamental headlines are not great. The frenzy in Bitcoin, hence the mind-blowing profitability of the mining business increases the demand for electronic components, such as chips, which become rare due to a combination of pandemic and huge Bitcoin miner demand. As such, the global chip shortage is about to have a serious impact on the prices of our much-loved laptops, smartphones, cars and more. The situation brings up one fundamental question about our future choices: are we ready to compromise our essential electronic items for the sake of Bitcoin. Is the huge energy spent to operate the Bitcoin network sustainable, and how feasible the idea of Bitcoin as the world’s ‘currency of choice’ in international transactions?