The CIO office’s view of the week ahead.Dear readers,A public holiday in Geneva on Monday means we are sending the Weekly View today instead.This week has seen some unsettling events, including a rise in oil prices and Italian political developments. Brent crude rose above USD 80 / bbl, a four-year peak, largely on fears about a fall in Iranian oil exports following the US’s withdrawal from the nuclear deal and sharp disruption to Venezuelan oil supply. US production has been increasing, but is coming up against capacity constraints. Based on oil futures, USD80 for Brent oil may not become the ‘new normal’, but a price premium over fundamental equilibrium could last for some time and needs monitoring for its effects on inflation, consumer spending etc.In Italy, the Eurosceptic slant of
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The CIO office’s view of the week ahead.
Dear readers,
A public holiday in Geneva on Monday means we are sending the Weekly View today instead.
This week has seen some unsettling events, including a rise in oil prices and Italian political developments. Brent crude rose above USD 80 / bbl, a four-year peak, largely on fears about a fall in Iranian oil exports following the US’s withdrawal from the nuclear deal and sharp disruption to Venezuelan oil supply. US production has been increasing, but is coming up against capacity constraints. Based on oil futures, USD80 for Brent oil may not become the ‘new normal’, but a price premium over fundamental equilibrium could last for some time and needs monitoring for its effects on inflation, consumer spending etc.
In Italy, the Eurosceptic slant of both parties set to form a government has been causing market volatility this week—even though the latest draft of their programme of government contains no mention of wanting to cancel part of Italy’s debt or hold a referendum on the country’s membership of the euro. Yet the putative government has ambitious fiscal plans that could put it on a collision course with Brussels. Unsurprisingly, Italian bonds have underperformed Spanish debt, a situation that could last for a while. In general, we remain cautious on European government debt for now. US bonds have also had a rough week, with 10-year T-bond yields now higher than during the 2013 ‘taper tantrum’.
News from the US has been more positive. Retail sales figures and business surveys show the economy has regained momentum after a disappointing Q1 GDP growth figure. Trade developments may also be going in the right direction. True, renegotiation of NAFTA looks likely to drag on for a while—and might be complicated by the Mexican election on 1 July—but at this stage we believe there is a good chance of a final deal that contains no more than some technical tweaks to the existing agreement. More positively still, China has been making some conciliatory moves in its trade talks with the US (even though an end agreement is some way off). A more settled trade picture would certainly go some way to reducing continued tensions in emerging-market debt. In the midst of some indiscriminate selling, we believe that individual EM bonds are becoming increasingly attractive, but will wait for currencies to settle down to move.
Cesar Perez Ruiz,
Head of Investments & CIO, Pictet Wealth Management