Stocks are a sea of green on Wednesday, after hefty gains for US indices on Tuesday as rate cut bets ramped up after the July CPI report. The FTSE 100 continues to eke out gains, but the main UK index is lagging behind other European markets as it gets weighed down by the energy sector.
Oil supply glut weighs on FTSE 100
The oil price is in focus this week, as concerns grow that a global oil supply glut will get worse next year. The International Energy Agency said that inventories will accumulate at a massive 2.96mn barrels per day. This is a faster rate than the accumulation of inventories in 2020 at the peak of Covid. The peak of the supply glut will be at the end of 2026, according to the IEA, which could keep a lid on the oil price for the long term. The Brent oil price is down 0.3% on Wednesday and it is hovering below $66 per barrel.
The technical signals suggest that there could be more downside to come. Brent crude fell through its 100-day sma at $66.25 earlier this week, which suggests that momentum is to the downside. The oil price is lower by 1.4% in the past 5 days, and there have been broad losses across the energy spectrum, as the oil demand glut weighs on Natgas to gasoil, along with an unprecedented hot summer across Europe, which is also depressing hearing fuel demand.
The discussions between President Trump and President Putin on Friday could also be weighing on the oil price. If they do find a solution to the war in Ukraine, then it could exacerbate the supply glut even further, and the bias could be to the downside for the oil price as we lead up to the talks.
For the FTSE 100, this means that big hitters like Shell and BP could come under further downward pressure. BP is lower by 1.6% on Wednesday and Shell is also underperforming the main index and is lower by 0.8%. Other drags on the FTSE 100 today include defensive stocks, such as British American Tobacco, and housebuilders like Persimmon, which is coming under pressure as the market scales back hopes for further BOE rate cuts.
Nasdaq reaches fresh record as tech giants shine on
The Nasdaq reached another record high on Tuesday, as the tech stock rally continues. The Nasdaq 100 has been driven higher by double digit gains for Apple and Tesla in the last 5 days, and Palantir is higher by 7% as it continues to benefit from better-than-expected results. Overall, US stocks are benefitting from increased rate cut expectations, and a strong earnings season for Q2, with earnings growth for the S&P 500 above 11% for last quarter.
The dollar continues to tumble
The dollar is also in focus this week. It is the weakest performer in the G10 FX space so far this week and is lower again on Wednesday. Bond yields have stabilized on Wednesday after European yields rose sharply on Tuesday, however, this isn’t boosting demand for dollars. The exodus out of the dollar is boosting not only G10 currencies, but also emerging markets, with strong gains for the Chilean peso and the South African Rand so far this week. When the dollar falls, it can boost overall risk sentiment, so stocks may continue their rally later today, and futures markets are pointing to further gains for US stocks later this afternoon.
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