Daily Commentary

MarketMinder’s View: The announcement that the United Arab Emirates (UAE) will leave the Organization of Petroleum Exporting Countries (OPEC) means little for the oil market in the immediate term, considering the Strait of Hormuz’s closure restrains much of its production. But in the longer term, the decision taken by OPEC’s fourth-largest producer does highlight how OPEC’s status has fallen. The bloc used to hold great sway over the oil market—and it is still important. But as this notes, the UAE’s departure will lower the group’s share of global output to 26% from 30%, a figure that has fallen dramatically as output in the US, Canada, Brazil, Guyana and elsewhere has grown. Moreover, “The UAE’s withdrawal ‘marks a significant shift for the oil-producer group,’ said Jorge Leon, head of geopolitical analysis at consultancy Rystad. ‘Alongside Saudi Arabia, it is one of the few members with meaningful spare (production) capacity, the mechanism through which the group exerts market influence and responds to supply shocks,’ he wrote in a note.” This further cedes ground to other producers as the swing factors in the oil market. The idea the cartel “controls” prices is increasingly outdated, and this decision only furthers that. The titular “reshaping” of global oil markets already happened—this is more aftereffect than driver, in our view.

MarketMinder’s View: Are US bond markets sending mixed messages? This article argues they are, but the evidence is frankly thin gruel. It cites the fall in high-yield credit spreads—the difference between yields of US high-yield corporate bonds and comparable-maturity Treasurys—from a recent war-driven peak of 346 basis points on March 30 (bps, or 3.46 percentage points) to 286 bps today as “divergent” from 10-year Treasury yields at 4.3% and forecast to rise by a couple of pundits quoted herein. Ditch the forecast, which is just an opinion. Look at actual movement and you see fairly sensible and blasé action. For one, high-yield spreads’ decline puts them back near historical lows, which makes sense to us given two factors: One, regional wars have historically never caused a recession on their own. Two, high-yield bonds are highly correlated with stocks. Hence, stocks bottomed in the mini-correction the same day spreads peaked. And now they reversed it as stocks hit new all-time highs. The comparisons here to past spread blowouts last spring or in 2008’s financial crisis are also a stretch, considering those equity market moves were far greater and a far more severe risk to credit quality. (We mean, the latter is the biggest bear market and recession of the last half century at least. Why are we comparing a mini-correction to that?) On the Treasury side, yields are also down from late-March peaks! And at no point have they spiked and signaled huge inflation risk. 10-year yields rose from 3.97% pre-war to a high of 4.44% and are now back to 4.30%. Such yields are within the well-trafficked range seen since 2023’s start. Bigger moves up and down since didn’t tell you much about prices. You can chuck the “divergence” narrative, in our view. It is all fear-based and overwrought.

MarketMinder’s View: A net 10 percentage points of eurozone bankers reported tightening credit standards for borrowers during the first quarter, as war fears caused them to rein credit in (this means the percentage of banks reporting tighter standards was 10 percentage points above the share reporting looser standards). Two takeaways from this: One, given the steep yield curve (long rates are well above short, making new lending profitable as banks borrow short term to fund longer-term loans), this slight tightening likely proves a fleeting war response, much as markets have signaled. When it becomes clear the war’s effects on inflation, oil and GDP are smaller than feared, bankers will likely revert to the incentives from wider profit margins on new loans the steep curve hints at. Two, this is yet another point against the ECB potentially raising interest rates in response to war-driven oil price rises, which aren’t really inflationary anyway (they foster consumer substitution). The ECB potentially raising short rates would flatten the curve more and likely further dissuade credit creation. They aren’t doing so now, but this is a matter worth watching.