What a Relief (Rally)

By: Steve Sosnick, Chief Strategist at Interactive Brokers

Equity indices are broadly higher on headlines that indicate some easing of tension in the Ukraine crisis. By any measure, that is a plus – in a human as well as an economic metric. Oil prices are the biggest “tell”, with West Texas and Brent crude both trading about $4 lower. If we avoid war in Ukraine, we avoid potential sanctions on Russian crude oil and natural gas, which eases pressure on energy prices.^[i]

Lower crude prices and an easing of geopolitical tension are allowing traders to distract themselves from the truly staggering Producer Price Index statistics released this morning.PPI rose 1.0% on a month-over-month basis and 9.7% on a year-over-year basis versus expectations of 0.5% and 9.1% respectively.  Yes, that is just a hairbreadth below an annual double-digit rise. Core PPI, which excludes more volatile food and energy prices, was nearly as shocking, coming in at 0.8% and 8.3% versus 0.5% and 7.9% expectations. Bottom line, even with today’s improvement in energy prices, companies are seeing increasing pressure on their input costs. It seems inevitable that those costs will either need to be passed on to consumers, keeping pressure on the Consumer Price Index, borne by the companies, pressuring their profit margins, or some of each. None are an appealing prospect.

But this morning does not appear to be the time to let a gloomy outlook weigh too heavily on the prospect of a potential breakthrough in a global hotspot. Stock investors don’t care today that bond rates, whose rise had been temporarily interrupted by a flight to quality, resumed their advance. If higher rates are supposed to pressure tech stock prices, they’re not doing so today. The Nasdaq 100 (NDX) is outpacing the S&P 500 (SPX), rising over 2% vs about 1.5% as I write this.  Last week we wrote that bear market rallies are short, sharp, and furious. While we’re not currently immersed in a bear market, the mentality that causes traders to chase rallies off of oversold conditions is on full display today.

We also discussed the concept of socially acceptable volatility both in writing and in a podcast. Today is a prime example of that. Consider the market mood and rhetoric if we were falling by the same amount that we are rising. There would likely be public hand-wringing and ominous discussions. Instead, we have a generally buoyant mood and we are taking the rally in stride. Part of the positive tone stems from the idea that markets are supposed to go up, another stems from the thought that rising markets eventually dampen future volatility. We see that in the falling VIX, which is about 2.5 points lower, though to a still-elevated 26 level. The market is not yet convinced that the all-clear signal has been given.

For now, let’s enjoy the good news coming from Eastern Europe. We can resume our usual concerns tomorrow.

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[i] A cynic would bring up the possibility that Russian oil companies used the recent spike in oil prices to sell a significant piece of their forward production at elevated prices during the crisis. I’m not that cynical, am I?