US futures shrug off oil prices and Carney comments

US futures shrug off oil prices and Carney comments

By Craig Erlam on Jun 16, 2014 08:04:38 GMT

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  • US futures shrug off oil prices and hawkish Carney comments;
  • Sterling rallies as Carney warns that first rate hike may come earlier than expected;
  • Preliminary UoM consumer sentiment reading key today.

Yesterday’s spike in oil prices along with Mark Carney’s surprising hawkish comments at the annual Mansion House event appear to have condemned European indices to end the week on a negative note. Meanwhile, US indices are expected to shrug this off much easier, with the S&P seen opening unchanged, the Dow down 4 points and the Nasdaq up 2 points.

The bulk of the downside resulting from the oil spike was probably largely priced into US stocks yesterday, which would explain why they appear to be showing such resilience ahead of the open. That said, it’s unlikely that oil prices have peaked quite yet, in fact there could be a significant amount of upside to come if previous episodes of disrupted supplies are anything to go by, so I expect there’ll be more suffering to come for stocks.

Given what we’re just recovering from, it would be outrageous to say this has come at the worst possible time, but it is certainly extremely inconvenient. The recoveries in the UK and US are still fragile, while the eurozone is only stagnating at best. We could have really done without another oil price shock that could derail what recoveries we are seeing and extend what has already been one hell of a financial crisis.

With US President Barack Obama not ruling anything out, we have to assume that the situation in Iraq is going to get worse before it gets better. This will be disruptive to say the least, not just to the consumer who will see disposable income take yet another hit as they are forced to pay higher prices at the pump, but also to companies that rely on oil and gas. Hence why these stocks could suffer a lot more in the coming weeks and months.

This could potentially make the comments made by Bank of England Governor Carney a little irrelevant as I can’t imagine that the MPC would look to tighten monetary policy at a time when the economic recovery is under threat. Clearly the markets don’t see it that way, which is understandable as it’s a little early to start pricing in such assumptions.

Carney’s warning that interest rates could rise earlier than financial markets are currently expecting came as a total surprise to traders, most of whom were not expecting the first hike until the first quarter of 2014 at the earliest. Sterling rallied aggressively following the comments, just falling short of 1.70 against the dollar for the second time in a little over a month. Unlike last time though, traders now have a reason to buy at these levels and force the pair through this major resistance. I expect this will happen in the coming days, potentially following a brief correction given the scale of the rally since yesterday. A break through 1.7042 would see the pair trading at levels not seen since October 2008, the period when sterling went from trading at more than $2 to the pound to $1.35 in the space of five months.

The end of the week is looking pretty quiet with the only notable economic release being the preliminary UoM consumer sentiment reading for June. This is an important piece of data as it gives us key insight into consumer attitudes in the coming months. The consumer is so important to the US economy that this cannot be ignored.

About Craig Erlam

Craig Erlam is Market Analyst at Alpari UK. He joined Alpari (UK) at the beginning of 2012 after four years in the financial services industry, including working at Goldman Sachs. Craig writes market commentary that regularly appears on websites including The Financial Times, Reuters, BBC, The Telegraph and FOX Business. He also provides insight and analysis for clients which he posts daily on Twitter, Google+ and the Alpari (UK) website. You can also find Craig on YouTube where he gives short market updates, including charting analysis.

Recent posts by Craig Erlam

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