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Purves on Oil and Implications for SPX (Audio) · Bloomberg Intelligence

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  Speaker 1: You're listening to Taking Stock with Pim Box and Kathleen
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  Speaker 1: Hays on Bluebird Radio Boil and oil prices, taking a
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  Speaker 1: look at what is in store for the future of
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  Speaker 1: crude oil. It is up more than one percent today
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  Speaker 1: dollars a barrel. Michael Purvis is the chief global strategist
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  Speaker 1: for Wheeden in Company and he joins us now. Michael,
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  Speaker 1: thanks very much for being with us. Tell us your
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  Speaker 1: thoughts on what is driving the price of oil right now? Well,
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  Speaker 1: it's not the dollar, you know, the dollar in crude
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  Speaker 1: and than you know, tight of the hit in so
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  Speaker 1: many ways for so long, but the dollar has not
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  Speaker 1: really been moving. It has a lot to do with
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  Speaker 1: and you know, certainly not inventories either. We had actually
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  Speaker 1: pretty bullish UM inventory report the other day. Um, what
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  Speaker 1: the overarching issues are are we going to be getting,
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  Speaker 1: you know, incrementally more supplied of Libya and Nigeria and
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  Speaker 1: and also the demand picture, whether the demand picture is
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  Speaker 1: really not going to be as robust um. You know,
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  Speaker 1: various oil analysts have have looked at whether the you know,
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  Speaker 1: the whole the larger you know, move above the sort
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  Speaker 1: of forty trading range is going to really get deferred
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  Speaker 1: further back, and I think that's also, you know, helped
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  Speaker 1: push down some bullish sentiment here. Okay, Michael, Well, your
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  Speaker 1: role as chief Global strategy, of course you're trying to
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  Speaker 1: applaud a lot of equity strategies in there, and I
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  Speaker 1: assume that's why you're so focused on oil right now.
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  Speaker 1: So take your view of oil and translate it to
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  Speaker 1: what it means for the US equity market. Well, if
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  Speaker 1: if oil is trading in the sort of forty to
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  Speaker 1: fifty range, it means a lot less. But when oil
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  Speaker 1: starts getting stressed um, in other words, down to forty
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  Speaker 1: and even below US didn't late July, that's when you're
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  Speaker 1: gonna start seeing, um, you know, the correlation of equities
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  Speaker 1: and crude oil to the downside and particular pick up there.
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  Speaker 1: So if you know right now it's oils um, you know,
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  Speaker 1: being tossed around a little bit, uh generally over the
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  Speaker 1: last few days, more down than up. But if it
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  Speaker 1: does push towards forty, then that's going to be yet
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  Speaker 1: another further headwind on on US equities. Michael Broader, US equities,
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  Speaker 1: not just the energy equities, okay, not just energy equities,
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  Speaker 1: and beg your pardon. Okay, So Michael, I'm what if
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  Speaker 1: you could speak a little bit maybe bring into the
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  Speaker 1: picture of the market volatility that we had on on Friday,
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  Speaker 1: and uh maybe just link that to what you believe
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  Speaker 1: is going on in the bond market right exactly, so
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  Speaker 1: you know, uh them over the last couple of years,
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  Speaker 1: that's really the dollar has been the sort of the
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  Speaker 1: key pivot asset for defining you know, risk off moves.
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  Speaker 1: If the dollar got too strong, that was really much
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  Speaker 1: more at work. And frankly, longer term interest rates were
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  Speaker 1: kind of you know, people were almost uh this sort
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  Speaker 1: of complacent about that being you know, everyone sort of
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  Speaker 1: thought they'd just be a lower a heck of a
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  Speaker 1: lot longer, even if we got some rate hikes. You know,
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  Speaker 1: the said moves the short term rates, but not necessarily
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  Speaker 1: the longer term rates. But what was really I think
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  Speaker 1: underscoring last ride. It was nothing to do with a
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  Speaker 1: September or even a December hike, which rather sort of
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  Speaker 1: the structural issues involved in the global bond market. And
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  Speaker 1: what was I thought very interesting to see is that
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  Speaker 1: if you looked at the ten year at UM futures
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  Speaker 1: contract for the Japanese tenure bond that started breaking its
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  Speaker 1: strengthening trend back and even early July and the aftermath
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  Speaker 1: of Brexit um and then you saw that follow through
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  Speaker 1: with the blond market in August and then again and
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  Speaker 1: that's ultimately flows to our tenure um uh in early September.
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  Speaker 1: And I think so you know, when you look at
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  Speaker 1: the treasury yields, the tenure yield climbing you know, uh,
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  Speaker 1: forty basis points since Brexit, a pretty major move that
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  Speaker 1: owes a lot to what's been happening overseas in Japan
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  Speaker 1: and Germany. Well yeah, and in fact, the bond strategists
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  Speaker 1: and traders are saying it has everything to do right
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  Speaker 1: now with the Bank of Japan being rumored to be
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  Speaker 1: ready to cut its key rate more negative of and
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  Speaker 1: uh not by as many long term bonds they want
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  Speaker 1: to flatten their yield curve. They don't. They don't want
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  Speaker 1: it actually want to step in the yiel curb. But
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  Speaker 1: it seems into a certain degree then the Bank of
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  Speaker 1: Japan is kind of taking the baton away from the Fed.
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  Speaker 1: But does that mean to extend this to stocks again,
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  Speaker 1: that equity traders are gonna start watching the Bank of Japan.
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  Speaker 1: I mean, seriously, does it really make that much difference
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  Speaker 1: to US stocks with the Bank of japandas well, Yeah,
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  Speaker 1: it does. I mean it is indirect. I mean the
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  Speaker 1: transmission mechanism for this. If the Japanese ten year puts
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  Speaker 1: upward pressure on yields in that market, and also the
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  Speaker 1: booned and treasury market, all these three markets tend to
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  Speaker 1: move together. The spreads between the bonds often don't change
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  Speaker 1: that much, but if the you have to keep you know,
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  Speaker 1: keep in mind that the equity pushed fresh hides we
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  Speaker 1: got this summer was really largely helped driven by the
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  Speaker 1: by the record lows and the senior treasure yields we have.
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  Speaker 1: We would not have those record lows and the senior
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  Speaker 1: treasure yields without this extreme movements in in appanees and
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  Speaker 1: and also German bunds. So if that whole um cork
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  Speaker 1: is going to pop to the upside there and I'm
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  Speaker 1: not saying it is, but that is really the risk
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  Speaker 1: that if we start seeing that that whole yield environment
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  Speaker 1: in Japan really start moving higher, there's no question that's
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  Speaker 1: going to flow right into equities, and those these are
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  Speaker 1: the it's it's a different set of questions that need
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  Speaker 1: to be asked an answered. For the respect to the
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  Speaker 1: ten year moving higher than it is with the dollar
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  Speaker 1: moving higher. Well, if that's the case, Michael Purvis, are
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  Speaker 1: we going to experience continued moves higher in volatility? And
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  Speaker 1: if so, how can investors profit? Well? I think you
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  Speaker 1: know right now, you know, after last Friday sort of
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  Speaker 1: jarring wake up call to the end of summer with
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  Speaker 1: the volatility really expanding, I think look that, you know,
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  Speaker 1: when you look at the VIC surface um across the
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  Speaker 1: VIX curve and you look at where the VIC is
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  Speaker 1: likely to be, it's probably going into a higher place
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  Speaker 1: because it's not just about the ten ure yields. It's
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  Speaker 1: of course about elections in the in the United States
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  Speaker 1: November's and it's also about the fate of our you know,
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  Speaker 1: economic progress and of course uh interest rate hikes. Right,
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  Speaker 1: So you put that all together, it's hard to imagine
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  Speaker 1: the VIX is going to be in that sort of
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  Speaker 1: twelve to fourteen range for too long in the in
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  Speaker 1: the coming weeks there um, And I think what what
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  Speaker 1: the question about the Bank of Japan and the ten
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  Speaker 1: year yields? The domestically and globally really raises is jeez,
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  Speaker 1: you know, can can we really get a two thousand
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  Speaker 1: thirteen paper trans from again? Okay, Michael Purvis, thank you
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  Speaker 1: so very much. Cheap global strategist, connecting the dots around
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  Speaker 1: the globe for oil, for stocks, for bonds, and the dollar.
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  Speaker 1: Chief global strategist at Wheaton. I'm Kathleen Hayze Long with
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  Speaker 1: pim Fox. This is Bloomberg