Oil and S&P 500 Futures Extend Tumble to Start the Week – Is Sentiment Giving Way?

The US-Iran conflict is entering its second week and oil opened to another massive surge following a record-breaking, 35 percent week’s rally. With S&P 500 futures joining clearing support, is this the tipping point?   

Talking Points:

• Following a record-breaking week’s rally for US-based crude oil, the commodity shot more than 20 percent higher quickly on the Asia open  
• A tumble from S&P 500 futures clears further technical support and amplifies correlations and momentum that suggest genuine risk aversion is setting in
• There is meaningful scheduled event risk over the coming week (US CPI, US consumer, trade figures) but geopolitical headlines and anticipation of rate decisions will curb impact

 

Watch the Full Video (Pre-Iran Attack)

 

A Geopolitical Crisis Turns into a Tangible Economic Crisis

The surge in energy prices following the outbreak of the US-Iran war may prove the systemic catalyst that finally shakes loose the market’s resiliency – which may have been more complacency than genuine confidence. US-based WTI crude started the past week off with a significant, but reasonable, rally. However, by the week’s close, the commodity’s surge was really taking shape, punctuated by the more than 15 percent rally through Friday alone. On the week, crude posted a record-breaking 35 percent increase, and offered little reassurance into the weekend close that the supply-side fears were fully priced into the lofty perch above $90 per barrel. With headlines of ongoing military strikes, Israeli targeting of certain oil depots and Iranian leadership seemingly appointing a new Supreme Leader; the fundamental charge carried over to Monday’s open. Promptly after the Asian session started, the futures market gapped another 7 percent and quickly charged to a full 22 percent early morning peak – what would be the biggest single-day rally since April 2020 if it holds.

US-Based WTI Crude Oil Futures 1-Day Rate of Change (Daily) 

Source: TradingView.com; NYMEX; John Kicklighter

 

Markets Show Their Strongest Lean Towards True Risk Aversion Yet

While the message from the Trump Administration is that this is a limited engagement, the market is not confident this will so readily be resolved – whether in the form of the cynical ‘TACO’ expectation or simply a messy return to peace. It is almost ironic that a more mundane economic concern seems to be the potential tipping point for market confidence. Certainly the throttling to the global outlook due to higher energy prices is extremely consequential, but the collective sentiment seems to have absorbed a number of systemically-important concerns over the past months without succumbing to a full immolation. We may be close to convincingly undermining that reserved confidence. Where the rotation of speculative exposure away from AI and even the ‘Sell America’ trade seemed an initial stage, there was resiliency in other regions and asset classes. That was until last week. Emerging market, high yield fixed income and finally foreign indices finally took a meaningful step back.

Table of Relative Market Position and Volatility 

Source: John Kicklighter

 

What are the Next Dominos for a Full Risk Aversion?

Despite the aforementioned markets’ retreat, it would still seem more likely that the underlying – and seemingly logic defying – resilience in global sentiment re-establish itself than there be a lasting retreat. When sentiment across the financial system is engaged behind a committed ‘risk on’ or ‘risk off’ banner, correlations align along assets’ risk profile. The reasoning behind the collective view can be singular or varied, but the result is ultimately all consuming. Yet, when there isn’t a core need to unwind general risk; there is a more measured sense to seek alternatives in a marginal diversification rather than the near panic that follows a drive for complete divestment. With my preferred – though inelegant – barometer of sentiment, the S&P 500 finally dropping out of its multi-month range in pre-exchange Monday trade; the pressure only seems to be building. Concern is healthy in this environment, but full bearish conviction should be set to a high standard when settling on the reversal of a robust, 11-month bull trend. Stronger correlations, moment closer to that of energy and perhaps the S&P 500 falling below its 200-day simple moving average would all add weight to the case.

Chart of S&P 500 and 200-Day SMA (Daily)
 
Source: TradingView.com; Standard & Poor’s; John Kicklighter

 

Schedule Event Risk Will Compete for the Market’s Attention

Considering the volatility arising from some of the key areas of the commodities and capital markets, it is likely that scheduled event risk will either be relegated to second place in terms of influence or at the very least be evaluated in the context of the prevailing themes of interest. There is certainly a run of capable event risk on tap, but it is perhaps more upstream than what the markets are ready to consider as far as economic impact (say consumer confidence or trade figures) or will be more of secondary concern (such as monetary policy in reaction to the geopolitical upheaval). That said, monitoring the market’s responsiveness to the event risk on the docket will say as much about our landscape as anything else we could evaluate.

Calendar of Top Global Macro Event Risk
 
Source: John Kicklighter

 

US Inflation Updates the Week Before the FOMC

Last week, the US Bureau of Labor Statistics released its February employment report and generated no small shock to a market already sensitive to ‘bad news’. The economy lost -92,000 jobs against expectations of an approximate 70,000 increase – leading to the biggest negative surprise since August 2021 – and following a 126,000 increase the month before. As initially shocking as that may seem to traders, in context, the uptick in the jobless rate to a mere 4.4 percent doesn’t add major pressure on the FOMC to shift its priorities for monetary policy. In contrast, on the other side of the dual mandate, we still have inflation running above the central bank’s target 2 percent. With oil prices surging, the expectation for a general swell in consumer inflation will reasonably follow. However, the CPI and PCE deflator (the latter is the Fed’s preferred measure) releases we are due this week are unlikely to show these more recent effects as the data collection was for February. As such, any easing in the figures will likely be de-emphasized while increases will only add to concerns.

Chart of US Core CPI Overlaid with the US Jobless Rate (Monthly)

Source: John Kicklighter; US Bureau of Labor Statistics

 

Trade and Trade Wars

Something more of an outlier focus into the coming week, but nevertheless important from a macro perspective, are the release of key trade-related data points. Among the various indicators on tap, we have the February trade balance report from China on Tuesday with the US and Canadian figures for January set for Thursday. China, in the midst of its Two Sessions, has lowered its growth target and is considering its outlook against the backdrop of energy shipment restraints from Venezuela and now through the Straight of Hormuz. For the United States, President Trump’s fight over tariff powers with the Judiciary makes both a long-term and month-to-month level of uncertainty. In Canada’s case, it finds itself caught up in the mix as an economy that attributes much of its GDP to exports, particularly commodity exports.

Chart of China, United States and Canada Trade Balance (Monthly)

Source: US Census Bureau; China NBS; Canada Stats

 

A Rebound in Consumer Confidence is at Clear Risk

Where many of the economic series of note due over the coming week are encumbered owing to their dated time frame and more recent market-based volatility, there are a range of sentiment measures that carry an important forward-looking consideration. There are a number of surveys due over the week (eg Japan BSI, Australia business, Mexican consumer); but I am most interested in the business and consumer measures for the United States. In the case for the former, the NFIB measure for February will gauge the small business view of a bigger picture theme. The University of Michigan has the leading consumer confidence reading with a recent few months of recovery from near-series lows. If that bounce falls apart on fears related to higher energy prices and decreased spending, the concerns of an economic slowdown in the worlds largest economy will receive a significant boost.

Chart of University of Michigan Confidence and Inverted WTI Crude Oil (Monthly) 

Source: TradingView.com; UofM, NYMEX; John Kicklighter

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-- Written by John Kicklighter, Global Head of Content

 

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