Stocks jumped at the open in hopes of a second day rally as traders return from the long weekend and Wall Street reacts to news that Saudi Arabia, Russia, Qatar and Venezuela have agreed to cap crude production at January levels if other major producers, such as Iraq and Iran, follow suit.
Sinking oil prices, of course, have been a major cause of financial market turbulence to start 2016, as it has caused sharp drops in both the share price and earnings of oil-related stocks that resulted in negative ripple effects around the globe, including rising fears of recession. The tentative move to support prices, as it requires buy-in from other oil-producing nations in the Middle East, is being viewed as a first-step towards stabilizing crude prices.
Rumors of such an agreement fueled a major stock rally on Wall Street Friday, when the Dow Jones industrial average soared more than 300 points and the broader Standard & Poor's 600 stock index rallied 2%.
At the open, the Dow was up 140 points, or 0.9%, the S&P 500 was 1% higher and the Nasdaq composite was up 1.4%.
The expectation on Wall Street is that the tentative deal to freeze oil production could provide a further lift to U.S. stocks and energy shares, which have been moving in lockstep with oil prices for most of 2016. Still, as is often the case when tentative deals that require participation from mulitple parties are floated, Wall Street will be closely watching to see if the deal comes to fruition. What's more, the deal focuses on a production freeze, not a cut, in what is already an over supplied market.
"The conditional freeze of production announced by Saudi Arabia and Russia this morning suggest commodity-related pressure on stocks may further ease this week," Gina Martin Adams of Wells Fargo Securities told clients in a morning research note.
The reaction in the oil patch today suggests not everyone is buying the hype. The price of U.S.-produced crude, which jumped 12% Friday, was up sharply earlier in the session, but briefly gave up all its gains and was trading in and out of positive territory about 8:30 a.m. ET. A barrel of West Texas Intermediate crude was up 4 cents to $29.48. And while U.S. crude earlier this morning was up more than 15% from last week's low of $26.05, it was still off the high of $31.53 earlier Tuesday.
A stabilization in oil prices is one of the pre-conditions Wall Street cites as a building block towards ending the massive drop in stock prices this year, which has been sparked by a combination of weak oil prices and investor confusion and angst surrouncing the Federal Reserve's interest rate policy. Wall Street is hoping a bottom in oil is finally beginning to materialize.
"One of our signposts for a turnaround in stocks – a bottom in oil – may have just formed in the nick of time, for the S&P traded within a stone’s throw of our downside target last week," Adams wrote. "While we cannot be certain a bottom has officially formed for stocks given the complexities of shaking the powerful addiction with easy money, enough signs of capitulation have emerged, in our opinion, to suggest investors with a longer term view should benefit from adding a bit of exposure to stocks at these levels."
The general message on Wall Street is that a near-term bottom may be in place, one that will set the U.S. stock market up for a so-called "bear market rally." Such a rally is a sharp, temporary move up that doesn't break the longer-term bearish spell.
Stocks in Europe don't seem to be buying the hype of today's oil announcment, either. The broad Stoxx Europe 600 is down 0.3%. The German DAX is off 0.8% and the CAC 40 in Paris is hugging the flatline, up 0.1%.
Wall Street will also be digesting a spate of fresh economic data this week, ranging from a look at the health of New York state manufacturing today, to January readings on inflation at the wholesale level, housing starts, industrial production, as well as minutes of the Fed's January meeting, on Wednesday.
