OIL AND THE REOPENING TRADE SURGED

Equites led by the reopening trade surged.  Equities are interpreting the Omicron variant will be relatively mild.

Oil gapped about 6% after Saudi Arabia boosts crude prices, signaling confidence in the demand outlook.  Halliburton, the biggest provider of fracking, warned that the world is headed into a period scarcity for oil after several years of underinvestment following crude’s plummet from $100 barrel in 2014.

Halliburton cited industry data that explorers outside the US and Canada cut by roughly half their capital spending budgets as compared with historical norms. Domestic expenditures have also collapsed.

This implosion in capital spending amplified by an “extremely hostile regulatory and legislative environment” coupled with shortages of “both men and equipment” has left oil companies in an advantageous position “for the first time in a long time, we will see a buyer looking for a barrel of oil as opposed to a barrel of oil looking for a buyer” as per Halliburton.

Changing topics, the illiquidity in the Treasury market may become a systemic issue.  Bloomberg writes “buying and selling large quantities of US government debt without substantially moving the market is about the hardest than it has ever been.”  Moreover the number of “fails”  (the inability to deliver bonds) have increased to worrisome levels.  Bloomberg cities Wall Street research that liquidity is about to become even worse as the Fed ends QE.

The head of a primary dealer commented “the liquidity in the Treasury market is nothing more than a mirage as the Fed is basically the only real balance sheet in town.”  The Fed’s Treasury holdings have more than doubled since the March 2020 collapse to $5.6 trillion.

The last thirty days Treasury market volatility has been intense.  The two-year Treasury or the instrument most sensitive to monetary policy has collapsed in price and surged in yield.  Longer dated Treasuries has dropped considerably in yield in manner consistent with a major crisis.

As widely accepted the primary determinates of long dated Treasury prices is current and future inflationary expectations.  A 6.7% annual CPI rate is expected for November, the highest rate since 1982.  Depending upon the data point picked, inflationary expectations are between 20- and 40-year highs.

Wow!  Something is amiss!

Yesterday Treasury prices fell moderately. Is this decline any of significance?

What will happen today?

Last night the foreign markets were up.  London was up 1.10%,  Paris up 2.26% and Frankfurt up 2.03%.  China was up 0.16%,  Japan up 1.89%  and Hang Seng up 2.72%.

The Dow should open moderately higher as concerns about the severity of the omicron variant receded and China pledged measures to support economic growth.  Oil up another 4% to almost $72/barrel.  The 10-year is off 1/32 to yield 1.44%.

 

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