Oil
The deepening interconnectedness of the "global eco-system" brought front-and-center by NY Fed President Dudley will keep inflation at the consumer level synchronized in the world's largest economies. The importance of global variables in the evolution of local inflation rates will remain elevated.
With the Fed more sensitive to how its policy affects the global economy, and <i>vice versa</i>, we believe monetary policy will remain accommodative to encourage U.S. and EM growth.
The U.S. and the global economies are improving. A synchronized upswing normally trumps the Fed in determining the path for the dollar. U.S. inflation expectations are likely to rise relative to the rest of the world, weighing on the dollar. The risks for EUR/USD have risen. We are hedging our long EUR/USD position by shorting the euro on some crosses. Buy CHF/JPY.
Clearing the refined-product overhang in the global storage markets is not as straightforward as it used to be: The Kingdom of Saudi Arabia (KSA), China, and India all are making concerted efforts to boost refining capacity, which is leaving them with surplus product that ends up being sold in export markets.
The 35-year bond bull market is coming to an end and the downward sloping trend channel for yields is changing to flat. Asset allocators should trim duration and fixed income exposure.
Refiners will reduce run rates over the next month or so to clear unintended inventory accumulation, but it's not like they've never had to deal with this situation.
In successful investment analysis "less is more, and usually much more effective."
Commodity speculation provides liquidity to hedgers, allows price discovery, and offers access to an asset class that typically produces returns that are not correlated with stock or bond returns.
We view the "sweet spot" for market-balancing oil prices to be within a range of $50-$65/ barrel: Oil prices will be below/in the lower half of this range during 2016H2 and will average in the upper half of this range in 2017, perhaps exceeding the range in 2018. Without OPEC serving as an attentive "human regulator" of production, bouts of oversupply and undersupply will have to be managed through the drill bit (not the output valve), leading to increased price volatility beyond our "sweet spot" range. In this environment, quick-reacting U.S. shale producers and service companies are best positioned to benefit early in the up-cycle.
Post-Brexit uncertainty will continue for some time. But we were already cautiously positioned, and would not go any more defensive.