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Forget The Bombs, Buy The Stocks

Forget The Bombs, Buy The Stocks

Well, it was a reasonably uneventful U.S. session considering the circumstances.

Stocks rallied to a 7-week high. Here are some meaningless lines:

Stocks

Israel and the Quds are shooting at each other, which isn’t at all surprising and the risk of an escalation there seems to have risen materially over the past 48 hours in the wake of Trump’s exit from the Iran deal.

“Iran does not in any way welcome new tensions in the region,” Rouhani told Merkel over the phone today, adding that Tehran has “an advisory” role in Syria. Meet your “advisor“:

advisor

But there’s no reason why that kind of thing should unnerve investors, right? Of course not. And especially not when inflation prints below expectations.

The CPI miss was a welcome reprieve for equities, as it lowers the perception that the Fed will be forced to tighten more aggressively.

The dollar fell when the inflation data crossed, rebounded, but ultimately weakened which is good news for all manner of trades that have been getting squeezed lately:

DXY

Treasurys rose, with the 30Y leading the way after a strong auction:

30Y

Guess what? 29bp on the 5s30s:

30Y2

The ruble rallied hard, playing catchup to crude after a holiday:

USDRUB

The correlation between the currency and oil prices has broken down of late as the effect of U.S. sanctions on Russian entities and persons outweighed all other considerations. But as Bloomberg’s notes, the relationship is trying to make a comeback after disappearing completely.

As for crude itself, prices took a breather early on, but rebounded later in the session. Clearly, the escalation between Israel and Iran (operating out of Syria) will make it difficult for the geopolitical risk premium to be priced out in the near-term. WTI still sitting above $71:

WTI

BofAML has now become the first Wall Street bank to suggest that we may be headed back above $100. You can read more on that here, but this is the key excerpt:

Looking into the next 18 months, we expect global oil supply and demand balances to tighten driven by the ongoing collapse in Venezuelan output. In addition, there are downside risks to Iranian crude oil exports. Plus we see a high likelihood of OPEC working with Russia in 2019 to set a floor on oil prices. As a result, we project an oil market deficit of 630k b/d in 2018 and 300k b/d in 2019. The deficits should push OECD oil stocks down closer to 2.6bn barrels by 4Q2019. With inventories set to drop below 5-year normals, we raise our average Brent forecast for this year and next to $70/bbl and $75/bbl respectively. We also introduce a 2Q $90/bbl Brent price target for 2019 and see a risk of $100/bbl oil next year, although we are concerned that these market dynamics could unfold over a shorter timeframe.

Investors appeared willing to give Argentina a bit of respite while the government attempts to negotiate a credit line with the IMF. The peso rose for the first day in four. They’ve now activated a $2 billion “contingency line” with the BIS.

Goldman’s Alberto Ramos was on Bloomberg TV today noting that while we’re still not there yet in terms of the peso overshooting, Macri’s move to call up the IMF was “bold and determined” considering the fund is “a debased brand in Buenos Aires.”

Speaking of pesos, MXN surged on Thursday apparently after an opinion poll suggested Obrador’s poll lead is narrowing. The currency got an extra boost from the CPI miss in the U.S.:

USDMXN

The Malaysia ETF recouped some of Wednesday’s losses, logged on the heels of Mahathir Mohamad’s shocking election victory.

iShares is super excited that they’re getting to serve as one of the only plain vanilla ways for investors to express their opinion on this with local markets closed. “EWM is serving as a real-time price discovery vehicle for investors while local Malaysian markets remain closed until Monday, as evidenced by record volume yesterday,” Chris Dhanraj, head of U.S. iShares investment strategy for BlackRock said. In case you were wondering what “real-time price discovery” looks like, here it is:

EWM

And here’s what happens when the only way for people to “discover prices” in Malaysian equities is via an ETF:

EWNVolume

As for the ringgit, well, here are the 1-month NDFs:

NDFMYR

The pound fell following the BoE (on hold and markets seemingly pricing out further hikes this year):

GBPUSD

Oh, and Italy looks like it’s going to get an outright populist government – because what could go wrong with that?

ItalyVsStoxx50

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