Hi everybody, here is an extract from a Financial Times article. \" Tuesday 21:0

Question

Hi everybody, here is an extract from a Financial Times article. " Tuesday 21:00 BST. Hefty gains for financial and technology stocks drove equity indices sharply higher on both sides of the Atlantic, further helped by a rebound for oil prices, as participants continued to focus on the prospect of a rise in US interest rates this summer." I would like to know why oil price and interest rate increases can bring the stock market up. It should be the opposite, right ? And could someone explain to me the meaning of this sentence "Oil prices were once again an important factor for stocks as the markets shrugged off the negative influence of a rising dollar." Thank you

Explanation / Answer

For stocks, the first interest rate increase is likely mostly priced into the stock market. If the Fed ends up raising rates higher and quicker than investors expect that will likely be bad for the stock market.

As between stocks and oil prices are concerned, one plausible explanation of the tendency for stocks and oil prices to move together is that both are reacting to a common factor, namely, a softening of global aggregate demand, which hurts both corporate profits and demand for oil.

There is a positive correlation between stocks and oil prices, and it is not just a recent phenomenon. The positive correlation of stocks and oil might arise because both are responding to underlying shifts in global demand.

The tendency of stocks and oil prices to move together is not a new development. Much of this positive correlation can be explained by the tendency of stocks and oil prices to react in the same direction to common factors, including changes in aggregate demand and in overall uncertainty and risk aversion.

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