Upward momentum in oil and financial markets driven by sentiment

It is a fact that optimism has gone up with the distribution of coronavirus vaccines.

Consequently, both oil prices and stock markets have improved. However, since oil is a commodity, its price movement is also based on fundamentals which, in my opinion, have not shown any real change. For this, the upward momentum that we have seen in oil prices is more likely due to an improvement in sentiment in the stock markets, plus the global recovery, and the progress with vaccinations.

One of the reasons for the latest financial upward momentum is based on the expectation of global improvement, which came simultaneously with a weak dollar outlook and the fact that the US Federal Reserve and other international central banks are holding their present policy steady.

The global stock rebound has come despite upheaval in American politics. The outlook for additional US fiscal support has outweighed other concerns after the underlying index outperformed the return to a stable economy. The rebound shows that investors are putting their money in the coronavirus vaccine basket, disregarding the rampant infection rates that continue to stifle the world’s economic recovery.

Oil prices have been pushed higher, building on the latest strong stock gains, while investors are counting on the upcoming US stimulus and on the fact that, with vaccines, the days of the pandemic are numbered. Investors appear to see “the light at the end of the tunnel.”

It is worth noting that the US dollar has softened against most currencies, with the expected consequence that most stock markets and oil prices are rising. In fact, most large international companies, including banks, oil, and tech companies, make most of their income in US dollars. Thus, when the US currency falls, profits and, hence, share prices rise.

Some people argue that the stock market’s surge is based on sentiment and that it is too risky for investors. Actually, it is the opposite.

Faisal Faeq

It is also widely noticeable that the overall risk appetite in global markets is relatively more subdued compared to recent times.

Central banks have added a huge amount of liquidity to shore up economies and stock markets. Apparently, the central banks are not done yet, and will continue to inject liquidity.

Some people argue that the stock market’s surge is based on sentiment and that it is too risky for investors. Actually, it is the opposite; investors like the “risk” because with it, volatility increases, and the possibility of them making money increases.

How do they protect themselves or reduce their risks? They protect themselves with appropriate hedging mechanisms. For instance, they use “options” to reduce the risk.