Founders: Oil's Selloff, Bonds at the Crossroads

GS, TS Lombard Reports

1. Goldman on Oil’s Selloff

   We believe the selloff in Brent of 6% yesterday and 11% over the past week reflects three main factors, which we think will prove to be transitory.

   

   Comment: Our bias leads us to think this is a war pitting Fed/Biden vs.Opec/Russia implying a large trading range where the US spends its future to keep oil down like it does Gold when it rallies. Then the BRICS bulls cut production on the lows. This is not new, but it is a much bigger one than witnessed in the last 20 years. The fly in the ointment for the US is the Bond market¹. Yields get high enough and there will be some soft capitulation on Powell’s part likely in the form of QE/YCC.. The BRICS “fly” is their economics with half the world in recession now due to China and the Ukraine war.

2. TS Lombard on Bond Bull and Bear Scenarios

   If the FOMC hawks are right about the policy path, 10y yields above 6% are possible But the mean dot plot suggests 4.75% is right; a recession would push yields lower

   

   Comment: The report notes the market continues to underestimate the Fed’s commitment to higher for longer, but skews its bias to the bull side. By their own admission there are far more shorts than should be comfortable now. The meta message here may be to watch for a short-covering rally.