The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Oil squeeze?
Oil futures spiked last night, with Brent and WTI almost hitting $120 per barrel. Japan’s Nikkei fell 5% and China’s Hang Seng fell more than 1%. Europe opened down almost 3%. Our premarket futures were off 140 points in the middle of the night but recovered to trade down only 70 points ahead of the open. The S&P dipped shortly after the open, with intraday lows printing around 10 AM, down 100 points. Bulls went to work from there and repaired most of the damage, almost getting the index to unch’d by lunch. We spent the rest of the day in the down 20 to down 40 point range until the index went positive in the final hour, popping on comments by President Trump about the Iran war ending shortly. The S&P price action was essentially the inverse of crude oil’s. The more oil fell intraday, the more the S&P rallied. The Treasury curve started higher but flattened over the session, an interesting turn for the recently-beat-up long-end. Capital flow was 120%. Investors were a bit more active than usual but not scrambling.
The major markets are reflections of the crude oil market right now. Whether this is wise or not, doesn’t matter in the short term. The perception is set that higher crude is bad for inflation, bad for GDP, and bad for risk assets.
Most of us would agree that the pop in crude prices is temporary, and that we should look through this short-term pop. But the markets aren’t quite doing that. They are acting as if the higher crude prices are going to stick around for long enough to be modestly disruptive to both inflation and growth.
The oil futures curve is in backwardation, a healthy sign that the current turbulence won’t stick around. But even the futures market projects oil price stickiness for a while. Look at the below curve.
December WTI is around $70 a barrel. Not that the futures market is infallible but today’s curve has oil averaging almost $80 a barrel for the year. That’s going to leave a mark on US inflation and US GDP. And however difficult it will be for the US to deal with, other countries will have it worse.
So maybe the equity bears have a point? Maybe the bond bears and the inflation-worriers have a point too?
They do. But also, this necessitates that things don’t improve quickly. If the Straits of Hormuz open somewhat quickly, all the crude futures prices will drop fast. And the current projections by the futures markets will go bye-bye. We’ll be looking at $60-ish per barrel crude in the near, medium, and long term.
Risk-on will vault higher when that happens.
But it’s got to happen, and happen sometime soon. Otherwise we’re just going to grind lower, with intraday dip-buyers moderating the pain along the way.
See you tomorrow.
-Mike
Visdom Market Commentary
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