Commenting on today’s trading with a focus on potential conflict in the middle east moving oil prices, Gorilla Trades strategist Ken Berman said:
Today’s session proved the strength of the underlying bullish trend, as even the risk of an oil shock and a widespread conflict in the Middle East wasn’t enough to cause a meaningful pullback. Although the price of oil jumped by almost 15% today, stocks and bond yields barely budged, and equities outside the energy sector traded in narrow ranges, as usual ahead of Fed meetings.
The major indices edged lower in choppy trading today, and the Dow broke its eight-day winning streak, as investors tried to judge the consequences of the attack on the Saudi oil industry. The Dow was down 144 or 0.5%, to 27,182, the Nasdaq lost 23, or 0.3%, to 8,154, while the S&P 500 fell by 9, or 0.3%, to 2,998. Advancing issues outnumbered decliners by a 5-to-4 ratio on the NYSE, where volume was slightly below average.
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Iran vs Saudi
Today’s session was all about the energy sector in the wake of the surgical attack against the Saudi oil infrastructure, and the price of crude oil hit its highest level since mid-May. The WTI contract surged through the $60 per barrel level due to the increased geopolitical risks and the uncertainty regarding the extent of the supply disruption, and the commodity finished the day near its intraday high. According to Saudi sources, more and more evidence is pointing to Iran’s direct involvement in the attacks, and that raises the odds of an open conflict between the two competing regional powers.
The conflict between the U.S. and Iran, which revolves around the Persian state’s nuclear program took a positive turn in recent weeks, but the weekend attacks could lead to a full-blown military conflict in the Middle East. Saudi Arabia and Iran have been waging a ‘proxy war’ in Yemen for years, but until now, the two countries avoided an open conflict. The supply disruption alone would likely only lead to a temporary spike in energy prices, but should the Kingdom and the U.S. retaliate against Iran, the global economy could face even stronger headwinds.
Oil surges on potential conflict in the Middle East
While the key sectors diverged substantially today, and oil-related stocks turned volatile, the major indices were relatively stable. The services and consumer goods sectors were hit by the possibility of a major oil-price-shock, and although the major energy-related issued jumped, safe-havens outperformed the risk-on sectors. That said, small-caps remained strong throughout the session, and the key large-cap benchmarks also held on to their recent gains. The Fed’s monetary meeting could still turn out to be the most important event of the week, but in light of the increased global risks, a hawkish surprise seems even less likely.
Even though tomorrow’ session will likely be another relatively quiet one due to Wednesday’s rate decision, there will be a few key economic releases coming out. Industrial production declined unexpectedly last month, but we saw improvements in some of the forward-looking manufacturing measures in recent weeks, and analysts expect a 0.2% increase in output. The NAHB Housing Market Index is expected to come in at 66, matching last month’s reading, and although mortgage rates surged higher this month, financial conditions remain relatively loose, which should continue to boost the struggling sector. Stay tuned!