Most market moves have been reasonably modest overnight, although US equities and bond yields have pushed a little higher.
Oil prices rose to a new, post-2014 high. The CAD and GBP have fallen after a dovish Bank of Canada statement and lower than expected CPI respectively.
The S&P500 is 0.3% higher overnight, with energy stocks leading the way on the back of higher oil prices. Morgan Stanley was the latest bank to beat earnings estimates, adding to positive sentiment (although the banking sub-index was down on the day, underperforming the broader market again).
There was little market impact after Trump confirmed that CIA director Pompeo secretly met Kim Jong-Un ahead of a planned summit between the two leaders, with the market having shifted attention away from North Korea (towards US-China trade tensions) some time ago.
Oil prices rose to a new post-2014 high, with Brent crude oil up 2% to $73.25 after the US reported a drawdown in oil inventories last week. According to the IEA, oil inventories are on track to fall below the 5 year average in the next few months amid the ongoing supply cuts in place by OPEC and Russia and still robust demand. Declining inventory levels make the market more vulnerable to possible supply disruptions in the Middle East and Venezuela.
Ahead of a summit this week between OPEC and Russia, the UAE energy minister noted that he was worried about a lack of investment in global energy production and described shale oil producers as their “partners” in supply. It doesn’t seem like OPEC has any intention of abandoning the supply cuts before they are due to roll of at the end of the year, even though prices have recovered substantially.
Besides boosting energy stocks, the recent rise in oil prices has helped boost the US high yield (i.e. “junk”) bond market, of which energy producers are a reasonable proportion. US high yield spreads are approaching their tightest levels since before the GFC.
Market expectations of inflation have also risen, with the 10 year breakeven inflation rate rising to 2.15%, its highest level since 2014. This has helped boost US Treasury yields, with the 10 year rate up around 3 bps to 2.85%.
The Fed’s Beige Book released a short while ago reported “only modest” wage increases despite a tight labour market and noted that businesses had (unsurprisingly) expressed concern about tariffs.
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