By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – Brent settled north of $100bbl for the first time in almost four years yesterday, sparking a round of further de-risking across the board. Today, geopolitical events will remain in focus, despite a busy data docket.
WHERE WE STAND – After a risk-on Tuesday, and a subdued Wednesday, we got a risk-averse Thursday, with caution prevailing across the board, amid a renewed surge in crude prices, as participants continued to closely monitor geopolitical events in the Middle East.
We had a bit of a ‘triple whammy’ of bad news during the day, with President Trump noting that he views stopping Iran from developing a nuclear weapon as of ‘greater interest’ than oil prices; the Iranian Supreme Leader offering his view that the Strait of Hormuz should remain ‘close’; and, lastly, British intelligence reports chiming with the US assessment that Iran may have already started to mine the Strait.
I’ll note that this latter point was denied by the Iranian Deputy Foreign Minister later in the session, though I think it’s safe to say few took his words at face value. In any case, also on the (marginally) positive side of the coin, there was news of Trump planning to suspend the ‘Jones Act’, which presently requires ships transiting between US ports to be US-flagged, and majority US-crewed.
The aim here is clear, to ensure continued flow of crude and crude products from the Gulf of Mexico, to the US east coast, via generally cheaper foreign tankers, thus removing some pressure on prices at the pump. Still, this would be another ‘sticking plaster’ as opposed to a longer-run fix, something which can only come by re-opening Hormuz. I do wonder, though, if this is a precursor to the Admin going down the route of oil export restrictions. Again, if this were to happen, it might put a cap on domestic prices for a short while, but would be a longer-run negative for US-based refiners, and for transatlantic relations.
That’s still a hypothetical for now, thankfully.
Still, in the ‘here and now’, this remains a market where correlations with crude benchmarks remain essentially 1, as every asset continues to take its lead from the direction that energy prices are heading in. On that note, the front Brent contract settled north of $100bbl last night for the first time since 2022, with the ever-tightening physical market continuing to pile on upward pressure.
Given that rally in crude, moves elsewhere were somewhat predictable. Govvies sold-off across the board, though Treasuries underperformed in a change from the recent norm, with the benchmark 2-year yield rising over 10bp on the day. Elsewhere, the dollar found renewed haven demand as the DXY continues its march towards what now feels an inevitable test of the 100 handle, while stocks faced stiff headwinds on both sides of the pond, and gold also rolled over, with bullion continuing to act as more of a risk asset than a haven.
For the time being, momentum is likely to remain relatively in line with what we saw yesterday. I’d stress, though, that while I remain cautious on risk assets in the short-term, I’m still of the view that present events are more likely to prove to be short-term turbulence, and not a longer-run turning point, given that the fundamental backdrop is still a robust one all told.
LOOK AHEAD – I’d wager that the price action we see today is quite likely to mirror that which we saw this time last week. Namely, a broad desire to de-risk as we move into the weekend, and with few, if any, seeking to ‘catch a falling knife’ and fade those risk-off moves if/when they begin to gather some steam.
That said, there is a fairly busy data docket, even if none of it is likely to matter to markets at all. January’s UK GDP figures are set to show the economy having grown by 0.1% MoM at the start of the year. Subsequently, this afternoon brings a stateside data dump, including the second read on Q4 GDP, January’s PCE, durable goods orders, and job openings figures, plus the March UMich sentiment survey..
Besides that, all that’s left for me to do is to warn of the potential for gapping risk when trade resumes at the start of next week. I’d argue that the potential for a gap up in crude benchmarks is pretty high, especially if the weekend passes without any sign of de-escalation, or more importantly progress on re-opening Hormuz.