As we have noted in the last two days, on the heels of Janet Yellen's mutterings, US equity markets have exploded higher even as the highly correlated and causative oil prices have done anything but rise. This 'fact' has not escaped BofA's Hans Mikkelsen's attention as he warns, "While stocks currently are getting a break from oil, it appears most likely that they reconnect when the decline in oil prices accelerates – especially if we see associated weakness in credit and EM." And sure enough, modestly at first, the two are starting to converge this morning...
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Chart: Bloomberg
As BofA notes, Yellen unchanined stocks from oil (for now)...
Since just prior to yesterday’s release of the FOMC statement Brent oil is down 4.2% while stocks have surged 3.2%. That represents a massive break from the first part of December where the two markets traded down in lockstep. This recent decoupling reflects partly on Fed Chair Yellen’s press conference where she explained how declining oil prices are expected to be a net positive for the US economy. Furthermore, she went out of her way to dismiss any downward pressure on inflation as “transitory”. As lower oil is good for the economy it makes sense that even the Energy sector in the S&P is up nicely (+2.0%) post the FOMC statement, despite the further decline in oil.
While stocks currently are getting a break from oil, it appears most likely that they reconnect when the decline in oil prices accelerates – especially if we see associated weakness in credit and EM.
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And then there's this...
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