Surging oil prices are attracting the attention of investors, with UBS the latest bank to debate what a $100 oil price would mean for the global economy. Like Merrill Lynch, which recently warned of a "risk of $100" by 2019 or earlier, UBS is concerned. Oil prices recently hit $80 and have risen some 50 per cent over the last year – the 11th biggest price spike in the last 70 years, says UBS, and higher than the "sweet spot" ($50-$70) for the global economy. Oil spikes have been, as Merrill put it, a "traditional business-cycle killer", but there's no reason to hit the panic button just yet. Adjusted for inflation, oil prices are below levels seen for much of the 2005-15 period, with UBS noting that an $80 oil price means "something very different than it did for our parents".
Secondly, UBS estimates a $100 price would reduce global economic growth from 4 to 3.84 per cent in 2019 – pretty mild stuff.
Thirdly, headlines about one of the biggest oil spikes in 70 years are a little hyperbolic: the 10 spikes that exceeded the current one have all taken place since the 1970s, with six occurring since the dawn of the millennium. Volatile oil prices have long made forecasters look foolish. Oil has doubled six times since 1987 and has halved on several occasions, notes Calculated Risk blogger Bill McBride. Last June, when oil fell into a bear market, Stocktake warned it was "not productive to greet perfectly normal price gyrations as apocalyptic", with oil likely to "be back in bull market territory sooner rather than later".
It’s worth remembering that, when it comes to oil, abnormal price gyrations are perfectly normal.
Markets cheer dovish Fed statement
The potential speed of the US rate-hiking cycle has worried investors for months, so last Wednesday’s unexpectedly dovish words from the
Federal Reserve
were greeted with more than a little relief. Markets had been coming around to the idea that the Fed was prepared to hike more aggressively than investors would like. A fortnight ago, futures prices indicated for the first time markets were expecting four rather than three hikes this year. That narrative has now been abandoned
By saying it was prepared to accept a “temporary period of inflation modestly above 2 per cent”, the Fed made clear it would prefer a slight inflationary overshoot to any action that might choke off the economic recovery.
Ten-year bond yields retreated back below the much-watched 3 per cent level; perhaps more crucially, given the endless focus on the possibility of the yield curve inverting, two-year yields reversed sharply lower. Bearish strategist Peter Boockvar warned recently that Fed tightening would deliver a “punch in the face” to ill-prepared equity investors. That punch seems to have been delayed, as the Fed continues to take a “slowly does it” approach.
Another Elon Musk meltdown
Poor Elon Musk. Not only does the
Tesla
chief executive have to deal with “boring” analysts asking “bonehead” questions, he has to put up propagandist journalists who are in cahoots with Big Oil. Safety concerns, long stopping distances of its Model 3 Sedan, production difficulties with the same car, working conditions at its factories . . . the electric car maker has had much bad press lately. Musk isn’t happy, last week bashing “holier-than-thou” journalists under pressure “to get max clicks” and earn advertising dollars.
Tesla doesn't advertise, whereas "fossil fuel companies" and car companies "are among world's biggest advertisers". The solution, he suggested, is a Yelp-like website that would allow people rate to rate the credibility of journalists and media organisations. Conspiracist? hyper-sensitive? Musk rejected one journalist's description of a "media-baiting Trump figure screaming irrationally about fake news", but it's telling Donald Trump Jr was busying agreeing ("so true!!!") with the Tesla founder. Like Trump, you don't know if Musk really means this stuff. Is he under such strain he believes this nonsense? Or is he, as Tesla short-seller Jim Chanos recently alleged, engaging in "theatrics" to distract investors? For Tesla investors, it's hard to tell which option is more concerning.
Bulls edging market tug of war
Stocks remain in a trading range, with the S&P 500 mid-way between its high and low points of 2018. However, under-the-surface action suggests bulls are beginning to win the ongoing tug of war. “We like what we see with underlying sector breadth levels right now,” says
Bespoke Investment
, which notes a majority of stocks in every cyclical sector are trading above their 50-day moving averages. Defensive sectors are lagging, says Bespoke, which is “what you want to see”. Importantly, market breadth has kept improving even in weeks where stocks have slipped. In the market weakness in mid-May, for example, the number of stocks hitting 52-week highs hit its highest level since late January, relative to the number posting 52-week lows. None of this is bearish. Stocks look more likely to eventually break out to the upside than the downside.
