Stock Markets Rally as Gold and Oil Stutter

After consecutive sessions of oil and gold rising and stocks sliding, yesterday bucked the trend.

After soaring past $2,000 an ounce on Tuesday, spot gold looked set to break its all-time high of $2,072.50, which was set in August 2020. However, yesterday, the precious metal retreated back below $2,000, ending the session 2.8% lower and wiping out all of Tuesday’s gains in the process.

We saw a similar situation with crude oil. After several days of gains, where it looked like both Brent and WTI crude were destined to record new all-time highs, both dropped sharply.

WTI crude ended the session almost 12% lower, whilst Brent closed 13% lower, in oil’s biggest single-day plunge since the early days of the pandemic in 2020. Both benchmarks have managed to recover some of their losses this morning.

This slump in oil prices came as concerns regarding restricted supply were eased by various factors.

Prices dropped sharply yesterday after the United Arab Emirates’ (UAE) ambassador to Washington yesterday said that his country would be encouraging OPEC (of which they are a member) to consider raising oil output. However, following these comments, the UAE energy minister took to Twitter to reconfirm the country’s commitment to the existing agreement amongst OPEC+ members.

These comments followed news that the US were moving to ease sanctions on Venezuelan oil and were closer to reaching an agreement with Iran over reviving the nuclear deal, both of which could result in more oil supply for the global market.

As oil and gold prices cooled, stock markets rallied across Europe and North America. In the US, financial and tech shares soared to lead the main Wall Street indices higher. The Dow Jones, S&P 500 and Nasdaq Composite gained 2%, 2.57% and 3.59% respectively.

Spiralling energy prices combined with the anticipation that the Federal Reserve will hike interest rates next week in an attempt to rein in high inflation have sparked fears of a prolonged economic downturn.

Therefore, the news of a potential increase in oil supply helped ease investor concern, as lower energy costs will lower input costs for companies and, hopefully, boost consumer sentiment.

Two industries which reacted particularly well to yesterday’s oil price slump were banking and airlines.

Banks’ profits are positively correlated with the overall health of the economy and so share prices had come under pressure in recent sessions on fears of an economic downturn.

For example, prior to yesterday’s session, since the start of February, Bank of America share price had fallen by 16.4%. Yesterday, however, Bank of America closed the session with a gain of 6.35% with other big name banks recording similar gains.

Likewise, rising oil prices had caused airlines to suffer in the stock markets recently, as fuel costs account for around 30% of an airline’s operating costs.

The drop in oil prices was, therefore, well received by investors and airline stocks received a boost in the market. Amongst the best performers in the airline industry yesterday was United Airlines, whose share price surged 8.27% and continued to rise in after-hours trading.

Investors will want to keep an eye on oil prices in the coming days, weeks and months, as they will continue to have an impact on the financial markets and the situation is constantly changing.

Today, the European Central Bank (ECB) will announce the outcome of its most recent policy meeting and, whilst interest rates are expected to remain unchanged, investors will be looking for any signs of how current geopolitical issues will affect monetary policy.

Furthermore, ahead of the Fed’s own policy meeting next week, the latest US Consumer Price Index (CPI) figures are scheduled to be released this afternoon. Whilst these figures won’t show the full impact of the recent rise in oil prices, investors will be watching closely.

If inflation is reported higher than expected, then the Fed may be forced to consider a higher rate rise than the 25 basis points currently expected.

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