Rollercoaster week as trade talks take centre stage
Investors needed nerves of steel throughout the week as Donald Trump’s tweet sent financial markets up and down in rocky trading sessions. The VIX index, which is broadly viewed as a fear measure, spiked as high as 23.4 compared to 13 last Friday as global equities collapsed to multi-month lows. On Friday, President Trump carried out his threats and raised tariffs on $200 billion of tariff goods. At the same time, he said that President Xi Jinping wrote him a “beautiful letter”, suggesting that China was ready to make some concessions and to finally move forwards with the trade deal. The Donald concluded by saying that he has “no idea what’s going to happen.”
On Friday morning, investors were cautiously optimistic that the situation would ease before the weekend. Equities were mostly blinking green across the screens, while in the FX market, safe haven currencies gave up previous gains. Emerging market currencies were also better bid with the TRY, HUF and THB up 1%, 0.33% and 0.65% respectively. Unfortunately, according to a statement release on Friday, the Chinese government will have no choice but to “take necessary countermeasures.” Friday trading would most likely be as chaotic as the ones from the rest of the week. Trump would most likely drop another angry/enthusiastic tweet on Sunday; therefore, investors should make sure to avoid carry positions over the weekend. Happy trading.
Oil to firm
WTI is now building a base above the $60 handle. Looking forward we anticipated that crude oil will continue to firm over the summer. Our expectation for tighter market conditions is based on demand from US summers driving season and low gasoline inventories. Ultra strong household position indicates that 2019 vacation spending will be healthy. On the supply side, US sanction on Iranian production has slowed to levels not seen since 2013 and scheduled maintenance in North Sea and Caspian Sea will limit immediate production reaction. So far, Saudi Arabia has not increased production to OPEC assured 10.3mn output to manage higher prices. This week negative US-China trade news has marginally weighted on crude prices.
Outside of cyclical development, we remain constructive on oil prices due to broader structural changes. Since the US unilaterally withdrew from the Joint Comprehensive Plan of Action (JCPOA) tension between the two nations have only increased. In November 2018 the US re-imposed all sanctions on Iran with the US extending waver on imported Iranian crude for six months. On April 22nd the US state department announced that no more waivers would be allowed after May 2nd, 2019. The US geopolitical strategy to manage Iran is focused on reducing Iran’s oil-based revenue to zero. Oil price development remains related to Iran production decline and Saudi motivation to gain market share by raising output levels.
