U.S. equities moved higher on Tuesday as disappointing overnight results from Alcoa Inc (NYSE:AA) — kicking off a first-quarter earnings season set to be the weakest since 2009 — were largely ignored. While shares of the aluminum maker lost 2.7%. But another gain in crude oil lifted spirits.
In the end, the Dow Jones Industrial Average gained 0.9%, the S&P 500 gained 1%, the Nasdaq Composite wafted up by 0.8% and the Russell 2000 finished the day a percent higher. Treasury bonds weakened, the dollar was mixed, gold was little changed and oil rose for its third consecutive session, up 4% to close at $41.98 a barrel.
Energy stocks led the way with a 2.8% gain. Chesapeake Energy Corporation (NYSE:CHK) surged 34.4% after it was upgraded by analysts at Tudor Pickering Holt citing better credit access. This follows a 20% rally on Monday.
Technology stocks were the laggards, up 0.5%. Starbucks Corporation (NASDAQ:SBUX) lost 2.3% after being downgraded by analysts at Deutsche Bank citing elevated expectations and extended valuations.
The gains in energy pushed West Texas Intermediate to its best level since November on morning chatter concerning an agreement reached between Russia and Saudi Arabia regarding a production freeze ahead of the Russia-OPEC meeting scheduled for April 17 in Doha. Critically, it was reported that this agreement would not depend on the participation of Iran. Tehran had been demanding that any production freeze be set at its pre-sanctions output level of around four million barrels per day vs. around 3.2 million now.
Yet, these reports stand in contrast to recent comments by deputy crown prince Mohammed bin Salman, who suggested the Kingdom would only participate in an agreement if Iran played ball. No less than Goldman Sachs warned clients that market expectations seem to be getting extended, vis-à-vis the prospects and viability of any deal, adding that they see greater odds of a bearish dynamic following the meeting.
After all, Riyadh and Tehran are locked in a religious-based proxy war throughout the Middle East. Not exactly the type of good faith needed to lock down a deal.
Other factors that lifted stocks were more dovish commentary out of the Federal Reserve, with the head of the Philadelphia Fed calling for patience on further rate hikes until inflation accelerates. Also helping were comments out of Tokyo from Japanese Finance Minister Aso that the government was ready to intervene to combat “one-sided” and speculative” moves in the yen.
The moves in the yen have been responsible for some of the market weakness seen over the past week, since it underlies popular currency “carry trades” that hedge fund types deploy. This involves the selling or shorting of the yen, with the proceeds pumped into long position assets like U.S. equities.
Recently, a loss of faith in the ability of the Bank of Japan to stimulate Japan’s beleaguered economy — with a recent experiment with negative interest rates unsuccessful — resulted in a rise in the yen and losses on these carry trade positions. In addition, a stronger yen risked deepening Japan’s malaise by worsening its export competitiveness.
Given the oft repeated commitment by G20 countries to avoid currency manipulation, Tokyo needed to tread lightly. Thus, the deployment of “verbal easing” by Aso. Whether it has a long-lived affect remains to be seen.
With stocks rising on dovish Fed commentary, hopes of an oil deal and yen jawboning, the situation remains vulnerable, with these shaky catalysts challenged by big technical and fundamental challenges. The Dow is contending with overhead resistance from a two-year downtrend. Earnings are likely to be a drag. And U.S. GDP growth is slowing markedly.
Combined with higher inflation and a tightening labor market, corporate profits are also under pressure.
Yet, for now, it seems Wall Street is in an uneasy stalemate — likely until we pass April options expiration on Friday.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
