Oil Prices and S&P 500: Which One is in Driver’s Seat?

So far, the EMAlpha Oil News Sentiment has done a more than fair job in predicting price movement and all the indication is that Oil is getting in a more stable territory.

Fig. 1: EMAlpha Oil News Sentiment

However, this write up is not about Oil News Sentiment again. Instead, we want to highlight two things. The first is that despite a steep decline on 11th and 12thJune, we continue to remain of the view that we are not going to once again see the trough immediately. There have been concerns on the Second wave of Coronavirus pandemic in several countries, but for the local economies, things may not be as bad as they were during first time, a) the preparation is better after learnings have been incorporated in the response, b) the lockdowns are unlikely to be as severe as last time.

Fig. 2: WTI Crude July Contract (Prices over last week)

The other is that over the previous week, there is a huge similarity in Oil Price Movement and broader market movement in US (as reflected in S&P 500). The dip, recovery and volatility are virtually the same for both. While Oil demand continues to remain a concern, the broader consensus is that things are recovering. The same can’t be said about the economy with a reasonably high confidence about S&P 500 despite all the efforts from Fed. So, does this mean that Oil Price recovery followed Fed’s intervention to support the market or it is the other way round?

Fig. 3: S&P 500 Index over last week

As such, Oil Prices have been much more unusually volatile in the last few months with occurrence of even negative prices which was historical. The volatility may continue. However, now the reaction from market is far lesser to these events. The same trend is reflecting in S&P 500 too where things have been in a much tighter range. Ideally, Fed’s actions may not directly help the Oil demand much but it seems that here, Fed action made oil markets more stable. Hopefully, more clarity will emerge with more data in coming weeks.

Research Team
EM Alpha LLC

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About EMAlpha:

EMAlpha, a data analytics and investment management firm focused on making Emerging Markets (EMs) accessible to global investors and unlocking EM investing using machines. EMAlpha’s focus is on Unstructured Data as the EMs are particularly susceptible to swings in news flow driven investor sentiment. We use thoroughly researched machine learning tools to track evolving sentiment specifically towards EMs and EMAlpha pays special attention to the timely measurement of news sentiment for investors as these markets can be finicky and sentiment can be capricious.Our team members have deep expertise in research and trading in multiple Emerging Markets and EMAlpha’s collaborative approach to combining machine learning tools with a fundamental approach help us understand these markets better.

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