To The Moon

After a sharp fall in oil prices on Wednesday, the market saw a small rebound on Thursday. At the same time, the US dollar edged higher as investors continued to assess the impact of the US midterm elections and the ongoing conflict involving Iran.

At first glance, a 2% recovery in oil may not seem significant. But after crude prices dropped more than 8% in the previous session, it shows how quickly market sentiment can change.

I think investors should pay attention to three important factors: oil prices, the US dollar and the upcoming jobs report.

1. Oil prices remain a major source of uncertainty

Oil prices fell sharply after the Democrats’ strong election results raised hopes that tensions involving Iran could ease.

However, the situation remains unresolved. Investors are still watching developments in the Middle East, especially whether the conflict could affect oil supplies and shipping routes.

This is important because higher oil prices can increase transport, manufacturing and energy costs. Businesses may eventually pass those costs on to consumers, creating more inflation pressure.

If oil prices continue to fall, it could help reduce inflation concerns. But if they rebound strongly, expectations for lower interest rates could become more complicated.

2. Why is the US dollar moving higher?

The US dollar initially weakened after the election results, but it edged higher as oil recovered and investors considered the latest economic data.

A stronger dollar can affect global markets in several ways.

For investors outside the US, including those investing in US shares from New Zealand, currency movements can affect the value of returns when converted back into local currency.

A stronger dollar can also make commodities priced in US dollars more expensive for overseas buyers.

For gold and other dollar-priced assets, currency movements can influence demand and prices.

3. Friday’s jobs report could change the market direction

The next important event is the US non-farm payrolls report.

Recent weekly jobless claims fell to 189,000, below economists’ expectations of 196,000. This suggests the labour market may still be holding up well.

Why does this matter?

If employment remains strong, the Federal Reserve may have less reason to reduce interest rates. If inflation also stays high, interest rates could remain elevated for longer.

On the other hand, weaker employment data could increase expectations of easier monetary policy.

This creates a difficult balance for investors. Strong economic data can support company earnings, but it may also reduce the chance of interest rate cuts.

4. What would I watch next?

I would focus on these indicators:

• Crude oil: Does the recovery continue, or was Thursday’s move only a short-term bounce?

• US dollar: Does it strengthen further as investors reassess interest rate expectations?

• Employment: Does the jobs report confirm that the US labour market remains strong?

• Inflation: Do energy prices create more pressure on consumer prices?

• Treasury yields: Do bond yields rise as investors expect interest rates to stay higher?

My view

I would not read too much into one day’s movement in oil or the dollar. The market is trying to price in several uncertainties at once: the direction of the Iran conflict, the political changes in Washington and the Federal Reserve’s next move.

For me, the most important signal will be whether oil prices can stabilise while the US economy remains strong without creating further inflation pressure.

A weaker oil price could support consumers and businesses, while a stable labour market could help company earnings. But if oil rises again and inflation remains stubborn, the market may have to reconsider expectations for interest rate cuts.

The next few trading sessions could tell us whether this week’s rally has a solid foundation or was mainly driven by election-related optimism.

For discussion purposes only.