On Friday, the U.S. stock market rallied nearly 3% in one day. That rally is even more significant if you take into account that the stock market was down in morning trading nearly 1%. The market swing was nearly 3.5 percent. While I don’t really have any comments on where the market will be heading. I’m not a market predictor, just a someone who pretends to be a know-it-all. Some of the reasons that have been given on for that one day spike are however interesting and topics unto themselves

All three items above are related. Because oil trades in US dollars, a drop in oil prices can be partially attributed to the strength of the dollar. That in turn may be fueled by the European Central Bank’s reluctance to raise interest rates despite rising inflationary pressure. In this regard, the ECB is not too different from it’s U.S. counterpart, the Federal Reserve. However, more people expected that the Europeans would be more hawkish on inflation. Raising interest rates tends to create currency strength for two reasons. 1) Lower expectation on inflation (in that particular currency) 2) Investors move money into said currency for the higher interest rates.

Beside currency, and inflation effects, there’s also very much an investment substitution effect. In the past, bonds and stock tended to move in opposite directions as people shifted money from one to the other. Today the same story seems to hold for very much the same reasons. As investors move out commodities such as oil, they often need to park their money in something else, i.e. the stock market. This not a perfect relationship, but there never is a perfect relationship between anything.