The buoyant move up in stock prices over the last two weeks was based on the perception of lenient US trade measures. These perceptions produced a sharp U-turn yesterday as President Trump announced the imposition of 25% tariffs on foreign-made cars and car parts effective April 2. The panicky sentiment in the US stock markets from observed last night spills over to global equities this morning. The future remains worryingly uncertain. Another significant piece of this perplexing jigsaw puzzle will be revealed tomorrow when the pivotal US PCE data is released. It will provide hard evidence about inflation, or better say, whether the punitive measures introduced so far, chiefly on China, have had any adverse impact on consumer prices. And then, the first half of next week is expected to shed some light on how the US President assesses the economic developments of his 100 days in office, when he is expected to introduce reciprocal tariffs on trading partners and foes, the extent of which is obscure, to say the least.

Oil, on the other hand, ignored the souring mood in equities and concentrated on indisputable facts. The blanket 25% excise duty on countries buying Venezuelan oil has already slowed oil loading in the Latin American country and, since China and India are the largest Venezuelan oil importers, aided the Asian crude oil benchmark, Dubai gaining ground over Brent. In turn, the backwardation in the European marker remains solid and Brent CFDs are resilient. The across-the-board drawdown in the main categories of US oil stocks was deemed another bullish ingredient. So were the mutual accusations of breaking the Ukrainian-Russian ceasefire and additional Russian conditions of lifting sanctions, which the EU would not approve of. There have been fundamental justifications for the recent bounce in oil, yet one cannot help but conclude that it is the US trade policy that will be the ultimate and anxious judge of the direction of the next $10-$15/bbl move.

The Dollar Paradox

The macroeconomy has suffered three major crises in the last 20 years. The first one was triggered by the US subprime mortgage carnage in 2007. It led to a global financial Armageddon. The MSCI All-Country Equity Index lost 56% of its value between October 2007 and February 2009. The COVID-19 pandemic triggered a less muted panic as global stocks shed 13% of their values between December 2019 and April 2020. The loss was more pronounced (-35%) when the move is measured from high to low and is not based on monthly settlement prices. Then came Russia’s invasion of Ukraine, which considerably raised the fears of inflation. Consequently, stocks dived 27%.

Oil was not inoculated from these developments. Front-month WTI plunged 53% between 2007 and 2009. The damage from the high point reached in June 2008 was 68%. The pandemic-induced sell-off is still fresh in the memory as the US benchmark briefly plummeted into negative territory. The net loss, on a monthly closing basis, was 69%, much more severe than in equities as the twin impact of demand destruction and supply war took a heavy toll on oil. Energy prices understandably rallied in the immediate aftermath of the Russian incursion into Ukraine as the aggressor is a major oil supplier. However, when it became discernible that oil flows would be recalibrated but not cut, WTI plunged from $114.70/bbl in May 2022 to $68.10/bbl in May 2023 (-41%).
Growth concerns unconditionally and negatively affected oil demand in each of these three crises. It is an economic axiom that global growth is joined at the hip by the expansion in oil demand. Or better say, in times of hardship contraction results in falling oil consumption. What is curious to observe is that in the past three downturns listed above investors always found shelter in the warm embrace of the world’s reserve currency, the dollar – even in 2007-2008, when the US was the instigator of the collapse of risk assets. Its index against its major peers registered gains of, in chronological order, 15%, 3% and 17%.

It is premature to sound the alarm bell at a very high volume as the US administration only started to rewrite the geopolitical and geoeconomic order two months ago. The incoherent and chaotic policymaking, however, has not been lost on the markets and the inverse relationship between the dollar and stock/oil has been upended. It is an ominous sign or at least goes completely against the experience of the last 20 years. It seems as though that, and to borrow the words from yesterday’s note, trust is wearing thin. Since the February peak, equities, oil and the dollar have all weakened considerably (although the latest correction prior to yesterday’s sharp fall is deemed encouraging, hence the cautious approach to confidently foresee the next financial earthquake).

The dollar weakness at the time of ostensible economic turmoil is the unmistakable sign of the loss of trust and belief in the Trump administration’s handling of salient issues, political or economic. A vast amount of political capital was borrowed in the latest election campaign and now it is time to pay it back to voters and investors together with the tacitly agreed interest. America must be made great again beyond rhetoric, stock markets must be set on a sustainable upward trajectory, allies must be rediscovered and relied upon, and brazenly interfering with the judiciary must end. On the other side of every deal the greatest dealmaker in the world conducts there must be willing and not coerced parties, otherwise domestic and global trust and belief will further be eroded with inconceivable repercussions to the dollar, equities and oil. In addition to the immediate impact, further loss of faith will question the role of the dollar as the strongest and most reliable reserve currency.

Conventional wisdom says that a weak dollar is bullish for oil because it incentivizes consumption as the black stuff is cheaper in other currencies and for the same reason it discourages production. It is a reasonable assumption, yet it is a myth in the sense that it only works if or when a sufficiently large group or groups believe in it. Again, this belief seemed to have evaporated recently. The latest move higher might have insinuated that the trust in the US government was being restored but these hopes were shattered yesterday therefore we remain sceptical. This pessimism will only be proven mislaid if the dollar regains its mojo, or investor’s faith, due to constructive economic data, is re-gained reviving the optimism in a functioning Administration.

Overnight Pricing