Market Overview

6 October 2021

Oil and Financials on Top While Other Stocks Are Still Suspended

In the middle of the business week, the markets have still failed to form any stable trend. Judging the overall situation on a conventional base of weighted average instruments, such as the S&P 500 or the Euro Stoxx 50 indices, the several hours of steady rebound when the market community was trying to buy fresh dips, which were formed yesterday, were followed by a new day of sales again, and vice versa. 

There seems to be no reasonable end to this vicious circle, at least right now, while the clear winners soaring against the generally uncertain background so far are energy assets and several leading global financial institutions. Almost all important fuel producing companies received a strong boost since Tuesday when oil prices jumped to multi-year highs, immediately after the Organization of the Petroleum Exporting Countries and allies led by Russia, a group known as OPEC+, confirmed it is going to continue adding output and export volumes only at a gradual monthly pace of 400,000 barrels per day. 

OPEC+ refused to accept the idea of forcing production any further, leaving the market under the control of growing demand, despite desperate hints from U.S. President Joe Biden about his worries over high oil prices, which his senior aide expressed just several days ago at a meeting with Saudi crown prince Mohammed bin Salman. OPEC+ members referred to the chances of a traditional decline in demand, which has been observed to sometimes happened before the end of the year in previous years. "We will be monitoring the situation, as we know, demand usually falls in the fourth quarter, our plans on increasing (output) are even, we will be watching how the market will be balanced," Russian deputy prime minister Alexander Novak commented. 

Another OPEC+ source told Reuters, even before the ministerial talks, that the group had faced pressure to ramp up production faster, but the cartel is "scared of the fourth wave of corona, so no one wants to make any big moves." It's quite possible that for fuel producers that was just an excuse to keep the situation stable for now, because OPEC+ statements came out the day after Johns Hopkins institute's data was released showing that global corona cases hit the lowest level in nearly two months on Monday. With this being said however,  Brent benchmark futures already exceeded $83 per barrel during Wednesday’s Asian hours. 

Even though Brent prices rolled back to the $82 area during European hours, energy companies will clearly receive windfalls soon. Therefore, shares of Russian largest Rosneft and Lukoil oil producers are refreshing their all-time historical price highs while the U.S. and U.K. giants, including Exxon Mobil, Chevron and BP, are still seen to be on the way to their record highs. Inflation expectations, which also means a step-by-step erosion of the value of the Greenback compared to the cost of raw materials and commodities, is also one of the main reasons for expensive fuel. And again, due to inflation, the yield rates on safe haven U.S. Treasury bonds are also rising: naturally, debt holders are demanding more significant reward for their willingness to keep money in public debt. 

The big five of Western financial corporations are also holding their heads high, because large banks will now get better profit from their bond storage. Growing returns from loan portfolios and revenue, as well as dividend payments and buyback programs, are also good reasons for stable and even higher quotes of JP Morgan Chase, Citigroup, Bank of America, Morgan Stanley and Goldman Sachs shares, which are behaving much better than the average indicators of Wall Street in the course of last weeks' correction.  The rest of the market, and especially cyclical stocks, seem to expect a hopefully successful resolution of the situation around the raising of the U.S. debt ceiling. 

The unrealistic "threat" of almost impossible default by itself is unlikely to frighten the market crowd or large funds in any serious way, since all of them have already seen similar performances play out, and not once was there a happy ending in sight during this century. However, what the market is really interested in is whether Joe Biden's administration and its active congressional supporters will be able to push $3.5 trillion in infrastructure and social spending through congress. This scenario is more attractive to stock investors than the minimalist version of the extreme wing in the already long-split democratic majority, who just want to exchange the ceiling increase for a minimum of "extra" costs. In that version, most of the newly borrowed money only goes towards the extremely necessary expenses plus percentage payments for the existing debt, which could hardly inspire the stock rally. 

As the resolution of the debt ceiling dilemma is delayed, markets remain on edge, and the big "sharks" simply throw some of the smaller investors out of the trend, which leads to a deepening correction. However, this may be a positive factor in the future, as it frees up at least some "extra" money so that free funds could be used later as fuel to drive different stocks back into temporarily battered portfolios, but at higher quotes. The crowd usually tends to easily come back in a calmer moment, based on its regrets that some shares were relatively low and offensively sold during the current nervous stage of the movement.

 

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Lysakov Sergey
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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