So goes the oil price, so the equity market! The correlation between the two was never this tenacious, but it is the new norm for this year. Both of them are flowing so much in tandem that it is actually shocking. The bull strength for the oil market is breathing on hopes that perhaps both sides, OPEC/non OPEC may have become a little numb to their stubborn behaviour and a constructive dialogue may lead to a solution where we see a production cut. If that does take place, it will give a much needed boost for the oil price and we could easily cross the $40 mark without any hesitation. Does this mean that the equity market may also form the bottom for this year? Perhaps, no, it is not that simple despite the stout proven correlation between the two.
What matter for the equity investors right now is the assurance from the US Federal Reserve department that they are paying attention to the economic conditions, which are not only taking place domestically, but they also need to react to offshore volatility. If we get this comfort from the Fed, we could see a rally in the equity market around the globe.
Today is the final day of the Fed meeting, traders will be benchmarking the FOMC statement very closely. Now, if you are expecting that the Fed will come out of the door admitting that the recent rout in the market is created by them, then perhaps a wake up call may be in order. Miss Yellen, the Fed Chairwomen, is not going to fold this that facilely. The statement released today may show some signs of dovish approach, but it will not acutely say that the recent frailty is due to their decision. In fact, the Fed may actually only admit to this fact during their meeting in March, as they will have a perfect alibi to suggest that the conditions have changed due to the liquidity tightening and it is time for a change.
But, remember the Fed does have a dual mandate, price stability, which apparently they do care about, but no clear evidence and finally the labour market. The committee has paid audibly more attention to labour conditions and have kept this as the primary foundation for their decision and if the upcoming US NFP drops off the cliff, all bets are off and a U turn will literally be on their cards.
The precious metal remains the ultimate choice for investors given the uncertainty we have around various factors such as China slowing down, credit evaporation, liquidity tightening, emerging market rout, grisly results of the financial markets and not to mention the oversupply in the oil market. The metal is consistently moving higher and it is staying above its upward trend line. There is a strong possibility in the coming weeks, we could reach the mark of 1150 without any hesitation.
Disclosure & Disclaimer: The above is for informational purposes only and NOT to be construed as specific trading advice. responsibility for trade decisions is solely with the reader.
by Naeem Aslam