Macro markets

The tea leaves are murkier than ever.

Over the weekend we had several bits of (what we think is) important news.

Firstly, the Iranian deal has fallen over (the prospect of Iranian barrels returning to market post the negotiation of sanction removal), and news of rocket attacks from the region compounded the mystery of how a deal that was “almost complete” dissolved so quickly.

Secondly, COVID appears to have breached China’s “COVID zero” walls again, with the lockdown of a major city in response to rising cases. Whilst China got all the news, it is the case that the Europeans appear to be having the start of yet another wave, only days after we felt that case rates (in Europe) were a good cause for optimism.

Individual countries are noisy, so best to look at the “worldwide” flow of cases in the bottom right, where if you squint you can see an uptick.

Thirdly, we’ve got the first Fed hike in many years almost certain to go ahead this week. Tightening with China going into lockdown, COVID case rates climbing with a new variant (BA.2) and the overhang of escalating Russian activity make for a challenging backdrop.

The oil demand story is the most complex part of that new narrative. Omicron is bad for oil, equally, US gas consumption data (flights, travel) is as strong as ever. The Iranian story is very positive for the supply side dynamic.

Noteworthy that the 2yr (below, top right) yield has more than fully recovered from the Ukrainian dip, and the market returned to pricing in at least 7 hikes. Spreads continue to widen, and the inflation problem is very unlikely to resolve itself with the new news from China.

We feel we are on the right side of all this, with our investment strategy (which I’ve articulated in many a note, so I’ll probably not rehash it all here).

But it is finely balanced, out there.

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