Oil’s influence on stock market direction looks to continue Tuesday. Major indexes are tagged for early gains, building on a late-Monday rebound that was driven—you guessed it—by a bounce for crude prices. European stock averages rose for the first session in six, moving in step with the short-term recovery for oil prices (still down some 30% year to date) and energy stocks. Asian markets were mixed.
The S&P 500 (SPX) briefly poked a major psychological level at 2000 on the downside Monday but that brief visit wasn’t much of a chart test and the abrupt recovery appeared to energize the bulls even as bond prices were shattered, driving yields higher.
Oil-induced volatility could continue but a degree of defensive positioning ahead of the mid-week marquee event is also possible. The Federal Reserve will begin its meeting later Tuesday, with a highly anticipated decision on whether it will raise interest rates for the first time since 2006 due Wednesday at 2 p.m. Eastern. At last check, short-term Fed funds futures market traders have priced in an 83% chance that the Fed activates the first interest rate hike since 2006 this week, according to pricing calculations provided on the CME Group’s FedWatch Tool.
Pre-Fed thin volume could give way to a volume spurt as late week includes the potential added volatility of “quadruple witching”—the expiration of futures and futures options on top of stock and index options.
Crude Prices Remain Volatile. Crude oil pricing recovered modestly nearing U.S. trading hours but not before an overnight drop. In fact, with that move, crude prices fell close to their financial-crisis low. London-traded Brent fell to a low of $36.33 a barrel, below its close of $36.61 a barrel in December 2008. The U.S. benchmark contract also fell to as low as $34.53 a barrel. But gains during the European session helped stocks there and crude prices could be choppy throughout Tuesday. Year-to-date, prices for both grades have fallen over 30%. Industry analysts expect oil prices to remain lower based on the refusal by the Organization of the Petroleum Exporting Countries to curb production. That supply drag is compounded by an expected increase in supply from Iran and Libya. Traders will also be watching for the weekly U.S. crude inventories and production data from the Energy Information Administration scheduled for release on Wednesday. A Platts survey reveals expectations for U.S. crude stocks to have dropped 2.5 million barrels for the week ended December 11.
Inflation Remains a Key Point of Debate. The inflation debate is likely to color the Fed’s discussion. An early Tuesday report revealed a flat consumer price index in November. Inflation, however, is no longer trending lower. From November 2014 to November 2015, consumer inflation climbed 0.5%. Although that’s still very low, it’s the largest annualized gain since December. Similarly, core consumer prices increased at a 2% rate over the past 12 months for the first time since May 2014. The Federal Reserve has made clear that it wants inflation to rise to the 2% range, although the central bank has said it leans on a different measure known as the personal consumption expenditure index that’s rising at a much slower annualized rate. The core PCE had risen 1.3% through the 12 months ended in October.
What’s VIX Telling Us? The CBOE Volatility Index (VIX), which is lovingly called the market’s “fear gauge,” pushed above its long-term average of “20” late last week and, in fact, struck 26 early in Monday’s sessions before a late-day retreat in step with the recovery in broad stock averages and for oil. Traders tend to watch for breakout moves in VIX that can preclude a move for the broader stock market.
Join Us to Figure Out the Fed
TD Ameritrade’s JJ Kinahan and Craig Laffman will huddle pre-Fed decision on Wednesday, December 16, at 9 a.m. Eastern. They’ll discuss the potential impact of rising rates.