Daily Commentary

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: This looks at tariff policy, which is of course political. So please keep in mind we favor no politician nor any party, assessing developments solely for their potential market effects (or lack thereof). When the US Supreme Court shot down most of President Donald Trump’s “Liberation Day” tariffs on the grounds he lacked legal authority to implement them unilaterally, it did so arguing the International Emergency Economic Powers Act (IEEPA) didn’t specifically shift the power to tariff from Congress to the White House. We told you then the ruling, while significant in that it clarified those powers, didn’t mean tariff policy would shift in any meaningful sense. This article dives further into why we thought that. The administration has already slapped a 10% global levy under different, temporary legal grounds (Section 122 of the Trade Act of 1974). Those levies expire July 24, but, as detailed here, they are already looking to make them permanent under Section 301 of the same act. This section permits the president to enact permanent tariffs, but it first requires investigations into trade partners on grounds like dumping, currency manipulation and unfair labor practices. The investigations are ongoing now. You can question the validity of those investigations, considering the administration already hinted at the outcome. But tariffs under Section 301 have been enacted before and withstood legal challenge. Look, we would love it if these tariffs vanished—we think they are economic negatives that mostly harm the US itself. But that isn’t likely to happen. The good news? Markets already know all this. We think these tariffs’ power to sway stocks is gone.

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.