Opening Bell: Oil Eyes $73; Euro, Pound Rise; U.S. Dollar Consolidates

The widespread selloffs seen across global markets today are crushing investor hopes that yesterday's equity rally, prompted by diplomatic breakthroughs between the US and China, would have a somewhat longer lasting effect.

The S&P 500 jumped 0.74 percent, with all sectors in the green. Industrials (+1.51 percent) far outperformed Energy shares which tied with Real Estate, for second place; both gained 1.1 percent. The trade truce signaled by US Treasury Secretary Steven Mnuchin on Sunday had such a meaningful impact on multinational industrial firms that it outweighed the surging oil price, which, on Monday posted the fastest rise in years.

Industrials broke a downtrend line since the late-January record, thereby completing a bullish falling wedge. The price move suggests investors believe the US-China trade truce will last in the longer run.

We don't necessarily agree. However, given the market's twists and turns this year, along with fluctuating geopolitical risks, we freely admit that though we're pessimistic, we have been surprised repeatedly by recent market developments.

The Dow climbed 295 points, or 1.2 percent, but trimmed an earlier gain of 369 points, or 1.5 percent. The advance marked the Dow's highest level since mid-March, completing a bullish pennant and suggesting prices will continue to follow an upward trajectory.

The NASDAQ Composite jumped 1 percent intraday, but gave up half of those gains at the end of the trade session.

The Russell 2000 climbed 0.67 percent, posting a fresh record high.

As a reminder, the late-January double-digit US equity market correction—the first since the November 2015-February 2016 stock slumps—was provoked by a sudden shift in the outlook for the pace of tightening after Treasury yields reached a 4-year high. Therefore, minutes from the last FOMC meeting (released later today) hold special significance. Investors will scrutinize the release for any clue on the pace of interest rate hikes—especially after dovish comments by Federal Reserve Bank of Philadelphia's president Patrick Harker, who said on Monday he continues to support raising rates "judiciously".

Oil prices crossed the midway point to $73 dollars a barrel—a target not eyed since November 2014, which increases investor nervousness. Equities have already been consolidating since the late-January record high, posting the longest consolidation range since mid-2012 on worries that inflation would rise too quickly, prompting hasty rate hikes. Oil's impressive 25 percent spike since February, or the even more sizeable 72 percent leap since the June 2017 trough, threatens to boost inflation aggressively.

We can’t stress enough how powerful oil demand is; these spikes are occurring concurrently with the dollar at a five-month high. However, the current two-day USD selloff is likely slowing the path to higher prices for oil.

From a technical perspective, oil prices are reaching a secular downtrend since the 2008 crash. Will the prospect of looming US sanctions against Venezuela’s production of 1.4 million barrels of oil a day—after already reintroducing sanctions against Iran, with a slew of Mideast conflicts brewing and no end in sight—boost demand past the $80 threshold, allowing it to take on the more natural $100 level, not seen since mid-2014?

To fully appreciate the oil bullishness on the backdrop of a stronger dollar, emerging market currencies slipped after the dollar’s spike, with the Argentinian peso (-23 percent) and the Turkish lira (-17 percent) leading the downfall. Of course, the latter has been also weighed down by Turkey’s bond selloff, after President Recep Tayyip Erdogan said he opposed higher interest rates and looked to tighten control over monetary policy. This is in line with the stance Erdogan has maintained over the last few years, which pleases his electoral base but worries economists and foreign investors.