S&P500: US Indices Slide Today as Oil Shock Hits Risk Sentiment

Stocks Plunge Overnight as Oil Spike Fuels Inflation and Recession Fears

The major U.S. stock indexes are down sharply in overnight trading as oil prices spiked higher, fueling inflation and global recession fears.

At 07:18 GMT, Dow Futures are trading 47037.00, down 411.00 or -0.87%. S&P 500 Index Futures are at 6732.25, down 47.25 or -0.70% and Nasdaq Futures are trading 24817.00, down 166.50 or -0.67%.

SPR Release Sends the Wrong Message

Oil prices are rising despite the late Wednesday announcement by Energy Secretary Chris Wright that the U.S. will release 172 million barrels of oil from the Strategic Petroleum Reserve (SPR). The announcement came after President Trump said he would tap the reserve.

The issue that traders are having with the release is that it will take about 120 days to deliver the oil and that suggests the current war between the U.S. and Iran may go on for longer than originally planned. The market needs oil now, not in the future, and it’s getting more difficult to get it because of major problems getting through the Strait of Hormuz.

Traders Don’t Believe Trump’s “Very Soon”

Trump said on Monday that the war will end “very soon”, but the current price action suggests traders don’t believe him. Initially, crude oil fell from nearly $120 per barrel to $76.73 on Tuesday, but since then it has retraced nearly 50% of that correction.

Strait of Hormuz Remains Stalled

One major issue that stock traders are monitoring is the supply disruption at the Strait of Hormuz. The market is counting on the U.S. to provide insurance to ships attempting to travel through the Strait. On Wednesday, it was announced that insurance company Chubb would be the lead underwriter of the insurance. However, as of early Thursday, oil tanker traffic remains stalled due to Iranian attacks. There are also reports that U.S. forces have destroyed 16 mine-laying Iranian ships in the region. If this continues or spreads, it may prove too risky for tanker crews, let alone petroleum products.

$100 Oil Stops Being an Energy Story

The key price level the stock market is watching is $100 per barrel. Brent has reached and exceeded that level, WTI is approaching it. At this level, oil will stop being an energy story and starts being an economic one. It impacts many facets of the economy including consumer spending, on gasoline and airline tickets, and company transportation costs. Profit margins get squeezed, price increases get passed on to consumers and at some point, consumers stop spending.

For U.S. companies, the hit from an oil spike is not just higher energy costs, it means higher input costs for some industries. It shows up in logistics and eventually in earnings guidance. The longer oil stays above $100, the harder it becomes to dismiss as a temporary shock. Investors are anticipating the worst outcome and are liquidating positions today.

The Technical Picture – E-mini S&P 500 Index Futures

Technically, it looks as if the euphoria from Monday’s major reversal is wearing off. On the March E-mini S&P 500 Index chart, that reversal rally was partially thwarted by a short-term resistance zone at 6784.25 to 6831.25. The index actually reached 6852.00, slightly below the 50-day moving average, currently at 6914.07.

200-Day MA Is the Level to Watch

Today’s early downside momentum indicates the index is headed into the retracement zone at 6696.25 to 6644.50. Inside this zone is the 200-day moving average at 6694.02. If this support cluster fails, the selling could intensify all the way down to Monday’s low at 6584.50, which was essentially a test of the November 21 main bottom at 6583.00.

As Brent oil continues to strengthen over $100 and WTI heads to that level, the odds of a breakdown under the 200-day MA at 6694.02 will increase.

Essentially, the 200-day MA is the level to watch and oil prices are the key catalyst.

More Information in our Economic Calendar.