- Trump turns up the aggression with Iran, oil likes it
- But quite unlikely that this is a sustainable rebound
- Euro suffers after terrifying PMIs, awaits EU leaders meeting
- Stocks recover, yet safe havens thrive too
Oil prices recover as Trump rattles sabers with Iran
All the troubles in the oil market were magically resolved by a single tweet from the US President yesterday, who said that he instructed the US Navy to destroy any Iranian gunboats harassing American ships at sea. Crude prices erased early losses to close with gains and are marching higher today, as the ‘fighting talk’ sets the stage for more oil production to go offline if tensions truly escalate.
It’s unclear whether this was a deliberate attempt by Donald Trump to lift oil prices, or whether this was just another one of his infamously mercurial tweets. If it was intentional though, it’s a rather ingenious way of lifting the front end of the oil curve – which is what’s suffering right now – without even paying anything.
Beginning of a healthy rebound in oil?
Probably not. It’s been pretty clear over the past few years that for all his muscle flexing, Trump doesn’t want to start an actual war with Iran, and the Iranians are unlikely to pour gasoline on the fire with the pandemic ravaging their country.
Moreover, even if Iran’s entire oil production went offline instantly, that would only shave 2 million barrels per day off global supply, which is still ‘peanuts’ relative to a demand destruction that’s estimated at around 30 million barrels. It therefore wouldn’t come close to balancing the market, and in the more immediate term, it wouldn’t address the fact that there’s nowhere to store oil right now.
As such, while this was a welcome relief for the devastated oil market and oil-sensitive currencies like the loonie, it’s doubtful that it will last. The world is drowning in oil, and until the demand side of the equation improves, any sustainable recovery seems difficult if not impossible.
EU summit on euro’s radar, but don’t expect much
In Europe, all eyes will be on the meeting between EU leaders, where they’ll discuss how much more stimulus should be injected to help the continent recover, and how to pay for it. For markets, what really matters is whether they will agree on a risk-sharing mechanism like Eurobonds to share the burden and ease the pressure on highly-indebted economies such as Italy.
Alas, such an agreement remains highly unlikely for now given fierce opposition from Germany and the Netherlands. Indeed, reports suggest EU Council President Michel won’t even try to get the leaders to agree on a joint statement, so a deal is probably off the cards.
That might imply more pain for the battered euro, which is already losing ground today after the Eurozone’s PMIs for April fell off a cliff. The bloc’s composite index collapsed to a shocking record low of 13.5, consistent with an economy contracting at a quarterly rate of around 7.5%.
Fortunately, the ECB announced yesterday that it will accept bonds that have been recently marked down to junk as collateral for its loans, in a move calibrated to avoid panic in Italian bonds in case of a downgrade by the S&P tomorrow. While this should help slow the euro’s bleeding, the outlook still seems negative.
Stocks recover, but havens shine too
Risk appetite returned to global stock markets yesterday, with the S&P 500 (+2.3%) snapping a two-day losing streak, taking heart from the bounce in oil prices. Yet, safe havens like the dollar, yen, and gold also thrived, indicating that many are not convinced about the sustainability of the risk rally.
In particular, euro/yen is worth monitoring, as the pair is now testing a three-year low and another bout of risk aversion could be the trigger for a break, something that could drag other euro pairs lower as well.
