China Markets oil

Risk Appetite Moderates But If This Is As Bad As It Gets, All Is Well

Oil is the big story Monday, although many will just write it off to more geopolitical wrangling in far-flung locales.

Risk appetite faltered a bit on Monday amid thin liquidity (it’s a US holiday) and oil supply jitters.

Khalifa Haftar has decided to essentially halt Libya’s oil production by blocking ports he controls, the latest chess move (if that’s the right analogy) from the irascible commander whose penchant for unpredictability is becoming a source of extreme consternation for backers and foes alike. Meanwhile, unrest in Iraq left access to the Al Ahdab field blocked and threatened Badra.

The initial spike in crude was faded, but the market once again finds itself confronting uncomfortable geopolitical rumblings which together underscore the long-term perils of Western interventionism. The situation in Libya is wholly untenable, although even “untenable” may be an inadequate adjective as it implies that beyond some breaking point, a resolution (however violent and destabilizing) is inevitable. That may not be the case. It could be that the country remains in a state of purgatory animated by civil war.

It’s been a fun ride in the new year for crude.

The modest move higher for oil threatens to derail what is now a seven-week rally in EM equities and FX. Higher oil prices obviously hurt importers, but it makes little sense to spend too much time obsessing over the second-order effects on Monday.

China vexed some observers overnight by keeping both loan prime rate tenors unchanged, but it’s not really a surprise. The economy has stabilized and the MLF rate was kept steady last week (LPR is set off MLF). The PBoC has injected hundreds of billions of yuan in liquidity ahead of the holiday.

Throw in this month’s RRR cut and Beijing’s express desire to hoard policy ammo in case it’s needed later, and it’s easy to understand why policymakers eschewed another token 5bps LPR cut for now. More RRR cuts and LPR cuts are a foregone conclusion – no need to rush when the data is coming in decent.

The yen is still sitting near an eight-month low, reflecting buoyant risk appetite and, frankly, nothing to trade on.

“If this is the most depressing day of the year, we’re in good shape”, SocGen’s Kit Juckes wrote Monday. “The equity bull run gallops on with hardly a care in the world, bond markets sleep and the yen has few friends”.


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