Stocks had another good session overnight. The Dow was up 0.61%, while the S&P 500 rose 0.53%. The main impetus behind the rally was an agreement by OPEC members over the need to cut oil production levels.
This sent West Texas crude up a large 5.33%, while Brent surged 6% as traders scrambled to cover their short positions on the surprise announcement. It should be a good day for ASX oil and energy stocks today.
Mind you, the OPEC agreement is not yet binding. OPEC merely agreed on the need to cut production levels. The Financial Times reports:
‘The size of the cut or how the reduction will be achieved is not yet clear.
Reports this evening suggested the cartel would drop output to 32.5m barrels a day, nearly 750,000 b/d lower than the level it pumped in August, and that that decisions on how much each country will produce will be agreed at the next formal Opec meeting in November.
‘The last time Opec lowered production was during the global financial crisis in 2008.’
If the disparate and squabbling members of OPEC do go through with the agreement to cut output, it increases the probability that the bottom for oil is in. That’s good news for a sector that has been battered around the head for the past few years.
The other news boosting US stocks overnight was a speech from Fed boss Janet Yellen. She said there was no fixed timetable for the next interest rate rise, and that any tightening would be gradual.
No real news there apart from a comforting reminder that Yellen is perhaps the most dovish, timid, and market friendly Fed chief in the history of the institution.
In 1927, the-then Fed boss Benjamin Strong said he would administer a shot of ‘coup de whisky’ to the stock market. It kicked off quite a party. But the hangover from that episode was enormous.
If Strong was a binge drinking party man, Yellen is a seasoned alcoholic. She ensures the market has constant supplies of alcohol, but not enough for things to get out of hand…and not enough to force a nasty hangover.
She’s like the old dude on the park bench, sipping the bottle regularly to maintain the buzz.
Frankly, I’m a little surprised by Yellen’s comments. Especially considering that, at the Jackson Hole symposium, she sounded a more hawkish tone (for her, at least) by reminding the markets that interest rates were set to rise.
Now she’s backtracking again.
Could it be that she wants to do everything possible to keep her greatest critic, Donald Trump, out of the White House?
After all, Trump accused Yellen of being more political than his opponent, Hillary Clinton. And that’s saying something! It’s led to conjecture that Yellen would resign should Trump somehow manage the win the upcoming election.
‘“If Donald Trump wins November’s presidential election, there is now a clear possibility that Fed Chair Janet Yellen would resign almost immediately, perhaps even before the mid-December (Federal Open Market Committee) meeting,” Paul Ashworth, chief U.S. economist at Capital Economics, a London-based global forecasting firm, said in a note. “It is hard to see how she could continue in her position until her current term expires in early 2018.”’
You think Yellen wants to rock the boat in this precarious environment? She can say the Fed is an apolitical institution all she likes, but if you know one side will likely turf you if they get elected, you will do everything you can to make sure it doesn’t happen.
And the best way for Yellen to do that is to keep the market well supported into November. During the recent debate, Trump said that the US economy was a ‘big, fat, ugly bubble’, and blamed it on the Fed and their easy money policies.
He’s right, but there are many people who profit handsomely from the Fed’s big, fat, ugly bubble; so his comments didn’t gain much traction.
Still, think of it from Yellen’s perspective. If you start talking up an interest rate rise, you’ll give the market the wobbles. And if you give the market the wobbles prior to the election, it gives ammunition to Trump’s claims, and potentially plays into his hands.
And then you lose your job…
So if you’re Yellen, you’re now going to be very coy about raising rates. At least you will be until after the election.
That’s the way it looks to me, anyway. And would anyone be so naïve as to think that Yellen would put the credibility of the institution she runs over her own self-interest?
If this reasoning turns out to be the case, it makes it even more important to focus on the S&P 500. Following the early September selloff, the benchmark index is making another attempt at the highs.
If it can’t break out to new highs on an apparently improving economy — and a Fed that continues to hold off on interest rate hikes — then I think it’s a sign that the market is in a short term topping out pattern.
With September almost done and dusted, the spotlight turns to October, another traditionally volatile month for global stock markets. Let’s see what Yellen can do!
For The Daily Reckoning