(Houston)

Oil has been whipsawing all over the place lately. For the last several weeks, oil has mostly fallen, with some short term big rallies along the way. One of those was just a couple days ago when Saudi Arabia and Russia announced an agreement to cut output. However, the bottom has fallen out of the commodity as Saudi Arabia’s energy minister announced that he would only favor a small cut. This led to big doubts about whether the efforts will actually lower supply, sending prices spiraling down 5%.

FINSUM: This seems to be a direct consequence of the US’ ability to boost its production to offset any declines by OPEC. Accordingly, Saudi Arabia doesn’t want to lower its revenue by cutting only for the US to take advantage.

(Istanbul)

Alongside the renewed fall in equities, EMs and especially EM currencies have been taking it on the chin. With western markets seizing up and oil prices tumbling it is a double whammy for emerging markets. EMs are hurt by declines in oil, but are doubly wounded by the risk-off mood that is pervading markets. Treasuries have seen big yield declines as investors flooded in, and that has meant outflows from EMs, which have seen their currencies drop considerably. The Rand and Lira have been hurt most.

FINSUM: This ship probably won’t be righted until western markets exercise their demons.

(New York)

Stock markets are taking a pounding right now. Where should investors turn? One’s first instinct is probably to look for ten-year Treasuries. However, that safe haven may have finally worn itself out given the current rising rate paradigm. So where should investors turn? Look at short-term (two years and under) securities, both sovereign and corporate. The two-year Treasury yield is now 2.82%, and funds at the very short end of the curve have positive returns for the year even though the rest of fixed income has had a tough time.

FINSUM: Short-term bonds look very favorable right now. Yields are strong and they have little rate sensitivity. So long as one avoids too much credit risk, they look like a good safe haven.

(New York)

There is a lot going against equities right now. A trade war, rising rates, a weaker 2019 earnings outlook, a fading tax effect, and high valuations. There is one more to add to the list, and it could end up being the worst of all—stocks are now yielding significantly less than short-term bonds. Two-year Treasuries are yielding 2.82% while the S&P 500 is yielding just 1.9%. Yields better than bonds had been an incentive for investors to put money in stocks for years, a phenomenon called “TINA”, or “there is no alternative”.

FINSUM: With all the volatility and headwinds facing equities, and relatively unattractive yields as well, it is hard to see what force is going to swoop in to help out stock indexes.

(Houston)

If you haven’t been paying attention, something very interesting has been happening in the oil market. That development is that the US has quietly replaced Saudi Arabia as the world’s largest oil producer. That is a major development because the US is outside of OPEC and thus is a major counter-balance (headache) to Saudi Arabia and OPEC’s ability to control oil prices. Each time Riyadh wants to cut output to boost prices, the US can raise its production to offset the cut.

FINSUM: The US is in a strategically superior position for the first time in a very long time. This whole dynamic is symptomatic of the new era of bountiful oil. We ultimately believe that prices will stay well below $100 for several years to come because of how supplied the market is.