Turn-Around in Oil Gives Market A Boost Ahead of Thursday ECB Meeting

The story so far this year is oil prices locking closely with the stock market, and that was evident again early Wednesday as stocks moved higher after a rebound in oil one day before a key European Central Bank (ECB) policy meeting.

Early Wednesday, oil reversed Tuesday’s declines, with U.S. oil futures trading back above $37, up more than 35% from last month’s decade-low prices. European futures climbed above $40. Crude oil and S&P 500 (SPX) futures now have a 92% correlation, meaning stocks and oil frequently rise and fall together.

The overnight turnaround in oil came after media reports that producers both in and outside of OPEC plan to meet in Moscow later this month to discuss an output freeze. However, Russia didn’t confirm those reports, Reuters reported. The strong upward move in oil that began last month came after producers first began talking about a possible freeze.

U.S. stocks took their cue from oil, falling on the commodity weakness Tuesday and then moving higher on Wednesday. That followed the pattern that’s held so far this year, with stocks riding higher on oil strength and declining on oil weakness. Energy stocks led the losses on Tuesday.

In Europe, stocks rose ahead of the ECB’s meeting Thursday, and U.S. stocks also took their cue from Europe. Markets are baking in expectations that Thursday’s policy meeting will result in a rate cut, MarketWatch reported. A 10 basis-point cut in the deposit rate to -0.4% is expected, according to MarketWatch. ECB President Mario Draghi said last month that the ECB “will not fail to act.” The rate announcement is scheduled for 7:45 a.m. ET Thursday, with Draghi scheduled to hold a news conference 45 minutes after that. One question remaining is whether the ECB will also decide to expand its quantitative easing program. Typically, central bank stimulus and rate cuts can help lend support to equities markets.

Technically, the S&P 500 (SPX), which closed above 2000 on Monday, wasn’t able to repeat that feat Tuesday. The 2000 mark remains an important technical signpost.

Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2016 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.