Market sentiment has taken a turn to dovish last week with a number of key interest rates decisively moving higher across a number of developed economies. Outflow of capital from risk assets have pushed risk assets lower with Nasdaq-100 slipping -1.9%, S&P 500 losing -0.8% and Russell 2000 sliding -0.4%. US dollar, measured as DXY, has gained a whooping 1.2% while gold slid -1.8%. Oil was up 7.7% last week.
Oil price soared after an attack on the world’s largest terminal in Saudi Arabia on Sunday. Oil futures are up +1.25% as of March 8th, touching
U$ 67.9 level. The Ras Tanura storage tank, with capacity to process 6.5 million barrels a day, was targeted on Sunday by drone from the sea. The output appears to be unaffected, as per the Kingdom’s spokesperson. Oil’s rally accelerated 7.7% last week after a surprise announcement from OPEC and its allies to keep production steady for April, with only Russia and Kazakhstan allowed to increase production. Oil price jumped 4.8% after the announcement, breaking resistance level near U$ 63.3. West Texas Intermediate has now recovered to U$ 66.9, wiping off 2020 losses. Oil has benefitted from a plethora of catalysts last year, from the Blue Wave in the U.S., to a rapid vaccination rollout in a number of developed countries. Oil price, measured as USOIL, has been in an upward trend since November when momentum indicators turned bullish on the daily chart. Price has found support at 8-day and 21-day moving average levels, signaling a strong upward momentum. We see an area of interest near U$ 73.5 to 74.5 offering strong resistance.
Oil, like other commodities, have benefitted from re-opening and vaccination rollouts as investors are banking on rapid economic recovery. CRB, or Commodities Research Bureau Index consisting of mostly energy and agriculture contracts, has recovered to U$ 193.4, level last seen in October 2018. Increase in commodity prices are expected to put a pressure on consumer and manufacturing companies that spend more than 40% of their revenues on raw materials. With the current gap in the labor market as 9.5 million people are unemployed in the States and another 10 million on extended benefits, there is little room to pass on the increased costs to consumers. Historical data confirms that – only 20% of price increase in the CRB index has been passed through to CPI. Increase in commodities prices, however, has deepened the narrative of higher inflation. A key interest rate, U.S. Treasury 10-year yield, has spiked to 1.6% – level last seen in February 2020. Also, the yield spread between 2-year and 10-year Treasury notes has stretched to 1.5% which is the highest since November 2015. Higher spread is interpreted as the market’s expectation of faster recovery, and potentially higher interest rates on the short end. Higher 10-year UST yield, also commonly used as a benchmark for risk-free return, has bolstered the US dollar. USD, measured as DXY, has broken a number of key resistance levels and is currently near U$ 92.2. Technical indicators support USD’s march higher, with resistance levels near and U$ 92.3 and U$ 93.0.
Have a great trading week ahead!