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What’s Our List of Systemic Risk Indicators Saying now? Pick up our latest note here:
Don’t miss our next trade idea. Get on the Bear Traps Report Today, click hereOil is on a roll. WTI is up 12.4% from the May 5th lows while Brent 12.1% higher in a beautiful counter trend rally.
“We’re getting a solid capitulation reading in our seven factor model today focused on the oil space. We recommend buying into capitulation today.”
The Bear Traps Report Trade Alert, May 4, 2017
Higher oil prices, infer higher inflation, which should drive interest rates higher. Typically, 5 year break-evens track this spread and move higher (break-evens help market participants measure inflation expectations). However, so far today rates are broadly stuck near their post CPI lows from last week. This speaks to the large bid for bonds. It looks like rates will want more time to assess the quality of these production cuts. The market wants to see if there is a more meaningful impact on oil exports, which have not really slowed from OPEC countries post the November deal.
Oil, Rates and the Fed
The front end of the oil futures curve has surged (orange line above) relative to 2019 pricing contracts. What does backwardation mean for rates and the FOMC? What we have seen since the November output cuts from OPEC, US inflation expectations move in close lockstep to oil prices, but more importantly, the structure of the oil curve. Following the news that Russia and Saudi Arabia are willing to extend the current cuts by nine months, the calendar 18 brent spread went back into backwardation.
What’s Our List of Systemic Risk Indicators Saying now? Pick up our latest note here:
Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here
