The rise in Brent crude oil demand
On May 8, US President Donald Trump announced the withdrawal of United States from Iran deal and will restore wide-spread sanction against Iran. As major oil importers from Iran’s production, European countries like Germany and France, together with China do not appear to support the sanction.
Soon after that, the US–China trade talk held in Beijing also fell out with no outcome after the team led by Steve Mnuchin proposed a mandatory cut of US$ 200 billion trade surplus to be implemented by Chinese government before 2020.
Market investors have become convinced that Trump administration might be able to disrupt global oil production after he slapped the sanction on Iran. Traders are worried of rapid supply cut in coming months that will lead to demand rise. Dollar Index climbed back to five-month high at 93.50 while US Treasury 10-year bond yield visited above three per cent last week.
On Thursday, Brent crude oil prices hit US$80 per barrel that was last seen in November 2014. Market has stoking fear of supply squeeze if Iran’s export could fall soon amid current tight supply. West Texas Intermediate (WTI) Crude also reached 3-1/2 year high above US$72 per barrel before slight receding.
Generally speaking, the simultaneous rise in US dollar and crude oil will be indicating an impending inflation that aligns to what President Trump has been preaching of healthy economic recovery.
Nevertheless, yellow metal has declined out of counter-balance to the rising crude and dollar. Despite the slow recovery in payrolls for April, market analysts are almost confident that the next Federal Reserve meeting in midJune will be calling for another rate hike due to higher dollar prices. Stoking inflation fanned by artificial fundamentals will provide an excuse to tighten the monetary policy by Jerome Powell while supported by the egregious behaviour of Trump.
The recent market landscape has created much uncertainty on Euro that is the major counter currency to the dollar. The zero yield on fixed- income assets with sluggish economy, together with rising unemployment have been a longstanding recession in the eurozone. With dented euro amid resurging debt, it could be disastrous to figure out another debt crisis might erupt anytime from Greece or Eastern Europe regions.
Some market critics say US government has succeeded in the plot of repatriating the offshore fund into American soil, at the expense of rupturing the economies of other bilateral parties. Notwithstanding the rising dollar amid looming growth, we foresee the imminent downfall on the dollar in a year’s time when the bullish trend loses demand. This was evidently depicted in the past era of early 80s before the global oil shock, late 90s before the Dotcom bubble burst and subprime crash in 2008.
Currently, stock market still portrays the bed of rises to investors when there is only one or few component stocks soar in their quarterly profits. All others are actually progressing on flat terrain in their corporate performances.
This is true to Dow Jones market and also apply to most Asean equity baskets. Be wary of running into a bear trap if you could not spot the sole bull runner amid the basket of blue chip stocks.
Technically, we suggest cutting your portfolio whenever there is a 10 per cent devaluation in the withheld equity. Do not fall prey to the bloody talons of the vultures when the equity market begins to overshadow your hard earned monies.
Always be reminded of higher US bond yields and tightening monetary policy as the forewarning sign of massive market correction. Stay wise.