Central Bank Stimulus Optimism Boosts Commodities and Risk Appetite

US stocks erased early losses while Treasuries sold off as speculation of forthcoming foreign central bank stimulus boosted oil prices and general risk appetite.  Both WTI and Brent crude rallied close to 4%, with Brent surpassing the $40 mark for the first time since late December.  The jump in oil was also helped by reports that US drillers cut their oil rigs for an 11th straight week to the lowest since December 2009.  It remains to be seen whether or not the recent market bounce off the lows in February is sustainable.  Despite the recent price retracement, the global oil supply glut is still expected to persist for quite a while and analysts at Morgan Stanley attributed “a large portion” of the recent price move to depreciation of the US dollar.  Regardless, recent data from the CFTC shows speculators have reduced their short positions significantly, and there are rumors that major OPEC producers are privately starting to talk about a new price equilibrium of $50/barrel.

Over the weekend, the Chinese National People’s Congress announced a targeted growth range between 6.5% and 7% for the world’s second largest economy in 2016.  The range isn’t a significant step down from last year’s firm target of 7%, but it signals a change in strategy which gives the Chinese government more flexibility in economic management, allowing officials to focus more on sustainable structural reforms rather than a specific growth figure.  Iron ore experienced its largest daily price jump ever as commodities enjoyed a boost from China’s revised outlook.

US economic data is light today (and this week in general), so investors are likely to focus on Thursday’s European Central Bank meeting.  Today’s scheduled Fed speakers include Brainard (dove, voter) and Vice Chair Fischer (dove, voter).  In the meantime U.S. swap and Treasury rates are up 3-5 basis points across the curve.