Wed, Jun 29, 2022 @ 16:23 GMT
HomeContributorsFundamental AnalysisFrom Negative Rates To Negative Commodity Prices

From Negative Rates To Negative Commodity Prices

Market movers today

Our main focus continues to be the PMI and US jobless claims on Thursday. Today’s primary release is the German ZEW sentiment survey. Being one of the first indicators to show how we have started Q2, the question is not if it is bad but rather how bad. The expectations component will also be closely monitored.

Markets will also note the various statements from EU heads of state ahead of Thursday’s EU council meeting. Yesterday, Spain proposed a EUR1.5tn fund, which could also issue perpetual bonds.

With the collapse in the front oil contract yesterday, the oil market is gaining attention due to signs of severe stress.

Selected market news

Yesterday the price on the first contract of WTI crude fell to the lowest level ever and even turned negative. The price on the second contract also dropped, but stayed well above zero; hence, resulting in a steep contango in the front end of the WTI forward curve. In our view, this is a sign of severe stress in the oil market, where storage and refinery capacity in the US are running out. Oil prices in general dropped yesterday, but we note that Brent was still trading above the recent low, still well in positive territory. We expect downwards pressure on oil prices to prevail until economies start to open up again.

In FX, the SEK is still dictated by global equity markets but remained relatively stable despite the uncertainty generated by the oil price selloff. The NOK was remarkably stable despite the WTI sell-off, highlighting two important points. Firstly, Brent crude is the relevant benchmark for the NOK and with a more subdued drop in Brent, the Brent-WTI spread reached record highs. Secondly, it was primarily short-dated contracts selling off. In sum, oil remains a headwind for the NOK near term via the terms of the trade but when digging into the details the headwind is less pronounced than what headlines would suggest. Generally, equity markets are weakening and credit spreads are rising as this level of commodity prices continues to be an indicator of weak demand and thus also credit risk. Overnight, equity futures are down about 2% in Asia and European futures are only slightly less negative.

Core / semi-core European rates were only slightly changed yesterday and yet again did not show great volatility. In other words, European government bonds seem to have consolidated in relatively narrow ranges and a new trigger is need to break the ranges (vaccine, COVID-19 data improving, economies opening up, EU policy response etc.). Spreads widened led by periphery and in particular Italy. The EU council meeting on Thursday and S&P’s rating review on Friday seem crucial at this stage to support the much tested BTPs.

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