News that negotiations to end the Middle East conflict could resume in Pakistan within the next 48 hours has acted as a massive relief valve. WTI Crude has dipped toward $91, easing concerns over energy-driven inflation. The S&P 500 extended its rally, the FTSE 100 is about to follow. The earnings season is underway, BlackRock and Citigroup are seeing upward momentum after strong Q1 earnings beats. The market is also reacting positively to the March Producer Price Index (PPI), which came in softer than expected. This reinforces the narrative that inflation is cooling, potentially giving the Federal Reserve room to pause or pivot on interest rate hikes later this year. Overall the news is positive, the rally should continue.
As noted yesterday it will take weeks / months before the inflation data deteriorates, crude oil is unlikely to drop back to pre-war levels. Supply chains have been disrupted too, like during Covid, this resulted in higher inflation. My view is that the rally is driven by positive news, the bad news has yet to come. This is the important question, when will investor start selling? They will sell ahead of the bad data, it could be now or next week. The drop in the oil price is positive for metals like silver and copper, copper is near its previous high, metals will rally, this too is inflationary.
The rally in the S&P 500 has been sharp and fast, the S&P 500 is already near the all-time high. This is understandable, when we are in a bull market and there is a crisis, people will rush to buy as soon as the crisis is over. They don’t want to miss the bull market, they are right, the decline is wave (2) of the bull market. After wave (2) there is wave (3) up. The problem is that very often people buy too early, in this case wave (2) is unlikely to be complete. I believe wave (2) will extend below the recent low before it ends. The consequences of the war are not over, oil will remain high, inflation will rise and yields will rise.