Stock traders have become oil price watchers

Anyone watching Landman, a gritty Paramount series about the lives of modern oil prospectors. At the start of Episode 10 of Series One, a monologue by American broadcaster Paul Harvey, noted for his comments on current events, describes the enduring power of the oil industry. “Oil is the paramount factor in the political economies of the day”. It’s worth either watching the first few minutes of the episode if you are not into the series or searching for the monologue online. He clearly describes the world’s remaining dependence on oil, the political tensions and consequences throughout history, and why changes in supply and demand have a knock-on impact on the global economy.

Last week, global markets continued to react to the risks of oil supplies being interrupted for longer and the price remaining higher for longer. Commentators are now concerned that even if the war ended next week, the world will be living with the consequences for some time, with extreme shortages of oil and natural gas for months.

According to an FT report, global stocks and bonds have suffered their biggest combined sell-off this month since the start of the Ukraine war in 2022. This time last year, global stocks were impacted by Trump’s tariff “Liberation Day” announcements, many of which he rowed back on as stocks dropped sharply. Finding a way to conclude this war is a little harder, particularly as the opposition has little to lose.

We have now had five consecutive weeks of declines for US stocks. Tech stocks had another difficult week; the Nasdaq was down over 3%, falling well into “correction territory”. The Dow Jones index likewise. The FTSE 100 has given up all of its gains for the year. Economic data coming through will start to reflect the impact of the war. On Friday, consumer confidence, as measured by the University of Michigan, came in lower than expected, reflecting the impact of higher energy prices. Bonds often offer a place to hide when stocks take a hit, but they offer little in the way of protection when stagflation fears rise. We have seen US Treasury yields rise by around 50 basis points across the curve. The UK 2-year gilt has hit 4.5%, up from 3.5% not so long ago, when the market was pricing in the strong likelihood of rate cuts in the coming months; now they fear rate rises. The 10-year now yields over 5%.

We saw more signs of capitulation on Friday as the VIX index climbed above 30. The ratio of speculators buying puts to buying call options has risen, but is still below levels considered peak fear. Markets in Europe look to start the day and the week on the back foot again. Crisis, as they say, brings opportunity, but patience is required at this time. Stock traders have become oil price watchers.