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Stock Market

Citigroup is advising traders to sell their positions on oil and use the proceeds to hedge against a decline in equity markets, Bloomberg reports, citing a note by the bank’s analysts.

“Heightened geopolitics can be simultaneously negative for equity prices through the growth channel and positive for oil prices through supply shocks,” the analysts said in the note. “Buy S&P 500 puts financed by oil puts.”

In addition to the geopolitical factor, other factors that would have an impact on future equity market trends were the U.S.-Chinese trade war, unrealistically high expectations for next earnings season, and the danger of a recession hitting the United States next year, the Citi experts said.

“These developments further validate our view that geopolitical tensions will be protracted. This is a price shock and maybe an inflation shock and a negative-growth shock.”

Brent crude spiked over $70 a barrel following the attack on Saudi oil infrastructure last Saturday and West Texas Intermediate climbed over $60 a barrel. However, the spike was brief and by Friday, Brent had fallen in the low 60s and WTI had dipped below that psychological threshold. At the time of writing, Brent was trading at $63.78 a barrel, with WTI at $58.71 a barrel.

The fast decline that followed the sharp spike in prices came largely on updates from Saudi Arabia that said production will be restored relatively quickly, with half of what was lost already back on stream by the middle of the week.

A report that Saudi Arabia had approached Iraq for additional oil lent prices temporary support but was not enough to send them as high as they had gone immediately after the attacks. For now, geopolitical tensions remain the biggest upside factor for oil prices as President Trump instructed the Treasury to add more sanctions against Iran, blamed by Washington for the attacks.

By Irina Slav for Oilprice.com

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  • Phil Mirzoev on September 23 2019 said:
    I guess Citi is absolutely iron-clad confident that the situation where the stock market and economy are in stagnation and the oil prices are high is impossible - in the foreseeable feature anyway.
    Even though, as a general rule, this is usually the case (oil doesn't go up in price when the economy and stocks market are in stagnation), there have been serious exceptions to it, for example in stagflation environment.
    Are we totally insured against stagflation environment? Well, it may not be the prime scenario in many economists books, yet, it is still a legitimate scenario and not negligibly improbable, in my view.

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