October 27, 2022
Crude prices in focus as US equities are narrowly mixed, with Energy, Industrials and Financials upside standouts. Communication Services (META) sells off most and Tech (AAPL into EPS) lags. Treasury yields are lower with curve flattening as the 10-year moves back below 4%. The 2yr/10yr curve has been inverted for several months, but a potentially more reliable recession indicator, the 3m/10y spread, inverted yesterday and usually precedes a recession occurring within 12 months. The Fed’s preferred recession measure, the 3m/18m forward starting 3m ahead is also about to invert. The dollar is firmer vs. most major currencies except yen. Gold is down -0.32%, while WTI crude is up +1.90% on record US exports.
SPX: Technical resistance at ~3900 remains the near-term hurdle for the S&P 500 (SPX). Disappointing mega cap Tech results over the last two days has somewhat dulled the positive impact of lower bond yields and lower terminal rate expectations. Terminal rate expectations are down -3.4bp to 4.793% and something below 4.75% and/or decent AAPL/AMZN prints this afternoon could be enough to take the SPX north of ~3900. Incremental demand from buyback windows reopening keeps risk skewed to the upside and a handful of popular CTA buy triggers lay just above 3900. We continue to see the 4100-4200 range capping the Q4 rally and it will likely take some easing in tight labor markets (October Jobs Report 11/4) and realized inflation (November CPI of 11/10) to get there. A regression of terminal rate expectations since April and SPX performance shows terminal rates of 4.5% lining up with ~4200.
Crude: Beginning December 5, any vessel moving Russian crude to be sold above a predetermined price cap will be prohibited from obtaining European shipping, bunkering, insurance and financing. Russia said it won’t comply with a US-led price cap and will try to legally find alternative buyers for its oil on ships that don’t require Western services. It’s been difficult for Russia to obtain Western services since late-spring, with estimated current Western capacity at ~2.9mbd. Russia will need to find tanker capacity for this 2.9mbd and for the 4.1mbd they’ve been selling to China and India if those countries don’t use their own fleets. This price cap will reduce Russian crude on the market and should keep oil prices elevated through next year.