Stocks rally off oversold levels on positive economic data
After finishing the prior month and the third quarter at the lowest level year-to-date, the stock market staged an impressive rally in October's first two trading sessions. The rally started, given the significant oversold levels, but gained strength as we received several positive economic data points. We received surveys from both the manufacturing and service sectors. The manufacturing survey showed prices moving to the lowest level since June 2020. Prices on the service side have now declined for five consecutive months. On the labor front, we saw a significant decline in job openings. The importance of the job openings data is the notion that the Fed can tighten without causing an increase in unemployment but simply reduce the record job openings. The combination of the data gave the bulls some ammunition that we could still have a soft landing (reduce inflation without causing a recession). We think it is notable that unlike the previous rally off the June lows, which was led by high growth parts of the market, this one seems to be led by cyclicals and large technology. We think the market is shifting its focus from a prior narrative around a Fed pivot to a more probabilistic Fed pause, however, it is still very early and we need to see more data.
The silence around Nordstream 1 and 2 attacks
A week ago, we awoke to the news of damage to both the Nordstream 1 and 2 pipelines. (These are the pipelines that deliver gas from Russia to Germany and the rest of Europe). Media outlets immediately concluded that given the size of the damages, it was likely an act of sabotage rather than an accident. While there was early speculation as to the limited number of state actors that could achieve such an act, there was not much clarity about who was responsible. We find it curious that a week later, there has been minimal discussion about this. It is no surprise that Europe is already in a dire energy situation going into the winter; this development worsens things. Given the Western world sanctioned Russia over its attack on Ukraine, the supply of energy via these pipelines was a source of leverage for Russia over Europe. Our concern is that this further complicates what is already a tumultuous geopolitical environment.
OPEC announces oil production cuts
To the chagrin of the Western world, OPEC concluded their meeting this week with a decision to cut oil production by 2 million barrels a day. This was not unexpected, given the price of oil has decreased significantly over the prior few quarters. Unhappy with this, the United States announced an additional release of oil from the Strategic Petroleum Reserve. We need oil and gas even as we transition to cleaner renewable energy. However, the under-investment in the industry over the last decade has tightened the supply/demand dynamics. We expect continued volatility in the price of traditional energy, with the potential for significant periodic spikes in prices.