Yields, Yields, Yields
If there was ever any doubt that low interest rates have come to stay, then 2019 has certainly proven to be a case in point. Whereas most economists in the beginning of the year predicted interest rate hikes, the reality (at least for US 10-year treasuries) turned out to be much different, as illustrated by the chart below.
The yield on 10-year treasuries came close to a 2-year low with the yield curve entering inversion territory, as measured by the difference between 3-month and 10-year government bonds. The spread between the 2 and 10-year treasury notes remains above zero (the usual benchmark). Whereas, the yield curve remains close to an inversion, which historically has been a reliable recession warning.
Not to be outdone by the United States, the European Central Bank announced it was ready to “use all the instruments that are in the toolbox” if the slowdown in the manufacturing sector spreads to other parts of the economy. That announcement sparked accusations from President Trump that Mario Draghi was unfairly manipulating the Euro and engaging in currency manipulation. The statement from the US President was no short of irony given that he had previously suggested that the US Federal Reserve should implement a stimulus to “easily win” its trade war with China.
Oil prices have fallen to a near 12-week low, as stockpiles of US crude remained near their highest levels since mid-2017. The International Energy Agency concluded there was a “relentless” growth in production that undermined the recent cuts by the OPEC.
What really stole the headlines with regards to oil, were the two attacks on oil tankers in the Gulf of Oman. These events raised further tensions between Iran and the United States – each accusing the other of the attacks. Given that 20% of the world’s crude oil supply travels through the Strait of Hormuz, there is plenty to fear if the situation escalates.
Other commodities that have become subject to controversy are the rare earths - a group of elements that are key to the electronics industry. China holds 40% of global reserves and accounts for nearly all production and the country has started to brandish the rare earths as a possible weapon in its trade war with the United States. In any event, China has already helped push the price of iron ore up to a 5-year high, as its steel production is exceeding all expectations.
And these were not the only tectonic shifts in the metal market. The London Metal Exchange, where Brexit Party leader Nigel Farage used to work, will no longer allow traders to drink before entering the trading floor. While hopes are high, we doubt that sober traders will do much to reduce the volatility in the metal markets.
Stay tuned on the Kairos portal for sober commodity price analyses!