Zero Equilibrium Macro and Market Watch: The Week In Markets.

By Chinedu Okoye 

Synopsis:

• This week is markets have been characterized by escalationofnthe Iranian - Israeli conflict, which has led to the blockade of the Straits of Hormuz, the channel where most Middle Eastern Oil passes through to their intended destinations.

• The conflict which has taken Crude Oil prices to the $90s levels with a tightened spread at $2.34/barrel (the difference between BRENT and WTI Crude benchmarks).

• Brent initially outpaced WTI at the beginning of the trading week, but the katte caught up as market demand spilled over to the cheaper WTI. Precious metals were negative on the week, but held above support levels, while crude returned double-digit gains.

• Equities fell across developed markets and economically advanced EM, with Europe taking the largest hit.

• The US Dollar gained against it's major peers, as the DXY hit the 99 before settling at 98.5 levels. However, the other traditional safe haven assets - Treasuries- also saw declines in both developed and Emerging Markets.

Commodities:

On a week-on-week and month-on-month basis, WTI gas outpaced BRENT adding +26.30% in the week and +44.38% month-on-month, as opposed to BRENT's 18.64% weekly gain and +32.62% month-on-month climb. BRENT closed the week ending March 6, at $93.04 and WTI $90.90.

(Commodity Watchlist %∆)

Precious metals held up, but dipped slightly as markets slashed chances of a rate cut, but held up month-on-month with silver outpacing Gold, up +8.75% month-on-month, and -12.34% on the week, outpacing Gold on weekly declines as well as monthly rise, living up to its bidding as more volatile asset relative to the yellow metal.

Equities:

All major DM and EM indexes on the ZE Watchlist are down week-on-week, and month-on-month with European stocks hit the hardest, as the Bloc is energy dependent an hence more susceptible to Volatility in energy prices.

Save for France's CAC 40, Al of these indices are still up year-on-year.

(Major Equity Index on the ZE Watchlist)

Oil and Gas companies have been major beneficiaries as higher oil prices widens profit margin. Tech companies paired back loses on Friday with the NASDAQ closing

Currency:

The US dollar rebounded in the week and in the past month against it's major peers as shown by the steep rise in the dollar index chart below.

(Dollar Index: Source Investing.com)

This rise is also visible in the table below as THE USD has strengthened against the five major currencies that make up the Dollar Index. The table below shows USD weakness on a year-on-year basis as it declined against most peers in the past nine months prior to this rebound.

(USD v Major Peers)

Fixed Income:

Whilst the US Dollar gained momentum in the week, and on the month, Gold was tempered and fixed income declined even as Geopolitical Tensions rise. This is a cautious move by the markets as they react to the chances of lesser than anticipated or no rate cuts within the year.

(Some Developed Soverign Bond Price % change)

From the table above which shows the price of bonds in the ZE Watchlist, UK Gilts declined the most amongst it's DM peers ZE tracks, followed by Euro Bunds as both fell-3.54% and -1.67% respectively.

Macro Watch: Crude Prices Inflationary for the Consumer?

Then extent to which inflation is expected to emerge from a sustained high energy commodity prices is depending the reliance on energy. In the US if has been argued that energy prices could be deflationary or neutral, however, in emerging markets and lesser developed frontier market economies, the effect is most likely always going to be inflationary. 

Why High Oil Might Be Deflationary

Analysts think that the high energy prices in the US would be deflationary rather than inflationary as consumers tend to cut back on other expenditures when good and/or energy prices surge.

Given the level of US household debt outstanding, and tepid labor market performance, core inflation may decline even as headline CPI increases, as consumers cut back on goods and services.

ZE Analyst Remarks:

• Crude has been the best performing commodity on the ZE Watchlist in the year, crawling back from the $60's level to the to above $90 on a tighter spread below the $3 flip point.

• However it's future gains depend on the duration of the intensified conflict. Not consumer demand.

We maintain our thesis for Gold hitting $5,500 by the end of Q2 and $6,000 by January 2027, and Silver crossing the $100 mark by year's end.

• For equities, we envisage consumer Staples, Value tech, energy and utility companies to outperform the markets in each of the indices above. Non-essentials like consumer discretionary would be hit the hardest, as will manufacturing.

• The decline in fixed income Sovereigns in both developed and emerging markets present favorable entry positions for bond investors, as it could well be up bid in the case of a recession or Fed rate cuts.

• If the US dollar strength is upheld, it could further weigh in on emerging markets assets, however, EM countries with strong reserves and healthy balance of payments, would be able to ride the storm.