Oil recorded impressive gains last week, but bond prices weakened. Equities were stable, notwithstanding the sensational but anticipated fallout between the world’s most powerful man and the richest one. The charade could be easily dismissed as a clash of egos, nonetheless it lays bare the consequences of a plutocratic administration headed by those from the private sector. It also confirms the suspicion that this is a government of the people, by the people and for the people no longer, also embodied in deploying the National Guard in LA protests over the weekend. The grotesque public spat between Donald Trump and Elon Musk, with all its possible adverse economic consequences, serves as a reminder that it will take an awful lot of work, competence and common sense to regain the trust of investors and improve the bleak approval rating of the electorate.

The optimistic view on oil, in addition to sanguine stocks, can be explained away by short-term supportive factors on the supply side, such as the Canadian wildfires affecting around 300,000 bpd production and the explicit and cynical reluctance of Russia to start peace talks with Ukraine. The $3.7/bbl advance ignored the Saudi determination to claim back a substantial share of the market or the hefty swelling of US oil inventories.

Given the quality of economic data last week, the resilience of equities is somewhat perplexing. The OECD cut its global growth forecast with the US outlook particularly disheartening. Worldwide factory activity was subdued in May. It contracted in Japan, South Korea and China whilst in India the sector’s growth slowed to a three-month low. Eurozone PMI stayed under 50 in May whilst in the UK it is also below the critical threshold, which separates contraction from expansion. In the US not only did manufacturing activity plummet but the service sector unexpectedly shrank last month. Concerns about inflation rose as suppliers’ delivery time lengthened due to supply chain bottlenecks. The labour market in the world’s biggest economy is getting looser as mirrored in the unexpected rise in initial jobless claims, the less-than-forecasted increase in private sector employment and Friday’s nonfarm payrolls, which came in above expectations but below the April reading. US trade deficit significantly narrowed in April, ostensibly a welcome development, after all, it is one of the declared objectives of the Administration. It is, however, notable that the reduction was driven by a 16% fall in imports, which a.) makes it arduous to finance the planned tax cuts, if the bill is enacted and b.) will increase inflationary pressure. To wrap up this round of economic data it is worthwhile noting that the ECB cut the costs of borrowing, whilst the Fed declines to bow to the pressure from the President. The interest rate gap between the US and the ECB (and others) is comparatively wide. This should support the dollar, only it does not. Its index is reluctant to break back above the 100 mark and recorded a slight loss last week. It is an ominous sign, which entails continuous misgivings about US economic policies.

So, is this buoyancy sustainable? Forecasting is notoriously challenging and proves inaccurate more often than not. There is a wealth of examples of the lack of foresight. Is there anything that we do not see, just like historians failed to predict the fall of communism, economic consultants the 2007-2008 financial crisis, pollsters the first Trump win and oil analysts WTI falling to negative territory in 2020?

It is a simple question with a simple answer: the end of the trade war. Will it intensify or will it de-escalate? Anton Chekhov, the brilliant Russian playwright believed that in a play ‘one must never place a loaded rifle on the stage if it isn’t going to go off. It’s wrong to make promises you don’t mean to keep’. In the US of 2025, this gun is trade. It is on stage but has not been used to its full capacity and when it was utilized, it mainly fired blanks, but we are only watching (and participating in) the first act. The most salient question in the coming months will be whether it will turn into a weapon of economic destruction and if it will, whom it will be aimed at.

The trade war is far from being over and is unlikely to be settled soon. Donald Trump cannot afford to backtrack and as such lose face and reputation amongst hard-core supporters. It is, nonetheless, implausible that every foe and friend will be in the crosshair of this metaphorical gun. The absurdity of blanket tariffs (defying its own purpose and punishing even those the US runs a surplus with) will meaningfully narrow the number of possible targets. Allies, including the EU, which is currently facing the triple threats of trade, defence and Ukraine from the US, will probably be able to come to mutually acceptable agreements by making concessions that can be sold as success back home.

China, on the other hand, is a legitimate target for two reasons. Firstly, its unfair practices of state subsidies must be countered, and the playing field must be levelled. Secondly, it is one of the two biggest economies in the world, consequently a fierce competitor of the US in the battle for global hegemony, and poses considerable threats to national security, unlike, say, Canadian steel. Notwithstanding the affable phone conversation between the two leaders last Thursday, which triggered the end-of-week equity and oil rally, and will be followed up by trade talks today, it would not be surprising at all to see the acrimony grow between these two juggernauts. Strong equities will embolden the US President (although bond yields might make him or his acolytes cautious) to play tough. China will not have the pressure from the electorate to cave in. The consequences will be potentially severe, leading to inflation + recession = stagflation in the US. China’s economy would equally suffer forcing it to look for alternative markets, a fancy phrase for dumping. This, in turn, will raise trade tension between China and its trading partners and inevitably create economic turbulence.

Although last week’s performances of assorted risk assets insinuate unbroken optimism that an equilibrium will be found, the above scenario envisages widespread economic chaos. The silver lining is that as the US approaches the midterm elections of November 2026, resistance to the inflationary and recessionary trade policies and the US budget will grow amongst Republican lawmakers and voters. Until then, however, the outlook remains bleak, equities should reverse their upward course, bonds come under renewed pressure, the dollar remain depressed, and the global oil balance register a supply surplus. The stock and oil market clearly disagree with us whilst we get a thumbs-up from bond and dollar investors. Even if the above reasoning sounds compelling, critics can take heart from the axiomatic observation that analysts are rarely correct.

Overnight Pricing