Business research

MT: Oil dips, bond rally and growing recession fears

Brent oil prices are down 17% since June 14 and have the potential to provide welcome relief to headline inflation impressions.


Today’s Podcast

Presentation Entropy

  • Recession fears hit markets
  • Fall in oil, Brent -9.3%
  • Renewed attention to gas shortages in Europe
  • European equities down; Euro Stoxx 50 -2.7%
  • stronger US dollar; +1.3% on the DXY
  • The euro falls 1.5% to its lowest level in almost 20 years
  • US stocks recover after weak open, S&P500 +0.2%
  • Coming soon: US services ISM, FOMC minutes

Calculate entropy, run out of energy” – Grimes and Bleachers

The United States returned from the Independence Day holiday on Monday with renewed fears of a recession. Today’s iteration had a more distinctly European flavor, with the mood souring noticeably around the European openness and overlapping with new energy concerns on the continent as oil workers in Norway launched a strike that threatened the gas supply. European stock markets are down, the US dollar stronger, especially against European currencies, and commodities are down sharply, driven by oil.

A more positive early tone helped by media speculation that later this week Biden would cancel tariffs on some Chinese imports would backfire sharply around the European opening. On the stock markets, the EuroStoxx 50 was down 2.7%, with other European stock markets also in the red. US equities took an early lead over Europe at the open, but rallied throughout the day. The S&P500 managed to close in the green, up 0.2%, as the Nasdaq shed earlier losses to be 1.8% higher. The Dow lost 0.4%. The recovery in equities during the US session was not reflected in rates or currency movements, with the US dollar holding onto most of its gains.

Oil prices reflected new worries about the slowdown while expectations of a slowdown in demand prevailed in a context of fundamentally tight supply. Brent was down 9.3% at US$103.0 and WTI was down 8.1% and below $100 a barrel at US$99.62. A note from Citigroup strategists made headlines saying crude could drop to US$65 this year in the event of a recession. Brent oil prices are down 17% since June 14 and have the potential to provide welcome relief to headline inflation impressions. U.S. pump prices were near $4.80 on Sunday after falling for 21 straight days from a mid-June record above $5 a gallon. Copper was also weaker, falling 4.2% to a fresh 19-month low.

Gas prices, however, bucked the trend. Gas prices in Europe hit a four-month high as oil workers in Norway went on strike over a wage dispute . Three gas fields were shut down in strikes that began on Monday evening. have been closed and more are planned to be closed. The strike has only reduced Norway’s gas exports by 1% so far, but the Norwegian Oil and Gas Association said it could reach 56% by the weekend, which would affect exports to the UK as well as to the EU. Europe has turned to Norway, traditionally its second largest gas supplier behind Russia, as it races to fill storage ahead of winter. The news in recent hours is that the Norwegian government has proposed a mandatory wage council to resolve the dispute. “The parties have said that they will end the strike so that everyone can return to work as soon as possible,” according to the Ministry of Labor and Social Inclusion.

The superimposition of the energy crisis could explain the more bearish tone evident in Europe. The euro lost 1.5% against the US dollar. Currency movements were at the forefront, with the fall in the Euro (or even the strength of the Dollar against most G10 currencies) taking over the stock market roll. The Euro hit a nearly 20-year low of 102.35 and is currently around 1.0265. The heightened risk to the eurozone economy from reduced gas supplies is clear, with the next key date now July 20/21 to see if gas supplies return to ‘normal’ after scheduled maintenance on the Nordstream gas pipeline to Europe from Russia is due to end. These risks are not new and NAB’s FX strategy team has been estimating for many months that the Euro will reach parity with the USD before the end of the year.

Reflecting these same themes, declines against the dollar among G10 currencies were led by Scandinavian currencies, with the NOK down 2.2%. The US dollar was previously up 0.5% against the yen in Asia, but held steady during the day as risk momentum settled. The AUD was down 1.0% at 0.6798, after hitting a fresh 2-year low at 0.6762; Friday’s low at 0.6764 won’t last long. The US Dollar is up 1.3% on the DXY and at 106.5 hit a new 20-year high.

In line with recession fears, yields fell globally. The German 10-year fell 15 bps to 1.18%, while gilt yields saw a similar decline, down 15 bps to 2.05%. The rise in US yields seen in the Asian trading session reversed and the curve flattened. The US 10-year yield fell 7bps to 2.81%, after hitting a high of 2.98% earlier and the 2-year 1bp to 2.82%. The 2s10 curve returns to inversion, albeit narrowly.

Yesterday, the RBA raised its cash rate target by 50 basis points to 1.35%, as widely expected. There was also little change to the concluding paragraph which continues to note that “the Board expects to take further steps in the process of normalizing monetary conditions in Australia over the coming months.” And that “the Council is committed to taking the necessary steps to ensure that inflation in Australia returns to target over time”. No big surprises then from the Bank, with more rate hikes clearly in sight, though those looking for signs that the Bank would follow the Fed in communicating a quick march into restrictive territory may have been disappointed. by adding the comment that medium-term inflation expectations are “well anchored” and the “great attention” paid to uncertainties about the reaction of household spending.

The data stream yesterday was light. Caixin China Services PMI, a survey that has a higher weighting for small businesses than the official index, came in well above expectations at 54.5 in June. This reflects the strength of the official non-manufacturing PMI and points to a strong rebound in June after activity was previously mired by COVID restrictions. But in a timely reminder of the fragility of current settings in China, Shanghai began mass testing in nine districts after detecting cases on Sunday and Monday, while Xi’an began seven days of control measures, including the closure of schools and restaurants. In other UK news, key members of Prime Minister Boris Johnson’s cabinet have resigned. Johnson reportedly promised to stay on and replace Chancellor of the Exchequer Rishi Sunak and Health Secretary Sajid Javid possibly as early as Tuesday.


  • A quiet day on the national calendar with nothing notable
  • In the United States, the ISM services index is seen down nearly 2 ppt to 54.0. JOLTS job postings for May are the only other data of note.
  • The June FOMC minutes are also released, but are unlikely to contain much new information given the volume of federal speakers we have enjoyed since then.

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