The Daily Prophet: Oil's at $50 and Bond Traders Are Rattled

Connecting the dots in global markets.

This time, it just may stick. After rising above the $50 a mark three times since March only to fall back as supplies surged, the price of a barrel of crude is once again at that psychologically important level. What's different now is that the move higher is less about speculation and more about fundamentals. There's even evidence that bonds, some currencies and stocks are moving, in part, because of what's happening in oil.   

Two of the most influential organizations in world oil markets -- the International Energy Agency and OPEC -- nudged their demand forecasts higher amid a global synchronized upswing in the economy. Their new estimates signal confidence that the global glut of oil that has weighed on prices may finally be easing, according to Bloomberg News' Jessica Summers. Oil demand for 2017 will expand by the most in two years, the Paris-based IEA said Wednesday. That followed OPEC’s increase of its estimate for how much crude buyers will seek from the cartel next year, driven by rising consumption in Europe and China.

The impact from oil's recent gains isn't limited to the commodities markets. The widely followed Energy Select SPDR exchange-traded fund of large-capitalization U.S. energy shares is up 6.82 percent from last month's low on Aug. 21, beating the S&P 500's gain of 2.88 percent over that time. Bond markets are weaker on concern higher oil prices may add to inflation. Currencies of energy-producing nations such as Canada and Russia are stronger this month. The market is "realizing that the rebalancing process is working,” said Mark Watkins, an investment manager at U.S. Bank Wealth Management, which oversees $142 billion in assets.

Economists have long debated whether higher energy prices are inflationary or a drag on the economy. The answer seems to lie in what's happening at the time. If rising prices come during a healthy economy, then it's inflationary. If not, then it tends to curb growth. Right now, bond traders seem to betting on the former. The breakeven rate on five-year U.S. government notes, or what traders expect the rate of inflation to be over the life of the securities, rose to 1.76 percentage points Thursday, the highest since early June. Yes, the jump followed a robust Consumer Price Index report, but the rise in the breakeven rate in recent weeks has tracked oil in lock-step fashion. Inflation is the equivalent of kryptonite to bonds because it erodes the value of fixed payments over time. So, the more payments you have coming, the more you are at risk of losing purchasing power. The economists at RBC Capital Markets noted in a research note that today's 0.4 percent increase in headline CPI came before any impact from Hurricanes Harvey and Irma, which pushed up gasoline prices. That should show up in next month's report, which the firm estimates could jump to 0.7 percent based on the data so far. That would be the highest reading since 2009.

You are not imaging things -- it really is harder these days to find cheap stocks. That's not only because of the length of the current bull market, which at 8.5 years is the longest on record after the run between 1990 and 2000. It's also because the number of U.S. publicly-traded firms dropped to about 4,400 in 2016 from more than 8,000 in 1996, the result of mergers and acquisitions and a decline in initial public offerings, according to Bloomberg News' Charles Stein. “The number of public companies has dropped by half, which is a great frustration for me,” Joel Tillinghast, whose Fidelity Low-Priced Stock Fund has outperformed its benchmark over the past 25 years, said in a Bloomberg Television interview Thursday. “It has become more of a winner-take-all monopolistic, oligopolistic market,” he said. Tillinghast also blames the rise of passive investing, which he said may cause investors to pay too little attention to the price they pay for a stock. Perhaps that's why the S&P Value Index has gained just 4.75 percent this year, trailing the 11.5 percent gain in the S&P 500 Index with the gap growing wider by the week.

You'd never know the U.K. economy was under a cloud because of the uncertainty related to the nation's withdrawal from the European Union by looking at the pound. Sterling is in demand by currency traders, who have drove the Bloomberg Pound Index on Thursday to its biggest gain since April. The 1.39 percent rise in the index brought its gains over the past three weeks to 4.24 percent. The latest move higher came after the Bank of England signaled that inflation is overtaking Brexit-related slowdown as an economic risk, and that policy makers are headed toward raising interest rates for the first time in more than a decade, according to Bloomberg News' Lucy Meakin and Jill Ward. Currency traders are more upbeat on the pound than any time in the past three years based on the cost of owning one-month call options on sterling versus the dollar relative to puts, reports Bloomberg News' Vassilis Karamanis. The premium on calls shows the market’s conviction that the currency’s more than 3 percent rally against the dollar this month has legs.


Bond traders don't care about your politics, only that you can meet your debt payments. What other conclusion is there to draw as traders gorge on bonds from some of the world’s most authoritarian governments? Wall Street soaked up junk-bond deals this month from Tajikistan and Bahrain, both of which are some of the most autocratic regimes as ranked by Washington-based Freedom House, according to Bloomberg News' Ben Bartenstein. Demand for the Central Asian republic’s debt was so high last week that it was able to cut borrowing costs by almost a full percentage point from its initial target. The Middle East kingdom sold $3 billion of debt on Wednesday, its biggest sale ever. These deals come as dollar bonds from Iraq, Ethiopia and Cameroon -- also on the watchdog’s list of “not free” countries -- have all returned more than 15 percent this year versus the emerging-market average of 9 percent. The strong demand partly reflects the market’s hunger for high yields and its hunt for stability, sometimes at the expense of ethical questions, according to Bartenstein. In an authoritarian regime, investors generally have a clearer picture of the future because they don’t have to worry about things such as messy elections or the bureaucracy of decision making.


Investors tomorrow will find out whether Hurricanes Harvey and Irma did anything to damp consumer confidence when the University of Michigan releases its preliminary sentiment index for September. The report will be the first widely-followed one to release data following the storms. The median estimate of economists surveyed by Bloomberg is for a slight easing to 95 from the 96.8 reading in August. The index was higher during the first eight months of 2017 than in any year since 2000, as Americans grew increasingly optimistic about employment and the economic outlook. When asked about recent events in last month's report, few consumers made any reference to the violence in Charlottesville, Virginia, or to North Korea.

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