Nasdaq soared 3% on Tuesday, the S&P500 gained 2% and the Dow, which was benefiting from a reflation divergence over the past couple of days added another 1.40%.
The major catalyzers are obviously the fading worries that the omicron strain will be another tough hit on the economies, plus the announcement that Glaxo’s antibody treatment is effective against the full combination of omicron mutations, that the US passed legislation to pave the way for a debt ceiling increase and the Senate will be able to raise the debt ceiling on a simple majority vote avoiding a Republican opposition, that the Chinese Evergrande’s almost certain fall shouldn’t send a shock wave to shake the broader market, and that the Federal Reserve’s (Fed) hawkish shift has certainly been digested and priced in by now. Those who have reduced risk over the past weeks are now looking to come back on the idea that even with a faster QE tapering in the Q1 of next year, the Fed will be easing the market conditions.
In summary, the news is not all rosy, but the perception is very optimistic, and that supports the back-to-back strong gains. In theory, such strong gains are sign of instability and should be taken with caution, however, the good news is that the volatility is easing, and the VIX index dropped 20% yesterday, meaning that the latest fears could slowly begin fading. Yet, the US inflation data due Friday remains an important threat to the market mood and could encourage some consolidation and perhaps some profit-taking into the critical data.
Oil: Risks tilted to the upside
The strong risk rally, the easing omicron worries, and the news that the air travel is doing fine despite the virus concerns are giving a boost to oil prices. US crude consolidates above the $70 pb, and the rising tensions around the Russian and Ukrainian border threaten the good relationship with Russia.
Also, the US will push Germany to agree to stop the contested Nord Stream 2 gas pipeline if Russia invades Ukraine. We see no particular stress on natural gas prices for now, but if we start seeing so, that could be a positive catalyzer for oil prices as well.
On the data front, the latest API data showed that the US crude inventories fell more than 3 million barrels last week, which is also adding a positive pressure on crude. The more official EIA data is due today, the expectation is a 1.5-million-barrel decline, and a bigger decline should add to the positive pressure on crude prices. Therefore, risks in energy prices remain tilted to the upside, for both positive demand, and potentially tighter supply perspectives.
Interestingly, the actual positive mood doesn’t fully reflect in cryptocurrencies. I believe that’s because the latest 20% dive has wiped out a good amount of leveraged positions and it will take a bit more time to restore the risk appetite. But Bitcoin is consolidating above the $50K mark, and the downside risks have reduced after a large amount of leverage positions have been cleared.