Wednesday 2, March 2022
Wrap
The only story in town is of oil becoming unanchored. The near month went up by nearly $8 a barrel. This is a commodity which was trading at a negative price a couple of years ago. The world seems to be waking up to the fact that (i) it needs a lot of oil to keep the show on the road, (ii) quite a lot of oil comes from Russia and it’s going to get harder for the west to import it and (iii), OPEC+ includes Russia, and they quite like the price of oil to go up and (iv) politically, in the west, it’s very difficult for governments to open up new sources of oil by auctioning exploration licenses, approving pipelines etc. and (v) a lot of millenials will avoid mutual funds etc. which include oil companies.
The interesting thing is that the whole forward curve is moving up. Previously, there were major moves in the near months, but much more muted moves in the more distant ones (as well as a complete evaporation of liquidity beyond a couple of years). Now it seems that cash is being pulled into energy commodities, which has resulted in increased liquidity at the long end.
The market may be over extended. Putin might decide to pack up and go home. Russia might be welcomed back into the international community. OPEC might reverse today’s decision to stabilize production at current levels. But the odds are against it. Does this mean that a ~8% jump in the price of oil is an accurate assessment of overnight change in the supply and demand schedules for oil? Probably not, but for the moment nobody is going to dare short oil, so it could well go higher.
Powell had his regular Congressional testimony today. For once, this wasn’t the main headline in financial news. He seems to have said that he plans to hike, on 15th March, but he will only do 25bp, and Ukraine makes it more likely that he’ll pedal back on the four hikes promise. Equity markets were up, which is at least consistent with that. Bonds were down too, again pointing to a risk-off event, even though higher oil is surely contractionary. $ZROZ (the 25+ year PIMCO zero-coupon ETF) was down 4.9%.
Macro Alf
I enjoy listening to Emil Kalinowski and Jeff Snider talking about the Eurodollar market and its derivatives, here.
They had a departure from the norm recently, in the form of an interview with Macro Alf himself.
Alf explained how QE had caused huge problems for banks in the Eurozone as it had destroyed the carry trade and had failed to induce banks to lend to productive activity. The fact is that we’ve created a lot of physical capital, and the marginal rate of return on investment had been forced down a long way, which is the ultimate determinant of real interest rates. Because banks can’t lend, because there is nobody safe to lend to, they are left stuffed full of reserves which, in Europe at least, don’t even pay any interest. In some sense, rates are the mirror image of prices. As real interest rates become ever more negative, it makes sense for stock prices to become ever higher. Can this go on forever? One feels that it can’t, but maybe in this case they can. The redistributive effects may eventually provoke a political crisis, which might be the start of the end. We’re not there yet, but we’re getting closer.
Diversion
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