Higher, But Not Biting
Last week, the Houthis’ military campaign expanded to the Bab el-Mandeb Strait, adding further risks to global trade and oil exports. Oil and gas prices reached new recent highs, with crude rising above $100 per barrel and gas moving above €80/MWh.
With fires erupting along the East-to-West pipeline, Saudi Arabia’s oil exports are coming under pressure. Saudi Arabia also announced that its production had fallen to a 30-year low. An unusual meeting between the Gulf countries and Iran is scheduled for this week to discuss trade through the Strait of Hormuz. This suggests that Iran’s leverage is strengthening, while the United States’ influence appears to be waning. At the moment, however, markets are not pricing significant consequences for risk assets. The adjustment has mainly been reflected in rates, unlike during previous episodes of geopolitical stress.
The Market vs “the House”
“I am the house now” and “You can bet against me if you want,” Treasury Secretary Scott Bessent said last week. The market is actively testing him. The announcement of a Treasury buyback programme was met with higher long-end yields, signalling disappointment among investors. Although the Treasury announced $6 billion in buybacks, it ultimately executed only slightly more than $5 billion. With oil prices and inflation putting pressure on the front end of the curve, long-term yields are finding little relief and have therefore reached new highs. Overall, the measures still appear small relative to the scale of the fiscal problem. The lack of appetite for fiscal consolidation makes the outlook even more challenging.
Hikes Priced, Delivery Due This Week
This week, markets are pricing 25bps rate hikes from the FED and the BOJ, while in UK the BOE is expected to remain on hold, although risks remain. Following last Friday’s CPI release, Warsh is now under pressure, and failing to deliver could trigger a credibility crisis with broader implications. Updated projections will also be published, potentially providing greater clarity on the future path of rates. If the Fed is viewed as beginning a new hiking cycle rather than calibrating monetary policy, monetary policy could have spillovers to risk assets. In Japan, the same dynamic applies, but the key gauge is the yen. Following the recent intervention, the BOJ needs to deliver, and may need to surprise markets with a more hawkish stance to support a further strengthening of the yen. In the UK, the Bank of England will likely leave rates unchanged, as economic activity has not accelerated significantly. However, the recent spike in inflation will be closely monitored.
Algebris Investments’ Global Credit Team
For more information about Algebris and its products, or to be added to our distribution lists, please contact Investor Relations at algebrisIR@algebris.com. Visit Algebris Insights for past commentaries.
Any opinion expressed is that of Algebris, is not a statement of fact, is subject to change and does not constitute investment advice.
No reliance may be placed for any purpose on the information and opinions contained in this document or their accuracy or completeness. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained in this document by any of Algebris Investments, its members, employees or affiliates and no liability is accepted by such persons for the accuracy or completeness of any such information or opinions.
© Algebris Investments. Algebris Investments is the trading name for the Algebris Group.
