Stocks mostly rallied to start the week, but Tech stocks came under renewed pressure. The broad market was flat as a result.

The elephant in the room, that walked in oddly enough from Saudi Arabia, did not wander off, with the New York trading session confirming the validity of the price leap seen in Asia.

Sustained higher oil prices are a real headache for the Fed. Further complicating a landscape of reduced but still far too high inflation.

This is not just about the move seen yesterday. Saudi Arabia has made it clear it will pursue a path of maintaining elevated prices, being prepared to turn the tap tighter on a whim. President Biden’s visit to Saudi Arabia seems to have achieved little.

This means the Oil price is beyond the control of the US Administration. Regardless of the cosier relationships it held previously.

There is no control and no limit on where the oil price is now headed. Which a is a very different scenario to what the Administration had hoped for. A hand in dealing with inflation.

The outlook for the inflation curve just steepened significantly, and with it the outlook for interest rates across the curve.

US Bonds rallied on the day, on the back of the confirmed serious contraction now taking hold across the manufacturing sector of the USA.

The economy remains in trouble. Even precarious. The market took this as some sign of hope of a weakening economy slowing Fed actions. This is the hopeful scenario.

The more likely scenario, is that oil prices will now remain firm and even strengthen further. While dampening demand, this will the flow through to the inflation problem. Which will remain front and centre in the Fed’s calculations.

The Fed believes it can and maybe is winning the fight against inflation. This is something it feels a greater confidence for. The Fed also knows that any sustained higher oil price, even though no where near the previous crisis levels, will nonetheless have an immediate and profound impact on prices across most services, manufacturing and retail sectors.

This latest surge in oil prices, though modest in comparison to the earlier crisis, may well have just as severe an impact on overall rate of inflation.

It is by no means a small problem, for as mentioned, this is a clear policy stance now from Saudi Arabia that will continue to impact US inflation going forward for some time.

As a result, the Fed will be hiking aggressively even as the economy slows further. The nightmare scenario of a recession accompanied by Fed hikes, is now a very real possibility.

The outlook for stock valuations in such a scenario, is dire to say the least.

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