The 'higher-for-longer' economy may be transitioning back to a 'Goldilocks' soft landing economy of not-too-hot/not-too-cold activity and inflation, which this week, at least, created a particularly attractive backdrop for stocks which was especially evident this week.
Despite this positive development, concerns persist regarding concentration risks, with the Magnification Seven group of stocks continuing to shoulder the majority of the market's weight.
Still, the primary concern surrounding a successfully achieved soft landing economy is the potential for a resurgence in growth, leading to renewed inflation and subsequent pressure on the Federal Reserve to respond with additional rate hikes. However, recent developments this week have cast doubt on the likelihood of this scenario. The most recent Consumer Price Index (CPI) reading showed a decline to +0.23% from +0.32% a month earlier, indicating that the trajectory for inflation remains relatively benign at this point.
Over the past week, money has been pouring into stock Funds. The sentiment in the equity market has improved this month, influenced by a shift in tone within the bond market. A series of favourable and softer macro data in the United States has bolstered confidence among duration bulls and has strengthened dovish rate expectations.
Given that concerns in the equity market were closely tied to developments in the bond market, the relief in rates directly translated into a grandiloquent rally off the October 27 lows.
The latest haul, amounting to nearly $26 billion, is the second-largest financial influx of 2023.
This recent development is likely aligned with the contemporary playbook observed by stock operators. As fixed income experiences a rally, stocks tend to follow suit. However, the current scenario is distinct as it coincides with significant bets on a potential shift in the Federal Reserve's policy outlook towards a more accommodative stance.
According to the rumour mill and backed by apparent sources, Saudi Arabia is considering extending its oil production cuts into the next year as OPEC+ discusses additional reductions in response to falling oil prices and heightened tensions over the Israel-Hamas conflict. In light of a recent four-month low in oil prices at $77 a barrel, the Saudi government is likely to continue its 1 million barrel-a-day cut until at least spring. This voluntary measure, initially introduced as a temporary step during the summer, is set to expire at the end of this year. Currently, Saudi Arabia produces approximately 9 million barrels per day, compared to its maximum capacity of about 12 million barrels per day. The prospect of further cuts is being debated within OPEC+ and is scheduled for discussion at the upcoming meeting in Vienna on November 26.
Many oil market speculators believe that OPEC will actively maintain Brent oil prices within the $80-$100 range, leveraging its pricing power. This strategy is perceived to establish a floor of $80 through what is colloquially referred to as the "OPEC put," while the ceiling of $100 is attributed to the organization's spare capacity. Despite potential downside risks such as increased non-OPEC supply or a decrease in GDP, our estimations indicate that Brent oil prices would likely hover close to $80 unless OPEC adopts a less assertive stance.
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