Stock rotation and resolution of the Oil market dislocation

US stocks are trading modestly lower Tuesday as portfolios rebalance around a now-steady increase on Treasury yields in the wake of the receding bank stress that is translating into a smooth rotation out of Tech and into the more pro-cyclical sector, at least for now.

Blackrock, typically viewed as a keen proxy for Fed sentient, wrote in the latest client note, “we think the Fed could only deliver the rate cuts priced in by markets if a more serious credit crunch took hold and caused an even deeper recession than we expect.”

As banking concerns seem to stabilize, investors may also be relieved that the US consumer is holding up well: stronger-than-expected March Consumer confidence and resilient home prices auger well for that view.

Tech and Communication Services have provided ample cushion to the S&P 500 at the index level amidst all the volatility we saw in March. Mega-cap Tech, in particular, has benefited from investors pricing in growth concerns and lower long-term rates in response to bank stress, but the cushion is deflating a touch as US yields move higher.

However, as longer-term investors look beyond the current price action, several giant tech heavyweights have fresh longer-term growth tailwinds that could cut short any sustained underperformance — particularly on the adoption of Generative AI, which is likely to benefit the big names (MSFT, GOOGL, NVDA, AMZN, CRM, META, INTU, and ADBE). And this could eventually lead to a resolution path that involves rates moving higher more than stocks moving lower.

Forex

So far, the US dollar has not benefited from the re-inflation of US yields; putting that view into check was an extremely weak February US Trade Report which should lower Q1 GDP tracking estimates.

And while 2-year and 10-year US Treasury yields are trading modestly higher but remain well below where they were at the beginning of the month, suggesting to overcome the current US dollar malaise, they may need to sustain a push higher to convince folks to buy the dollar.

Oil

As the banking sector foundations get shored up, oil investors are now better able to focus on macro; hence the reliance on the US consumer provided an additional boost to sentiment overnight that is currently riding upbeat on a China demand boom.

But correlations also count. Front-end US Yields and Oil prices have seen the sharpest dislocations on banking concerns. So with market stress receding and the fundamental impact from banks potentially contained, the outsized dislocation in the oil markets is naturally getting resolved.

As the dust settles and the smoke clears, crude prices will likely climb back to levels seen at the pre-banking crisis and could go even higher later in the year. Nevertheless, the burden of proof for that view remains on the market to pivot into a deficit, showing that marginal supply is needed.

In a tactical context, price action determines sentiment and narrative, which are seemingly improving.