The tone in Financial Markets has now eased despite the ongoing US-Iran-Israel conflict, now in its 12th day – Stock Indexes are still failing to generate traction, currently victim of strengthening selling flows.
The almost-perfect inverse correlation between Stock Markets and oil prices has now stalled, with Crude volatility also coming to a brutal halt.
It is surprising to see Markets disregard the pretty positive CPI report (coming in at 2.4%, as expected), but this points to a new dynamic: Current progress in inflation won’t help if inflation expectations, rising from higher Oil prices, remain high.
This further emphasizes Surveys like the University of Michigan Consumer Sentiment (released Friday at 10:00 A.M.) and the NY Fed’s Inflation Expectation Survey.
Rate cut pricing will also be particularly tied to the Core PCE numbers (next release also on Friday, 8:30 A.M.), the Federal Reserve’s favorite inflation gauge.
As noted in our fresh Oil analysis, the commodity is pointing to a more rangebound price action ahead – but any significant breakout, even if it is slow and persistent, will dampen risk appetite until a clear resolution of the conflict.
Still, the past few sessions of rebounds have helped US benchmarks recover into their higher time-frame ranges – Keep a close eye on immediate action as sentiment takes a turn lower by the minute.
Keep in mind that an ongoing trend is developing around Financials, particularly Private Asset Managers, which are seeing waves of liquidations and a much tighter lending Market – This damaged risk-sentiment a few Fridays ago and could have a much wider impact if this spreads further.