Well, you know what they say about nuclear standoffs: for every one you ostensibly resolve you have to start another one.
The Trump-Kim meeting is all set for next month in Singapore – although there are lingering questions about how Kim is going to get there.
U.S. stocks had a good week:
VIX: 12-handle. If only Seth Golden’s portfolio were alive to see this.
But overshadowing the North Korea news and rising U.S. equities (and also overshadowing the release of hostages previously held in North Korea), was the Iran deal. Indeed, this week was defined by Trump’s official exit from the accord and also by subsequent attempts from the analyst community to try and discern what America’s withdrawal from yet another multilateral agreement might entail.
Clearly, the asset most at risk is crude, but beyond the pricing in of the geopolitical risk premium (popularly known as the “Bolton premium”), it’s well nigh impossible to draw any definitive conclusions. There are a variety of reasons to believe that Iranian barrels will simply find their way to market irrespective of Trump’s efforts – because the U.S. is effectively going it alone, it’s entirely possible that the impact on Iran will be more muted than it was previously.
Irrespective of how this turns out for crude, spare a thought for the rial:
You can find more on the possible market implications for oil here and here and some color on the geopolitical ramifications here. Key to any forecast is trying to account for the fact that the market has less of a cushion when it comes to supply shocks thanks to Venezuela’s rapid descent into “failed state” status. Here’s BofAML:
Looking into the next 18 months, we expect global oil supply and demand balances to tighten driven by the ongoing collapse in Venezuelan output. In addition, there are downside risks to Iranian crude oil exports. Plus we see a high likelihood of OPEC working with Russia in 2019 to set a floor on oil prices. As a result, we project an oil market deficit of 630k b/d in 2018 and 300k b/d in 2019. The deficits should push OECD oil stocks down closer to 2.6bn barrels by 4Q2019. With inventories set to drop below 5-year normals, we raise our average Brent forecast for this year and next to $70/bbl and $75/bbl respectively. We also introduce a 2Q $90/bbl Brent price target for 2019 and see a risk of $100/bbl oil next year, although we are concerned that these market dynamics could unfold over a shorter timeframe.
It is worth noting that our constructive balances do not assume a catastrophic scenario for Iran and Venezuela. In fact, our balances reflect Iranian production remaining around the current levels of 3.8mn b/d for the foreseeable future, so a sizable reduction in Iranian crude oil exports over the coming months would present additional downside risks to our global supply scenario (Chart 12). Similarly, we see a number of scenarios that could lead to further declines in Venezuelan output to the end of 2019 (Chart 13). For now, we are assuming a total decline of Venezuelan production of 500 thousand b/d over the next 20 months, but we acknowledge downside risks here too.
Oil slipped a bit on Friday, but logged its second weekly gain and its fourth in five. We’re hovering, of course, at three and a half year highs:
Folks are nervous about inflation expectations’ slavish tendency to follow oil higher (the higher inflation expectations go, the more likely it is the Fed will be prone to overtightening – or so goes the narrative and it’s all about the narrative these days):
Well, here’s how the crude vs. breakevens story played out this week:
For all the strong dollar talk, the greenback was actually lower for the first week in a month, and is sitting just shy of its 55-week MA:
5s30s is, well, you know the story: it’s getting flatter:
But remember, that’s not necessarily a harbinger of horribleness – just ask Wells Fargo’s Chris Harvey. And that’s a good damn thing, because we’re back at pre-crisis levels:
The Argentine peso fell again on Friday to a fresh all-time low as everyone ponders the future amid the country’s plea for help from the IMF:
The lira was back under pressure on Friday as well and I’m sure you can guess why, but if not, here’s a hint:
- ERDOGAN: TURKEY TO EMERGE VICTORIOUS AGAINST INTEREST RATES
- ERDOGAN: TURKEY MUST PULL DOWN INTEREST RATES
Just try to imagine being mired in a worsening currency crisis and having the balls to say that in public. And hilariously, if you look at what he actually said in Ankara today, it’s even worse than those headlines. To wit:
If my people say continue on this path in the elections, I say I will emerge with victory in the fight against this curse of interest rates.
Because my belief is: interest rates are the mother and father of all evil.
Again, you’re reminded that he is saying that amid an acute run on the currency that’s seen the lira make fresh all-time low after fresh all-time low over the past couple of months. Here’s a quick annotated chart that shows you how quickly the fleeting rally precipitated by his farcical “emergency meeting” with economic policy makers earlier this week has been faded:
Despite the turmoil in Turkey and Argentina and quite possibly Malaysia on Monday depending on what kind of rhetoric we get over the weekend, emerging market assets actually came out ok on the week. The spread on EM sovereign debt fell by 4bps on Friday and although it’s off recent wides, things are dicey. Here’s Lisa:
Investors are demanding the most extra yield to own USD emerging-markets sovereign debt versus benchmarks since early 2017. pic.twitter.com/o4Ql2Mqr1o
— Lisa Abramowicz (@lisaabramowicz1) May 11, 2018
EM equities have actually risen for five straight days and as our buddy Kevin Muir reminds you, this isn’t exactly a catastrophe yet:
In Europe, Italian equities were rattled by the prospect of an overtly populist government in Italy, but the bigger picture is brighter. European shares rose for a seventh consecutive week – the longest stretch since 2015:
Finally, for your moment of zen, here is Sarah Huckabee Sanders wearing a kind of sideways prison outfit and trying to explain why people at 1600 Penn. are joking about John McCain’s cancer:
Reporter: Meghan McCain wondered aloud why Kelly Salder still has a job at the White House, does she still have a job?
Sanders: "I'm not going to comment on an internal staff meeting." pic.twitter.com/d0Q2ZUJm7A
— MSNBC (@MSNBC) May 11, 2018