OREANDA-NEWS. February 19, 2016. Market sentiment remains in a fragile state. Last Thursday overwhelming pessimism drove stocks to an almost two year low and oil to its lowest price in thirteen years. Then on Friday, the price of oil jumped by 12 percent and stocks surged higher, led by banks, industrials and consumer discretionary stocks, precisely the sectors that had taken the worst pounding over the past month.

The rally was triggered by rumor of a meeting between major oil producing countries to discuss production cuts in an effort to prop up prices. As it turned out the meeting did happen, on Tuesday in Qatar, and resulted in a production freeze agreement among Saudi Arabia, Russia, Venezuela and Qatar. It’s important to note that is not the same as a production cut, and might not lead to sustainably higher prices. To have any meaningful impact other oil exporters would have to go along. Iraq and Iran will join the discussion and there is no assurance that both will participate, and at what level of production. This is particularly true of Iran, which is just coming back online after western sanctions were lifted. But these talks could help to place a floor under oil, which itself would be a welcome development. Judging from the market reaction of the past few days, optimism had suddenly replaced pessimism as the prevailing sentiment.

Retail Sales Bring Some Good News

Two additional developments contributed to the better tone of the last few days. On Friday, U.S. retail sales rose by 0.2 percent in January, slightly ahead of expectations. More importantly, December’s reading was revised upward to a gain of 0.2 percent from the initial report of -0.2 percent. Forecasts of moderate GDP growth in the U.S. this year depend upon personal consumption approaching 3.0 percent. A negative reading in December had cast some doubt on that assumption, suggesting that the consumer was retrenching in response to market volatility and global growth worries. It now appears that such concerns were premature.

Investors also breathed a sigh of relief on Monday as China reopened for business after the weeklong lunar New Year holiday. After reporting another round of sluggish economic data, particularly regarding trade, there was some fear that Chinese stocks would move lower. But comments over the weekend from the central bank governor regarding the overall health of the Chinese economy, and also importantly putting to rest worries over potential devaluation of the currency, at least temporarily, gave markets an additional boost.

What More do Markets Need to Find Some Stability?  

It remains to be seen whether these developments represent the beginning of a sustainable turnaround. While that is a possibility, it seems unlikely. OPEC is hurting. Big budget deficits are taking their toll. The Venezuelan economy seems near collapse. Yet the Saudis are still more interested in maintaining market share than in actual cuts that would be more effective in pushing prices higher. And Iran needs the cash flow that oil exports can deliver as it endeavors to reinvigorate its economy. U.S. shale producers can keep the market well supplied and would themselves benefit from firmer prices. While a stable yuan would alleviate concerns of China exporting its deflationary impulse around the world, further devaluation remains a distinct possibility, most likely slowly over time. The U.S. retail sales report was the one piece of good hard evidence of decent economic activity. While that was certainly welcome, we’ll need more of it to build a durable recovery rally.

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