MARKETS

US equities were weaker Wednesday, S&P down 0.7%. US10yr yields up 6bps to 2.91%. Bunds up 6bps as well, to 1.18%.

Equities are trading lower again as the employment piece of ISM manufacturing contracted and the prices paid component remains elevated. If investors did not take kindly to Tuesday’s higher than expected inflation print in the Eurozone, they were mortified by the sticky US inflation print as the devil is always in the ISM data details. Higher than expected inflation, good new orders and mixed employment data are the perfect cocktails for the market to price in a higher US terminal rate scenario.

Anything that keeps the Fed on a more aggressive rate-hiking path will pull the rug from under any semblance of sure-footed equity markets.

With the FED hikes back on the boil. I expect the Chinese markets to continue shedding recent gains, particularly in the tech sector.

OIL

Traders are debating if the likes of Saudi Arabia are becoming worried about demand destruction or, at least, want to reset relations with the US by opening up the doors to swing producers to pump more oil. OPEC and non-OPEC members are meeting later today in a discussion framed by Russia missing its production quota for several months.

An OPEC meeting that drives oil prices higher would likely elicit an economic consequences trade, especially around the global end-demand outlook; hence I think the bounce would be capped in this risk-off environment. HOWEVER, an OPEC supply-driven lower oil price reaction would be a godsend to international risk markets, especially in Europe.

So, the million-dollar question is, can OPEC even offset lost Russian production.

While several OPEC+ members have struggled to increase production in recent months, Saudi production has moved steadily upwards – from ~8.1mb/d in March 2021 to 10.3mb/d in April this year, according to OPEC’s latest monthly report, but remains well below total theoretical capacity. Similarly, Kuwait, Iraq and the UAE have managed to raise production and are below theoretical capacity.

Given that OPEC tends to respond at a snail’s pace to market developments, there was a lot of skepticism in the oil price prices overnight, suggesting the market is still erring in the base case camp. But the potential for a shift in strategy and quotas does bring a new downside risk for oil that has not received much focus until now. But hold on to your hats; it could be a wild ride on the oil market roller coaster today, especially if OPEC signals more barrels are on the way.

 

Stephen Innes

Managing Partner

SPI  ASSET MANAGEMENT