Markets Dismiss Oil Shock, Sub-Surface Struggles

Every morning before the opening bell, the Schwab Market Update sets the stage for the day ahead, covering key market movers, economic developments, and emerging themes. Each edition includes "Three things to watch" and every Thursday features a weekly section, "Crypto currents." This recap revisits select items for those who may have missed them, helping traders head into the weekend better informed.

Market breadth still seems unimpressive, another sign of the market's current concentration risk. Friday morning, just 45% of S&P 500 stocks traded above their 50-day moving averages, well below peaks above 70% earlier this year when sector rotation lifted many firms outside of tech. What's more, just 53% are north of their respective 200-day trendlines. Things were slightly better for the Nasdaq Composite, with 60% of its components above their 50-day—this is still relatively low despite that index's heavy exposure to the sizzling tech sector. Also, about 17% of S&P 500 stocks are trading within 5% of their 52-week lows as of this morning. This is a large percentage considering the index made record highs yesterday—and topped 7,500 for the first time—and perhaps shows another sign of struggles beneath the surface of the tech-driven rally. Meanwhile, technical indicators suggest both the S&P 500 Index^® (SPX) and Nasdaq-100^® (NDX) are stretched. The only precedent for the S&P 500 being at record highs with less than 60% of its members above their 50-day and 200-day moving averages was December 1998 to March 2000. Veteran investors won't have to Google to understand the significance of that latter month.

The International Energy Agency (IEA) released its monthly oil report on Wednesday, and the news wasn't good. With traffic in the Strait of Hormuz restricted for more than 10 weeks now, crude supply losses are depleting global oil inventories at a record pace. Despite rising crude exports from the United States, Brazil, Canada, Kazakhstan, Venezuela, and Russia, global oil supply has contracted by 12.8 million barrels per day since February. "Cumulative supply losses from Gulf producers already exceed 1 billion barrels…an unprecedented supply shock," the IEA explained. A pre-war oil surplus has helped lessen the current supply-demand gap, however. Rising crude prices and "demand-saving measures" have also led global oil demand to contract—a trend that is expected to continue until a deal to end the war and reopen the strait is reached. It was an issue that Trump and Xi discussed Thursday, according to CNBC, and China said it opposes Iran's effort to charge tolls on the strait. Still, the oil market remains in a deficit, and even if a deal is reached to reopen the strait, the IEA warned that supply will likely be slower to recover. "Further price volatility appears likely ahead of the peak summer demand period," the organization warned.

Bloomberg recently detailed an interesting phenomenon in the options market. Beneath the S&P 500's strong recent gains, market internals are flashing unusually speculative behavior—especially a record surge in gamma, very low stock correlation, and extreme dispersion driven by heavy call buying in a small group of semiconductor names. That combination has only appeared once before in a similar form, in late 2021, shortly before the broader market peaked and rolled into a bear market. The article suggests this doesn't mean the rally ends immediately, but it does indicate the market may be entering a late-stage, more fragile phase where upside can continue briefly even as risks build. In short, the rally still has momentum, but the underlying setup looks increasingly frothy and vulnerable.

Two batches of inflation data released this week tipped investor expectations toward the Federal Reserve raising interest rates by the end of the year, according to the CME FedWatch Tool. The market is pricing in mild hikes—a percentage point in total, at most—for now. But for the most part, higher oil prices haven't yet worked their way into consumer prices. And the jump in core producer prices, which exclude food and energy, was already unexpectedly ugly in April, so a prolonged standoff in the Strait of Hormuz could bring more pain. What does that have to do with bitcoin, exactly? Some investors see bitcoin as a hedge against currency debasement. But money supply drives bitcoin's price more than inflation, and rising inflation paired with rising interest rates means tighter financial conditions—a headwind for bitcoin, said Jim Ferraioli, director of digital currencies research and strategy at the Schwab Center for Financial Research. A full-blown Fed rate-hike cycle would likely have a big impact on bitcoin, much as it did in 2022, he said. It's early, no doubt. But amid talk of the end of "crypto winter," bitcoin investors will be keeping an eye on consumer prices.

Surging energy prices were the main culprit behind the red-hot April inflation report, but rising food prices added to the pain. The closure of the Strait of Hormuz has led both fuel and fertilizer prices to spike this spring, pushing food prices higher globally. Many investors assume that the fertilizer market will quickly recover once the Strait of Hormuz reopens, helping food prices—and inflation—cool. It turns out that may be an optimistic point of view. Dozens of fertilizer plants in the Middle East were damaged or otherwise affected by the conflict, according to corporate fertilizer executives. "There's going to be a much longer tail and knock-on effect," Christopher Bohn, CEO of fertilizer producer CF Industries said in a May 7 earnings call. Once the strait opens, Bohn estimated restarting operations could take one to three months—or longer. "Startup of those types of facilities can be bumpy," Ken Seitz, CEO of fertilizer giant Nutrien said in the company's earnings call. "We expect prices to be tight for some period of time … this is a huge supply shock."