Morning Minutes 11/07/2018

Stocks Rally on Midterm Report Card; Oil Finds Its Sweet Spot

SIA Wealth White BG

November 7, 2018
8:45 am EDT

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Market Commentary By:
Colin Cieszynski, CFA, CMT
Chief Market Strategist
+1 (647) 282-4428

Stocks in Europe and North America have put on their rally caps this morning as investors applaud what could turn out to be a Goldilocks midterm election result for equities. As is common in midterm elections, there was a swing toward the opposition Democrats, but not the big blue tsunami they had been hoping for. The Democrats did manage to retake control of the House with a small majority but the Republicans increased their majority in the Senate.

Stocks have generally done well under President Trump to date along with the US economy, but had retreated in recent weeks partly on election uncertainty. Last night result gives the Democrats the ability to slow his agenda and potentially keep him from going too far, but doesn’t give them enough power to completely derail him or to take a serious run at impeachment. Historically, US stock markets have really hated impeachment most of all, dropping about 20% in 1998 when the Republicans went after President Clinton and plunging about 40% in 1973-74 when the Democrats drove President Nixon out of office. For stocks, this result looks just about right, not too Democrat, not too Republican.

Gridlock is good…  : )

The biggest action this morning has been in crude oil where both Brent and WTI have bounced back from yesterday’s tumble that took WTI to its lowest level since April, gaining 1.9% and 1.6% respectively. The rally was sparked by press reports suggesting that Saudi Arabia and OPEC could be looking at more production cuts in 2019. It’s too early to speculate if any cuts may actually materialize and how much, but what is important is that this shows that the Saudis are prepared to defend the oil price, by talking it up initially.

Recent action in oil prices suggest that we may have entered a sweet spot between the price Saudi Arabia needs for its Aramco IPO to go through and the price the United States is willing or able to tolerate before political or inflationary problems arise. This happy zone appears to be about $60-80/bbl for WTI and $70-90/bbl for Brent.

Last month as Brent approached $90, President Trump started complaining about the price and added supply to the market by enabling some of the biggest oil importers to keep purchasing oil from Iran exempting them briefly from the sanctions that had reduced supply. With recent reports showing wage inflation on the rise, the US can’t afford an energy price spike potentially forcing the Fed to accelerate rate hikes.

This week, with WTI approaching $60, Saudi Arabia has apparently started talking about cutting supply next year to shore up the price. It’s a big chess game. Last night API reported a 7.8 mmbbl increase in US oil inventories, with the street expecting a 2.4 mmbbl increase from DOE this morning. While we may see some intraday choppiness on this news, these broader ranges are now starting to look well established and defended by the big political players.

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