Higher Oil and ECB Stimulus Optimism Boost Risk Appetite

The quarter-end recovery in U.S. stocks continued in full force today, while Treasury prices traded lower (yields higher) off the back of higher oil prices and a more bullish assessment of the ECB’s stimulus plan.  The main driver of the rally in oil was an International Energy Agency report that said prices might have bottomed out due to a heavy reduction in output in the US and other non-OPEC countries.  The IEA report also said that the increase in supply from Iran has been less than expected.  Goldman Sachs, however, took the other side of the bet, telling clients that the 50% rally off the lows in under two months was “premature”.  Goldman believes record US inventory buildup offsets the sharp production declines domestically.  Regardless, US crude is headed for a fourth straight week of gains, currently trading up over 2% on the day.

Markets reassessed yesterday’s ECB announcement and decided that the stimulus package is better than initially thought, despite Draghi signaling an unwillingness to implement additional rate cuts.  Credit markets tightened and stocks rallied as investors reassessed the impact of the inclusion of highly-rated non-financial debt purchases to the impact of the latest round of quantitative easing.  A number of top ECB officials, including vice-president Constancio, spoke out in support of the measures, although they did acknowledge the botched communication.
 
US data released today showed import prices fell in February for an eight straight month, but the downward trend slowed.  With the dollar’s appreciation losing steam and oil prices stabilizing, import prices could soon increase which would add to pressure on domestic inflation and give more data support for additional Fed normalization.  All three major US stock indexes are currently trading up over 1%, while Treasury yields and swap rates are 3-7 bps higher across the curve.