Oil Surges as Iran Deal Scrapped

A review of the week's top global economic and capital markets news.

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For the week ending 11 May 2018

  • US crude rises above $71
  • Trump-Kim summit set for 12 June in Singapore
  • NAFTA deadline announced
  • Argentina turns to IMF for aid
  • Italy moves closer to forming government

As of noon on Friday, global equities showed a solid advance on the week. Yields on US 10-year Treasury notes were unchanged at 2.96% while the price of a barrel of West Texas Intermediate crude oil reached its highest level since December 2014. At midday WTI traded at $71.17. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), declined to 13.2 from 15.2 a week ago.

MACRO NEWS

Amid Iran sanctions fears, oil extends gains
West Texas Intermediate crude oil rallied as high as $71.79 a barrel this week in the wake of US president Donald Trump’s move to pull the US out of the Iran nuclear agreement. Unless a new arrangement is made, sanctions will begin to be reimposed on Iran in the next 90 to 180 days. Iran raised its production over a million barrels a day when sanctions were lifted in early 2016. At least some of that production is expected to be lost, underpinning prices somewhat. Iran’s regional rival Saudi Arabia says it will work with others to mitigate any potential supply shortages. Tensions between Iran and Israel ratcheted up further this week, with Iran firing rockets into Israeli territory from Syria, prompting Israel to strike back, destroying a good deal of Iran’s Syrian military infrastructure.

US-North Korea summit set
President Trump will meet his North Korean counterpart, Kim Jong Un, on 12 June in Singapore in an attempt to denuclearize the Korean peninsula. US secretary of state Mike Pompeo traveled to Pyongyang this week for further summit preparations and returned home with three American detainees that had been held by Kim’s regime.

Ryan imposes NAFTA deadline
With US, Mexican and Canadian negotiators scrambling to conclude an updated NAFTA agreement, US speaker of the house Paul Ryan has set a 17 May deadline on the process. Ryan says Congress needs an agreement by that date in order for it to be considered in this year’s legislative session. Mexico’s economy minister, Ildefonso Guajardo, said he expects to know whether a deal can be struck by the end of the day.

Argentina request’s IMF help
Attempts by Argentina to stem capital outflows proved insufficient this week, prompting the government of President Mauricio Macri to turn to the International Monetary Fund for help. In recent weeks, the markets have lost confidence in Macri’s gradual approach to undertaking much-needed fiscal reforms. Talks are now underway with the IMF, and any support package will likely require faster fiscal consolidation. For Macri, who faces voters late next year, turning to the IMF for support is risky, given its deep unpopularity in Argentina stemming from how it handled past crises.

Italy close to forming a populist government
After nine weeks of negotiation, Italy appears to be close to forming a government made up of a coalition of the populist Northern League and the 5-Star Movement. European leaders are concerned about the euro-skeptic alliance, though 5-Star leader Luigi Di Maio said Friday that such a government would not be a threat to Europe while a Northern League leader said that leaving the euro is not a priority. Italian government bonds lost ground this week as the potential antiestablishment coalition took shape. Italy’s president is pushing for a quick resolution. If a government cannot be formed in the next few days then fresh elections could be held in July.

US consumer price gains muted
The dollar lost a bit of ground and 10-year Treasuries slipped back after another probe above the 3% level this week as the US reported a smallmilder-than-expected rise in the Consumer Price Index. CPI rose 0.2% in April from March, while ex food and energy prices rose a scant 0.1%. The data suggest the US Federal Reserve can maintain its gradual rate-hiking pace.

EARNINGS NEWS

With nearly 91% of the constituents of the S&P 500 Index having reported for Q1, earnings per share growth is running at 24.9% compared with the same quarter a year ago, according to Fact Set Research. Revenues are growing at an 8.2% year-over-year rate.

THE WEEK AHEAD

Date

Country/Area

Release/Event

Tue, 15 May

China

Retail sales, industrial production

Tue, 15 May

United Kingdom

Unemployment rate

Tue, 15 May

eurozone

Gross domestic product, industrial production

Tue, 15 May

United States

Retail sales, business inventories

Wed, 16 May

Japan

Industrial production

Wed, 16 May

eurozone

Consumer price index

Wed, 16 May

US

Industrial production

Fri, 18 May

Japan

Consumer price index

Fri, 18 May

Canada

Retail sales, consumer price index

 

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Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; NBCNews.com.

This content is directed at investment professionals only.

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