Stocks continued rising today as the Dow overachieved, climbing approximately 0.6%, or over 200 points. The S&P and the tech-heavy Nasdaq Composite both saw increases of around 0.5% as well. This positive movement in the market comes despite Federal Reserve officials attempting to temper expectations for an imminent rate cut, emphasizing that such a decision is still “premature” and will be heavily influenced by upcoming data.
Investors are now turning their attention to the Bank of Japan’s decision to maintain interest rates below zero, with no clear indication of when this policy might shift. Despite this, US stocks are holding onto their gains, seemingly looking past these cautionary signals. The upcoming update on the Personal Consumption Expenditures price index, the Fed’s preferred inflation measure, is anticipated to play a crucial role in shaping the debate over the timing and pace of potential rate cuts.
Oil prices are also under scrutiny, as more companies, including BP and Norway’s Equinor ASA, join the growing list of those avoiding transit through the Red Sea following attacks on shipping in this vital trade route. The situation has escalated to the point where some vessels are rerouting around the Cape of Good Hope, adding significant travel time, while others await further instructions or military protection. As of Sunday, 55 ships had rerouted since the Houthis hijacked the Galaxy Leader on November 19, with 2128 vessels passing through the Suez Canal, according to the Suez Canal Authority’s managing director. Approximately 78 ships are reportedly awaiting instructions.
The potential for prolonged disruptions is increasing, with global trade possibly facing significant impacts. The US has already dispatched warships to intercept attacks, and a coalition of countries has agreed to conduct joint patrols. However, the effectiveness of these measures in ensuring safe transit remains uncertain. The risk of cost-push-induced inflation, reminiscent of the supply-chain disruptions experienced in 2021-22, is becoming a more pressing concern.
Rerouting ships, while saving on Suez transit fees, incurs substantial costs due to longer journeys and increased fuel needs. Insurance costs for travel over the Red Sea have reportedly skyrocketed, and the reduced availability of commercial vessels and fuel tankers is likely to exert upward pressure on freight prices. This comes at a time when drought at the Panama Canal has already contributed to higher prices, particularly for bulk transport.
Despite these challenges, the current oversupply in the container market, a result of the pandemic’s aftermath, combined with weak demand, is providing some cushioning effect. The composite container freight benchmark rate has risen by over 10% in recent weeks but remains lower than most of the year and significantly cheaper than during the pandemic peak.
In the energy sector, these developments have not yet significantly impacted crude supply but they have nudged prices upward due to the highlighted risks. Brent oil futures saw a 1.8% increase to $78.12 per barrel, and while this is higher than recent lows, it remains below the peak of $92 in mid-October. Ample supply and weak demand are keeping prices in check, outweighing the risks of severe supply disruptions for the time being. However, volatility in the market has increased, and there is a potential for upward price adjustments as the first LNG tankers begin rerouting around the Cape.
It’s clear that supply chain disruptions could dent the “inflation is over” narrative that’s formed over the last few weeks, which is likely to have an impact on stocks, too, near their all-time highs.
