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Why the oil rally may be the “last nail in the coffin” of stocks

Inflation is not the only big bogeyman that threatens stocks. At least for the Americans. Life is getting more and more expensive for the average American, and the oil rally can be, according to Kriti gupta from Bloomberg, that last “nail in the coffin” of equities.

Crude prices have returned to their 2018 levels, just before the trade war between China and the US escalated.

In this first half of 2021, oil accumulates a 45% rise after another rise, but 26%, in the previous six months. Currently, it is trading at $ 75 a barrel (both West Texas, a benchmark in the US, and Brent, a benchmark in Europe) and many already see it touching $ 100.

That oil rises is obviously very good news for shale producers, but not so good for economies that are so consuming and dependent on this raw material, such as the US. That’s where the headache for stocks comes in, at least for Wall Street.

Consumer spending is already beginning to moderate, and the effects of fiscal stimulus are likely to fade from next September, according to Gupta. Higher prices, whether for food or gasoline, are likely to lead to less expenses and travel, which in turn will lead to less income and less profit for many of the members of corporate America.

BEWARE OF THE CORRELATION BETWEEN BOTH

This expert suggests that concern about this is already visible, for example, in the 66-day correlation between the S&P 500 and a barrel of Brent. “Traditionally it is positive because the demand for shale tends to be accompanied by strong economic growth, which in turn gives wings to the stock markets, but now it is negative, something we have not seen since 2017,” he warns.

The last time that correlation between the two derailed, oversupply was crude’s biggest concern for three years that saw strong global growth. “TIt was also Trump’s first year as president, with his pro-growth policy agenda and tax cuts, “ recalls Gupta.

In short, if this correlation between the two continues to be negative and taking into account the current narrative of the markets, “the best bearish signal for the stock markets may be the rises in raw materials (such as oil),” he concludes.

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