Stock Futures Rebound from Monday’s Decline as Oil Prices Ease

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Image Credit: The Economic Times

Global stock markets kicked off the week in a frenzy, largely due to skyrocketing oil prices and the weight of market worries about inflation and interest rates. But once oil prices began to back off on Tuesday, stock futures bounced back – offering investors a glimmer of hope for a positive end to the week that got off to such a bad start with Monday’s decline. Let’s unpack what was going on, the result of softening oil prices, and what investors may expect moving forward.

The Key Factors
Sharp decline across the stock markets on Monday was due to a combination of factors, but the culprit was mainly the rise in oil prices. Crude oil prices jumped to levels that not only raised the fear of higher cost productions to businesses and higher prices to consumers but did more than that. Since energy is one of the main input costs for most industries, such rises in oil prices generally result in reduced profit margins for companies that can eventually result in earnings and valuations.

Supply constraints, as such, triggered the price surge, with major oil-producing countries, comprising members of the Organization of the Petroleum Exporting Countries, cutting down on production to balance their books. In tandem with such a situation, demand for oil remained high, setting a stage for a perfect storm in terms of price increases. The market reacted by taking a step back, with major indices like the Dow Jones Industrial Average and S&P 500 closing on a weaker note.

Adding to this, ongoing inflation and the monetary policy by the Federal Reserve also weighed heavily on market sentiment. Investors were keenly waiting for any hints on whether the Fed might raise interest rates so as to curb inflation and the move was expected to increase pressure on corporate earnings, as well as consumer spending.

A breather for stock futures
Oil prices started to ease coming into Tuesday as relief in markets was realized. Soft oil prices were blamed on expectations of alleviation in bottlenecks related to supply chains plus some reports indicating the prospects for supplementary oil production from various sources. The changed sentiment helped stock futures regain ground after Monday’s sharp sell-off.

The investors were also eased over concerns on inflation, as the downturn in oil prices reduced pressure on consumer prices. As energy is one of the major drivers of inflation, moderation in oil prices helps stabilize price levels across various sectors. It, in turn, raised some fears over aggressive hikes in interest rates by the Federal Reserve.

The futures of Dow Jones, S&P 500, and Nasdaq Composite were up by Tuesday morning. It could thus look forward to a rebound for the trading session that day. Dow Jones Industrial Average futures increased by about 150 points, or 0.4%, while S&P 500 futures rose 0.5% and Nasdaq futures added almost 0.6%.

Tech and energy take center stage
It has impacted various sectors in different ways, though easing oil prices did act like a bonanza for the battered stocks of tech companies. Tech stocks, which had taken a drubbing on Monday on the back of surging bond yields, staged a remarkable come-back on the back of falling oil prices and abating inflation concerns. Apple, Microsoft, and Tesla saw their stock futures advance as investors cheered lower energy prices for all that it meant for margin profitability and overall consumer spending.

In contrast, energy stocks rallied on Monday, as oil prices keep surging, and traded with some selling pressure. The futures for ExxonMobil, Chevron, and other oil companies modestly retreated given the expectation that earnings could be lower if oil prices continue to slide. Still, in the long run, these companies are going to be okay, considering that the world market for oil is pretty volatile.

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Image Credit: Serrari Group

Global Impact On How International Markets Are Responding
The relief on oil prices did not stop at the U.S. markets, for it was a global phenomenon. The FTSE 100 and the DAX major stock indices all rose in Europe as energy prices weakened. Investors in Europe, who, like their U.S. counterparts, were spooked by the sell-off on Monday, cheered more upbeat news about inflation and energy expense.

However, the markets in Asia remained a bit cautious. Even though some indices such as the Nikkei 225 of Japan rebounded, others remained subdued as pessimism over global economic growth and inflation persists. China’s economy seems to continue facing distress with its property market and overall slowdown weighing on investor minds.

What to Expect
While softer oil prices help ease the strain on stock markets, concerns about inflation, interest rates, and global economic growth are more generic and outstanding. The Federal Reserve will be scrutinizing any commentary on its intentions for interest rate increases. Should the inflationary tide show no signs of receding, more rate increases lie ahead, and that may take the steam out of this market.

In the near term, markets will remain sensitive to movement of oil prices and other key commodities. If oil prices stabilize and decline, this will ease further inflationary pressures and allow stocks to stage a recovery of some more. However, if prices again move up sharply, this may precipitate another round of selling.

Earnings season is also around the corner, and investors will be champing at the bit to see how companies have managed rising input costs and inflation in the previous quarter. Corporate earnings reports will provide a clearer picture of how businesses are navigating the prevailing economic environment, and weakness may weigh on market sentiment.

Conclusion
While a rebound of stock futures on Tuesday following Monday’s declines is a positive sign, further down the road, uncertainty still continues. There are some relief measures in terms of easing oil prices; however, greater concerns still persist on issues such as inflation, interest rates, and the overall stability of the global economy. Investing will call for vigilance, as close attention will be paid toward market actions, economic data, and corporate earnings toward further determination of the overall trajectory of the stock markets for weeks to come.

For now, however, the potential rebound in futures suggests that, hopefully, there is still room for optimism within this market despite how things might fall apart in the near term. However, navigating through these complex economic challenges will be a tough task and may put those investors in a volatile path going forward.