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LATE CYCLE EBB AND FLOW – Seeking a market equilibrium


In this late stage of economic expansion, a fully priced market debate itself between the ebb and flow of monetary and fiscal policy, international trade disputes, and unexpected economic events. You will find below the latest market-relevant developments this week.

As foreseen by markets, the Federal Reserve cut rates by 0.25% last Wednesday for the second time in a row, a slow but consistent path to lower interest rates. The Fed Funds rate stands between 1.75% to 2.00%.

The Chinese Government and People Bank of China (PBOC) tweaked financial conditions using several tools last week: a cut for bank reserves requirements, a reduced private sector borrowings, and increased investments for infrastructure.

A drone and missile attack to several Saudi Arabia oil infrastructure facilities rattle oil markets. Statements from both country officials blame Iran as culprit. The strike interrupted almost half of Saudi Arabia light oil flow (5 MM barrels of oil daily).

The financial impact was limited and short-lived. Saudi Arabia’s authorities claimed they would quickly recover production and repair facilities. A combination of emergency oil reserves (Saudi Arabia and the U.S.) and old oil fields revamp will fill the gap.

Later we learned repairs to oil infrastructure was extensive and may take months to recover. The U.S. government has decided to send U.S. troops to Saudi Arabia. Probably, oil prices might have an oil risk premium going forward due to Middle East concerns.

Last Friday, two events related to the U.S. China trade war moved markets sharply lower. Just comment from President Trump that a short term trade deal it is not required before 2020 election and abrupt interruption of a Chinese visit to explore agriculture purchased.

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Have a nice week!

- Michele López



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