Conditions have not improved, they are just less bad than the worst-case projections

Outlook:

The FX market is making up its mind about risk-on or risk-off. We have conflicting evidence. Equity index futures are up, oil is up, the 10-year yield is up, at least a little. Pandemic cases and deaths are falling, at least in the big picture if not in certain places like Texas. US data is bad but not as bad as Europe and Japan, whose data is worse than forecasts while one important US number, jobless claims, is also worse than forecast but less-bad than earlier reports. In a reality check, conditions have not really improved—they are just less bad than the worst-case projections.

The dollar is weaker against the AUD and Chinese yuan, and wobbly against some others. Are we getting a pullback? Maybe not, and if you sold dollar late yesterday, you may get your head handed to you this morning. The leader, the AUD, has stalled. The euro has turned around and is on the way back up after making a lower low but bears failing to hold it. Today can be roily.

Something bothersome may or may not have an effect on the dollar. That's the fiction being fed to us about oil. Looking at prices, we would normally deduce this is a market in the grip of delusions. WTI rose over 4% yesterday and continued to rise last evening ($17.19 at 7:15 pm ET). It has retreated this morning but still fairly robust. What can they be thinking? "Thinking" is the wrong word. It's denial of current conditions and expected conditions. Also at least a little delusional, or maybe a little mad, is Saudi Arabia sending 40 million barrels of oil to the US, as reported last week in the WSJ. The number of the giant tankers differs from story to story—it's somewhere between 19 and 24, and the amount of oil may be as high as 50 million barrels. The Wall Street Journal reported that the amount of oil headed to the US was seven times the normal monthly amount.

Earlier on March 7, Bloomberg noted that Saudi Arabia was snapping up tankers as the deal with Russia was failing. At the time they had hired 25-30 tankers and by now, presumably more. "The cargoes in question would be enough to supply France for about a month." We thought it was about punishing Russia and driving prices down to the point where Russia would obey. No, it was the Saudis intending to swamp the world with oil as a tactic to drive others out of business, especially US producers.

Or at least that's the story the press has bought and is selling on to us. But the story is full of holes and doesn't hold water.

As the ships get closer, though, there are rumblings in Washington that Trump will impose a gigantic tariff or forbid the ships to dock. We can't find any information about what purchase contracts are behind the shipments. Was Saudi Arabia just hoping to find a buyer once they hit the US coast? That's not how international trade works. Aramco is saving face by pretending that re-routing is often done in the oil business, but that's improbable. Those ships cost hundreds of thousands of dollar per day.

Aside from the bizarreness of sending seven times as much oil as usual to a country that seemingly didn't order it, did the Saudis not notice that the pandemic was shutting down the world economy? Now they have to pay all kinds of fees to the shipowners... an expensive oversight. What a coincidence that the only other high-level powerful guy who didn't see it coming at end-Feb is Trump.

This story stinks to high heaven. What's going on? One interpretation is that the US and Saudis made a deal to buy extra Saudi oil (for whatever reason) and now the US is defaulting on the deal. The Saudis are keeping mum because they don't want to allow a precedent. Second, we are supposed to believe the Saudis do not expect a tariff or refusal to dock from Trump, when that is precisely his modus operandi. The Saudis would have to be stupid not to have anticipated this response if they really were forcing extra oil on the US, and they may be many things, but stupid is not one of them.

The other Saudi "mistake" is not noticing that the pandemic would collapse the world economy. At the time the ships were hired and loaded, we already knew about the pandemic. On March 5, the Dow fell 970 points. The next day, the 10-year note yield was 0.926%. We already had a section in this report named "Coronavirus Watch" (global cases were 98,512 with 233 cases in the US on March 6 vs. 2.703 million last evening). Only people who don't read newspapers or watch TV didn't know this was going to happen. We know that Trump is among the very few in denial well into March. The Saudis are not stupid or uninformed. The Saudis do not buy and lease supertankers to ship oil to people who didn't order it.

There is something nefarious going on behind the scenes here. What role Trump is playing is not known but this has the potential to be just as dirty and shocking as blindsiding and extorting Ukraine. This time it looks like Trump is betraying the Saudis, who obviously didn't ship millions of barrels of oil that nobody ordered.

We have written several times that the equity gang is in the same boat--denying that earnings will be crashing and the outlook does not support current prices. What about the bond boys, more closely related to FX than any other sector? Well, they seem to think the benchmark yield will not fall below the Fed funds rates, and the Fed funds rate is expected at 0–25 bp to the last FOMC meeting of this year. There are no cohorts predicting and betting on negative rates. In fact, the usual criticism of the Fed, that it's behind the curve, is not being heard these days. And the 2-10 year yield curve is still a positive number. See the St. Louis Fed chart. We are not sure what this means. Evidently the bond market is not terrified out of its wits, either. But with the forecasts of contraction as grim as they are, and possibly understated if we get a second wave of coronavirus cases in the fall, as the experts fear, how can we not expect negative interest rates, a crashing stock market, and oil at $10?

Trump wants to do everything in his power to prevent an actual recession, defined as two quarters of negative growth. Q2 will likely be -10-11% so that puts all the weight on Q3, which is July-Sept and just ahead of the November 3 election. In addition to avoiding the formal recognition of "recession," he wants to keep the stock market up and the base distracted from the real economy. We already saw a distraction in the form of threatening to shoot Iranian gunships that harass US ships. The next one is likely declaring force majeur against those Saudi oil supertankers docking, or imposing a tariff.

The Big Picture shows that the world is going to hell in a handbasket. Longer-run, the dollar benefits. But we will get pockets of risk-on sentiment as we seem to be getting today that is based on data not as bad as expected or not as bad as earlier data. This is a soft reason to dump dollars. Be careful buying into risk-on.

 

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This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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