Sorry, couldn’t resist the obvious. Many MOONS ago if OIL PRICES were rising the BOND MARKET WOULD BE GETTING SOLD, EQUITY MARKETS WOULD BE STRUGGLING AS IT WAS FEARED THAT THE FED AND OTHER CENTRAL BANKS WOULD BE RAISING RATES TO STEM THE FEAR OF INFLATION. WHAT A DIFFERENT WORLD IN WHICH WE INVEST. As oil prices head higher, the bonds and equities both rally as did the PRECIOUS METALS. SO WHAT DYNAMIC MAY BE AT WORK?
Stock market bulls are buying stocks based on higher oil on the theory that global demand is driving OIL higher as an indication that ECONOMIC GROWTH is improving everywhere but Europe. However, the BRENT CONTRACT is outpacing the WTI, which throws the EUROPE story out, therefore the OIL must be rising because of geopolitical concerns. Can’t have it all ways so what we are left with is HIGHER OIL PRICES!
So how can it be that higher oil prices caused by geopolitical fears have not created a SELLOFF in the EQUITY markets and other assets? If OIL were to be a drag on growth shouldn’t the fragile global growth story be the death of the recent STOCK MARKET RALLY? If we weren’t living in a BALANCE SHEET RECESSION WORLD we would probably be seeing the FED nervously reacting to increased OIL prices. But in a deleveraging global economy it seems that any threat to global growth just gives the FED, ECB and BOJ an excuse to keep the liquidity spigot open.
It seems that fear of higher OIL is deemed to be a threat to growth and therefore the ZERO INTEREST POLICY IS TO BE MAINTAINED AND ENHANCED. As long as the DEMON OF ASSET DEFLATION AND ADVERSE FEEDBACK LOOPS ARE CONTAINED THE GLOBAL MARKETS ARE CONTENT, A GUSHER OF LIQUIDITY IS THE DOMINANT VARIABLE FOR THE MOMENT.
On February 29 we will listen to see if ECB President Draghi mentions the threat of very high BRENT CRUDE prices as a reason to err on the side of extra liquidity by increasing the SECOND TRANCHE to the highest expected levels. If he mentions the high oil prices all asset classes will breathe a sigh of relief and continue the rally.
This is truly a different world then many years ago when higher prices sent a TOTALLY DIFFERENT MESSAGE TO THE MARKETS AND INVESTORS. Higher oil prices beget higher equity prices and higher BOND PRICES. Why the world of investing must be seen through the LENSES OF DYNAMIC ANALYSIS. NOTHING IS EVER THE SAME; NOR ARE ALL THINGS BEING EQUAL.
***The focus will be on the impact of HIGHER FUEL PRICES BEING A DRAG ON THE CONSUMER. MAYBE THERE IS A REASON FOR FED POLICY BESIDES EUROPE … “I TELL YOU JANE IT’S ALWAYS SOMETHING.”