US rates higher
Markets are nervously watching US rates. 10-year yields are now at 3.25% (climbing over 80 bps in a month) with little sight of weakening. 2-year yields are stuck around 2.87%. The economy is growing at 3.2-3.5% with no real loss of momentum. Solid wage pressures increase expectations for greater inflation.
Then there are politics. Our base scenarios remain that Democrats take control of the House and Republican retain the Senate. Yet the possibility of an electoral surprise is driving market volatility. Also supporting USD is optimism over a successful negotiation of NAFTA. The renamed US-Mexico-Canada Agreement (USMCA) could market a shift in President Trump’s battle with globalization. Should 2019 bring a gentler US trade policy, we could see a rapid change in risk appetite. In the context of higher US yields and wider US-JP spread we remain constructive on USD/JPY to regain 114.00.
Weaker Iranian crude exports push prices upward
As US sanctions against Iran crude exports are approaching, exports from the Islamic Republic are slowing down. The output production of crude in the country appear to have lowered by 45% from its effective production from May, prior period before US President Donald Trump took the decision to withdraw from the 2015 nuclear deal with Iran.
The consequence on crude oil prices did not take long to come. The announcement even outpaced current geopolitical dispute with China along with last week EIA crude oil inventory report for the week to September 28. Additionally, Saudi Arabian statement that it is expected to compensate for Iran production shortfall turns out to be impractical.
Furthermore, after facing Tropical Storm Gordon, which interrupted about 9% of the Gulf of Mexico oil production for at least two days (incl. gas infrastructure for about 10%), the region is expected to shut back 19% of its production plant ahead of Hurricane Michael (incl. 11% for gas infrastructure), pushing crude prices to the upside.
Accordingly, Brent crude and WTI are trading at 4-year high, currently given at 84.36 and 74.73 (+26.66% and +23.70% year-to-date) respectively and heading higher.