Stocks saw a modest uptick as the final full trading week of the year commenced, with the Dow Jones Industrial Average inching closer to another record high. This upward movement comes despite attempts from Fed officials to temper expectations for imminent interest rate cuts. The Dow opened with a slight gain of about 0.1%, building on its recent all-time high achieved on Friday. The S&P and the tech-heavy Nasdaq Composite also experienced marginal increases of around 0.2%.
Investor optimism has been fueled by the growing belief that the Federal Reserve might implement more rate cuts in 2024 than previously anticipated. This sentiment was reinforced last week when Powell & Co. effectively took a victory lap, pointing to the most recent tightening cycle and falling inflation numbers as reasons to celebrate.
However, Fed officials have been vocal in their caution against premature expectations of deep and rapid rate cuts. Chicago Fed President Austan Goolsbee, echoing the sentiments of his New York counterpart John Williams, stated on Sunday that it’s too soon to claim victory over inflation. It’s an odd statement considering that Fed Chair Powell had ample opportunity to deliver the same message in his post-FOMC press conference last week but chose not to. Not only that, but coming Powell, it would have meant a whole lot more than a statement from Goolsbee or Williams.
Investors are now keenly awaiting Friday’s Personal Consumption Expenditures (PCE) price index, the Fed’s preferred inflation gauge. Economists are predicting a moderation in price pressures for November, which could influence the Fed’s rate decisions.
In corporate news, US Steel shares surged over 26% in early trading following an announcement by Japan’s Nippon Steel to acquire the company in a $14.9 billion deal. The offer price of $55 per share represents a significant premium over US Steel’s last closing price in August.
Elsewhere, Nio shares rose approximately 6% as the market reacted to news of a $2.2 billion investment from an Abu Dhabi investor in the Chinese electric vehicle manufacturer.
But the big story this morning was oil, which surged after BP and several container lines halted journeys through the Red Sea due to attacks on shipping. This development could potentially disrupt oil flows, as analysts have warned. West Texas Intermediate futures were trading just above $73 a barrel, with Brent crude futures above $78 a barrel.
The market is potentially underestimating the impact of these developments, as detailed by S&P Global’s Jennifer Gnana, Kelly Norways, and Mohammed Al-ansare. Major shipping companies, including A.P Moller-Maersk and Hapag-Lloyd, have suspended voyages through the critical Bab al-Mandeb chokepoint in response to attacks by Yemen’s Houthi militants. This suspension could significantly disrupt global trade flows, as the Bab al-Mandeb strait is a vital passage for 10% of global seaborne oil.
The decision to reroute ships via the longer Cape of Good Hope adds considerable distance to voyages, impacting delivery times and freight rates. The recent surge in attacks on various vessels, including tankers and container ships, has heightened concerns about the safety of maritime trade in the region.
The ongoing conflict and the resultant shift in shipping routes have led to increased war risk surcharges and higher freight rates. The situation remains volatile, with geopolitical tensions expected to remain a central focus in 2024. Even without this hurdle, oil prices were expected to rally in response to the growing belief among investors that the US economy can pull off a “soft landing,” thus driving higher oil demand, while a rate-cutting Fed would also help lift oil prices.
Now, a “short squeeze” could come into play after bears attempted to smash oil prices lower again following last week’s uptick.
So, while the market is buoyed by expectations of a dovish Fed stance, the fact remains that oil is oversold and stocks are overbought. The Houthi attacks add another bearish pressure into the mix for equities, while also supporting the theory that oil is about to jump further, calling into question whether the Fed has truly defeated inflation.
