Brent oil prices tumbled last week, and NASDAQ’s attempted rally fizzled out – and US interest rates continued to climb.
Oil
Having hit our targets 2 weeks ago, Brent continued to fall back, closing $5/bbl lower at $64.46/bbl.
✦ HIGHLIGHTS
- US oil inventories are still 8% above average 5-year levels, having risen for the second consecutive week
- US refined product demand is 8% down on the 5-year average, mirroring the oil production cuts that OPEC+ is forced to maintain
- But today’s artificially high prices mean US rig counts increased by 9 again last week, as companies revert to “drill, baby, drill” mode
- Virus cases are rising again in much of Europe, with Nobel Prizewinner Sir Paul Nurse only expecting a ‘return to normal’ by September, if vaccinations go well
- This will pressure summer holiday plans – especially as a new wave of the virus is expected over the winter
- European flight numbers reported by EuroControl remain down 65% vs 2019 levels
WATCH FOR
WATCH FORContinued energy price weakness as speculators realise that supply/demand fundamentals do not justify current prices.
S&P 500
The S&P drifted down to 3913 last Friday with the VIX volatility index unchanged at 21.
✦ HIGHLIGHTS
- Investors focused on the Federal Reserve’s optimism over the economic outlook, ignoring all the problems on the supply side with shipping and plant outages
- They continue to believe that short-term rates will remain low, even though they expect inflation to move above 2%
- The NASDAQ weakened again, however, after an attempt to rally at the start of the week
- It has led the advance over the past year, and so its weakness now is significant
- Banks were weaker on the Fed’s decision to raise their capital ratios back to pre-Covid levels
- The SEC leadership seems likely to review ‘payment for order flow’, to improve transparency over the real costs of trading
WATCH FOR
Rising bond yields to pose increasing threat to equity market confidence
Interest rates
The 10-year rate jumped again from 1.61% to 1.73%, with the MOVE volatility index stable at 69.
✦ HIGHLIGHTS
- Wednesday’s Fed meeting confirmed its lack of concern over rising 10-year rates
- Its focus is on maintaining short-term rates at near-zero levels to 2023
- This move should boost bank profitability, as they can borrow cheaply from the Fed and lend at higher rates to customers
- The 5 year/30 year spread reached a six-year high
- American Airlines raised $6.5bn in junk bonds – the largest issue in the industry’s history
- In normal markets, investors would want to ‘wait and see’ before rushing to lend at low rates on recovery hopes
WATCH FOR
Yields for 10-year bonds and beyond to continue to rise, and start to pressure the junk bond market
China
The icy temperature in Anchorage, Alaska reflected the mood at the first meeting of US-China foreign policy advisers in the Biden era.
✦ HIGHLIGHTS
- Nobody expected too much from this week’s meeting
- It was the first senior Sino-US meeting since 2017, and the first of the Biden era;
- Both sides had to show their domestic audiences that they were “talking tough”
- In reality, the new relationship will be a mix of strategic competition and cooperation where needed
- For the moment, Trump’s policies including tariffs will remain in place
WATCH FOR
Both sides to now focus on areas for potential co-operation – COP26, N Korea and the Iranian nuclear deal.
Summary
Investors still expect the central banks to rush to their rescue when the next bout of selling takes place. But the Fed’s regular meeting last week confirmed its focus is now on jobs and the need for higher inflation.
Oil
S&P 500
Interest rates
Market view today
Some concerns
Some concerns
Expecting inflation
Our current view
Negative
Reversion to mean inevitable
Expect long-term deflation
Positioning began
March 2021
March 2021
December 2021
Confidence level
Initial
Today
.
.
.
Relevant positioning
Reality starting to dawn
Waiting for reality to dawn
Expecting higher rates for the 10-year and longer-dated Treasuries
Confidence level: 
= 100%, = 75%, = 50%, 
= 25%
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