Yesterday’s oil rally provided a welcome distraction from earnings season to give a real boost to equity markets, as Brent’s rare spell of strength took it to new highs for the year.
Brent has been trading within a range of around $52-$62 for much of this year and we now find ourselves right at the top of it, which could make the next couple of sessions quite interesting. While Brent broke beyond the previous highs for the year, it never took off and prices appear to have since stabilized around this level.
That stabilization has prompted some profit taking in equity markets as well, which is why we’re seeing European futures hovering around yesterday’s closing levels. This is psychologically a very important level as another move higher would suggest that investors no longer see further declines coming in oil, potentially moving Brent into a new trading range between $62 and $72.
Reports that US firms are finally cutting production following months of oil rig closures is largely driving these moves in oil, as OPEC looks to claim victory in the game of chicken that both sides entered into in the middle of last year. I wouldn’t say either side has particularly won in this but OPEC has been determined not to relinquish market share to the new shale industry in the US and it looks as though the months of pain is finally paying off.
These oil moves have taken the shine off earnings season which hasn’t really taken off yet. Financials are performing well on the whole, which many expected to be the case in the run up to their earnings. We hear more from them today, with Goldman Sachs (NYSE:GS), Citigroup (NYSE:C) and Blackrock all reporting before the bell. So far companies appear to be slightly outperforming the relatively low expectations but I expect the road ahead to be quite bumpy as the impact of the strong dollar becomes much more apparent.
On the data front, it’s going to be a relatively quiet start to the session, but things will pick up this afternoon as housing, jobs and manufacturing data is released for the US. We’ll also hear from a number of Fed officials later in the session including Dennis Lockhart and Stanley Fisher, both of whom are voting members on the Federal Open Market Committee (FOMC).
The FTSE 100 is expected to open unchanged, the CAC 40 2 points lower and the DAX 14 points lower.