OPEC faces a potential end-game as Iranian oil returns and Net Zero policies start to reduce fossil fuel demand. Central banks in the USA and China face the need to start deflating the bubbles they have created.
Oil
The likely return of Iranian oil pushed Brent down $2.20/bbl to $66.73/bbl, as prices hit the resistance level in place since 2013.
✦ HIGHLIGHTS
- Last week’s Net Zero by 2050 report by the International Energy Association (IEA) is likely to prove massively influential
- The IEA has guided OECD energy policy since it was formed after the 1974 Arab Oil embargo
- It is now calling for an immediate end to all new oil and gas projects
- The G7 has already agreed to phase out financing for fossil fuels and remove fuel subsidies
- It also seems likely that Iranian oil will make an early return, as the nuclear negotiations enter their final stages
- OPEC now faces very painful choices:
Make further output cuts to support prices as Iranian oil returns
Or decide they have to “pump it or lose it” In response to the IEA report
WATCH FOR
WATCH FORPotentially fatal tensions at the OPEC meeting in June
S&P 500
The S&P ended another rollercoaster week down 0.4% at 4156. The VIX fear gauge was volatile but ended up only 1 at 20
✦ HIGHLIGHTS
- Equities sold off early in the week on concerns of potentially persistent inflation
- Markets were then supported by positive economic data and promises of continued Fed support
- But it seems likely the market’s belief in the “Fed-Put” will be tested over the summer
- Atlanta Fed President Bostic warned of “a lot of volatility over the next several months.“
- Citi’s U.S. economic surprise index turned negative on Thursday for the first time since March 2020
WATCH FOR
Market nervousness to continue as recovery assumptions continue to be questioned
Interest rates
The 10-year rate ended the week slightly lower at 1.63% (from 1.64%), having revisited 1.69% on Wednesday on inflation concerns. The MOVE volatility index closed unchanged at 55.
✦ HIGHLIGHTS
- Wednesday’s Fed minutes (from 28 April meeting) indicated no imminent change to its monetary posture, BUT
- “A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.”
- Rates for sovereign Euro debt continue to rise, increasing speculation that the ECB will slow its QE purchases (decision due on 10 June)
- Away from sovereigns, the WSJ estimates that “More than $5bn of bonds and loans designed to fund green initiatives are now issued every day.”
- Cryptocurrencies are again feeling the pressure as China looks to increase controls and Biden seeks to reduce tax-evasion
WATCH FOR
Fed to remain under pressure on inflation
China
The government continues to target unregulated shadow bank financing. This is causing increased pain in the private sector, as the official banks normally prioritise lending to other state-owned borrowers.
✦ HIGHLIGHTS
- The growing liquidity crunch is impacting many sectors, from chemicals to real estate.
- Funding sources are being reduced, when growth capital is needed to support cash-flow as the economy recovers
- The state-owned banks are strongly biased towards lending to other state-owned entities.
- Most notably the property sector (29% of GDP) is showing cracks, with bond defaults rising
- Private companies are also now finding it diffiuclt to agree new loans to service existing debt
- Major restructuring of many private sector companies is imminent.
WATCH FOR
Distressed sales to start as companies forced to sell off assets to reduce shadow debt
Summary
Real world issues of supply/demand and affordability are starting to challenge OPEC – and the myth that central banks can always keep markets moving higher.
Oil
S&P 500
Interest rates
Market view today
Some concerns
All news is good news
Expecting modest inflation
Our current view
Negative
Reversion to mean inevitable
Expect long-term deflation
Positioning began
March 2021
March 2021
December 2020
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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