Wednesday, April 15, 2015
Higher Oil to Prompt Record High S&P Index
Emini (ESM5) trades higher on the day by 9 points and is expected to make new contract highs today as the SPX index itself also makes at least a strong attempt against its historic high from February 25th at 2119.59. There have been a number of technical formations that could be interpreted as indicating a topping situation developing. However, I believe fund managers have been particularly sensitive to the possibility for an equity correction and investors are already oversubscribed to that notion.
We would suggest there was an extraordinary level of concern, much of which is still evidenced, that another move lower in oil toward $20 would unleash a strong financial backlash. A disruption to the financial system and the potential impact on equity, Treasury and other asset prices was expected to result from the inability of many firms to meet financial obligations because of lower oil output revenues.
Today, the rolling first oil future contract breaks above the recent, February 2nd, $54.24 high and could invite some momentum buying. More importantly for equity and fixed income markets, it could reduce the level of concern for a more dramatic financial disruption which might come from another drop in oil. To be clear, this strength in oil today should act as a support to equity prices, helping to drive the Emini to new highs today. At the same time, to the extent that some have priced in a potential bid to Treasuries from this same financial dislocation and because of the deflationary implications of lower energy prices, we should expect that all else equal, Treasury prices, especially longer duration instruments, will move lower.