The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Time favors the bears.
Headlines weren’t particularly significant to markets today. Overseas markets were mixed and our premarket futures bounced around flat mostly. The S&P opened slightly higher and chopped around as it drifted lower over the day. The announcement by the IEA to release 400 million barrels of oil from strategic reserves did not affect oil prices much, which was surprising. Yields continue to climb. The Treasury curve steepened significantly. The Dollar strengthened. The energy sector performed best, climbing 2.5%, while consumer staples performed worst, falling 1.3%.
As time passes, and the Straits of Hormuz remain closed, the pressure on oil prices resumes. Other markets feel the pressure too. Inflation worries mount as does the concern about demand destruction because of higher oil prices. Stagflation, an often used but rarely likely outcome, is gaining traction as a plausible scenario.
More financial pundits are sharing their projections about the GDP costs that will result from higher oil prices over different time horizons. The IMF published research stating that a 10% increase in energy prices, for a year, would push global inflation up 0.4% and slow economic growth 0.1-0.2%. One month ago the oil curve was pretty flat and $62 a barrel was about the average price for the next 6 years.
Now the curve is very distorted. The average price for the next 12 months is $77. That’s 24% higher than the pre-war price. The risks are obvious. The whole curve will have to fall quickly for the consequences to be small. Every day the curve stays about where it is, adds a day of drag to GDP and a day of inflation pressure. It also pushes the recovery further away.
At what point does the market break? That is the key question. Certainly, if the Straits of Hormuz open shortly, all the pressure vanishes and these worries vanish.
But the market is wondering how long Iran will keep shipping afraid to travel through the Straits. How long can Iran withstand whatever air attacks the US and Israel can bring to bear and still threaten the Straits?
Last week, markets thought it might be a week or two. Now markets are starting to wonder. Maybe the Straits will be closed for a month or two. Nobody is too certain about the time horizon but the fact that progress is slow-to-non-existent, is giving investors pause.
We continue to wait for a groundbreaking headline. As we wait, the pressure grows and the negatives build.
See you tomorrow.
-Mike
Visdom Market Commentary
IMPORTANT INFORMATION
This is general educational information and market commentary and is intended for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction.
All market and economic data herein is as of the date hereof and sourced from Bloomberg unless otherwise stated. The information is subject to change without notice and we have no obligation to update you.
This general market commentary is intended for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The views and opinions expressed constitute the author(s) judgment based on current market conditions, are subject to change without notice, and may differ from those expressed by other employees of Visdom Investment Group LLC ("Visdom") and Visdom. Past performance and any forward-looking statements are not guarantees of future results. It is not possible to invest directly in an index.
We believe the information contained in this material to be reliable and have sought to take reasonable care in its preparation; however, we do not represent or warrant its accuracy, reliability or completeness, or accept any liability for any loss or damage (whether direct or indirect) arising out of the use of all or any part of this material. Any securities referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by Visdom or by the author(s) in this context. The information presented is not intended to be making value judgments on the preferred outcome of any government decision. This information does not constitute Visdom research, nor should it be considered a recommendation of a particular investment strategy or an offer or solicitation for the purchase or sale of any financial instrument. Investing involves market risk, including the possible loss of principal. You should speak to your financial advisor before making any investment decisions. Visdom and its affiliates do not provide legal, tax or account advice so you should seek professional guidance if you have questions.
