Optimism didn’t last long

Optimism didn’t last long yesterday, and the market mood turned rapidly sour, as the news flow was not pointing at sustained gains anyway! Oil and commodity prices rebounded with the escalation of tensions in Ukraine. Plus, UAE Energy Minister said yesterday that they are pumping near maximum capacity based on its quota of around 3 million barrels per day under the agreement with OPEC+, confirming Macron’s worry that UAE and Saudi Arabia, which were perceived as the only two countries in the OPEC that have spare capacity, can barely increase oil production. In addition, the unrest in Libya and Ecuador hint that they may not pump to meet their quotas, which could further tighten supply. And the US strategic petroleum reserves fell to the lowest levels since April 1986. 

On the political front, the G7 leaders now want to put a price cap on Russian oil to limit the Russian profits from surging oil prices. On the other hand, the discussions between Iran and the US resume this week, giving some people hope that this time, we could see a material progress in nuclear talks, which could then lead to the end of sanctions against the Iranian oil. That would unlock additional barrels for the global supply, and help easing pressure on oil prices – and Biden clearly must gain by moving forward with a nuclear deal. But it’s complicated. The last time the two countries have come this close to a deal, the talks had stalled. 

All in all, the barrel of American crude trades past the $112 level this morning, and firmer oil keeps the concerns of high inflation tight, again. The US 10-year yield jumped more than 2% yesterday to 3.20%, and the US indices, which started the session in the positive, ended up in the red. The S&P500 slid 0.30%, and closed the session at 3900, while Nasdaq was the most heavily hit. 

In the FX 

The dollar index consolidates a touch below the 104 mark, as the EURUSD is again testing the 50-DMA to the upside. The European Central Bank meets this week, and investors will be looking for hints of how the Europeans are planning to fight inflation without triggering a fresh debt crisis in the Eurozone. We will certainly hear hawkish comments from the ECB, but what investors really want to know is more details about the upcoming anti-fragmentation tool, which is crucial if the ECB wants to catch up its major peers in raising the interest rates.  

The Bank of Japan (BoJ) on the other hand bought an incredible amount of JGBs last week to maintain their yields steady as the pressure on US and European yields puts pressure on Japanese yields as well. As a result, the BoJ now holds more than 50% of the Japanese government debt on its balance sheet. We believe that the BoJ could soon be unable to control its yield curve and let the yields move higher. If this is the case, we could finally see some material easing in the USDJPY. A rapid correction to the downside could immediately send the pair to and below the 50-DMA which stands near 130 at the moment.