The “No. 1” risk for the markets is “higher oil prices,” says a top UBS strategist. Equities ended the session lower on Thursday and S&P (^GSPC) had its first losing quarter since 2020. Despite a volatile month, the markets rallied during the last two weeks of March.
“The price of oil is a pretty good market barometer for escalation in Ukraine,” Stuart Kaiser, head of equity derivatives research for UBS, told Yahoo Finance Live.
“Obviously high prices get people worried about the growth outlook medium term, and then near term it gives you inflation risks,” said Kaiser.
On Thursday, West Texas Intermediate (BZ=F) and Brent International (CL=F) crude futures pulled back more than 6% after OPEC+ ratified an expected output hike of 432,000 barrels per day as of May 1.
The decline in oil prices came ahead of a Biden administration announcement to release more oil from the country’s strategic petroleum reserves (SPR).
“I think in the near term, it’s a tactical positive, but if this continues for weeks and months, the impact of the SPR release would be waning over that time,” said Kaiser.
Kaiser says “a close-second” risk to the second half of March rally “would be the market pricing how many total rate hikes we’re going to get from the Fed.”
“We’re a little bit skeptical of the rally we’ve so far,” said Kaiser. “It’s been a very sharp rally, but it happened on relatively low volumes, and the read on positioning of institutional investors is that it’s still pretty light.”
“We are still fairly cautious ahead of what’s going to be really important retail sales and inflation data over the next couple of weeks, and obviously a key fed meeting,” said Kaiser
Year-to-date the S&P 500 energy select sector (XLE) is up 40%. All eleven sectors of the broader market index have seen gains in the month of March, with Utilities, Materials and Energy stocks leading to the upside.
Ines is a markets reporter covering stocks. Follow her on Twitter at @ines_ferre
Read the latest financial and business news from Yahoo Finance