Oil prices ended a third consecutive session in the green yesterday, with WTI Oil and Brent Crude clocking highs of US$78.00 and US$85.00, respectively. WTD, both markets are up by around 15%, with near-40% gains YTD. The real issue right now, of course, remains the Strait of Hormuz, which accounts for about 20% of global Oil flows, and has seen most maritime traffic come to a halt.
As far as I understand, the Strait is not ‘officially’ closed; it is more a case of shipping companies avoiding the waterway for obvious reasons, and insurance companies either pausing coverage in the region or, for those still offering insurance, raising premiums to unaffordable levels. President Donald Trump has announced that the US will provide coverage and insurance guarantees for tankers navigating the Strait, which offered some relief. But it is still early days, and until tankers are moving again, I expect Oil prices to continue higher.
Yields, Fed Speak, Currencies, and Gold
US Treasury yields bear flattened on Tuesday, rising for a second consecutive session. The 10-year yield settled at around 4.06%, the 2-year at 3.51%, and the 30-year at 4.71%, as traders continue to pare back expectations for a Fed rate cut. As of writing, money markets are fully pricing in a 25-bp rate reduction in September, though July still has around an 80% probability.
Fed speak made the airwaves yesterday, with a cautious message, stressing data dependence and signalling that rate cuts are unlikely in the near term, which is clearly reflected in money markets right now.
In the FX space, the USD continued to welcome fresh bids, benefitting from its safe-haven status, with the USD index adding 0.5%. Even as some investors believed that Trump’s policies would diminish the currency’s global importance, the USD remains king and a standout in times of market turmoil. Interestingly, EUR/USD risk reversals have recently cratered, showing that EUR puts are more expensive than calls in implied vol terms. As shown in the chart below, the market is paying a higher premium to hedge the downside risk in EUR/USD right now.
