by Jean-François Jolivalt, Multi Asset Fund Manager, La Française
Geopolitical uncertainties have come back to the table after American killing of top Iranian general Qasem Soleimani. Oil and Gold surged on the news. The price of a barrel of Brent, the benchmark for northern European oil, came close to $70, flirting with the 2019 peak (Source: Bloomberg). Gold is back to $1550 per ounce, its highest level since 2013 (Source: Bloomberg). It also translated into a typical bid for safe-haven assets such as the Yen and government bonds which all rallied the following day.
This latest development in US-Iran relations follows last September’s attacks on Saudi ARAMCO facilities and on other Saudi energy infrastructures attributed to Iran. Markets were spooked, expecting disruptions in oil supply from the top producing region. A few days after US strikes were announced, Iran retaliated sending rockets on an Iraqi military base. This Wednesday, US President Trump publicly downplayed the whole situation looking to de-escalate hostilities with Iran.
At this stage, oil market fundamentals have not changed. Excess supply, thanks to the US shale-drilling boom and weak growth in global demand, is still our base case. In other words, oil should keep flowing abundantly. This should limit price increases. In this context, these dramatic events should have no major impact on the global economy. Our baseline economic scenario for 2020 is one of a mild pick-up with a slow and steady growth, low inflationary pressures and accommodative monetary policy.
Having said that, recent oil market volatility is occurring against the backdrop of increasing energy prices over the past several months. The primary reasons behind this move are:
1/ Markets are pricing out a number of tail risks, especially those related to Brexit and the US-China trade war dispute;
2/ Better economic data around the world suggests that a recession is no longer in the cards. Like any other risky asset, oil increased in tandem in a so-called optimism/reflation trade.
The way forward is however still uncertain as further tensions cannot be ruled out. Any escalation could certainly trigger a sharp increase in oil prices which would ultimately weigh on the global macro outlook. This supply-side driven price increase should decrease global capex, hit consumer demand and impact oil importers, especially EM countries with current account deficits. This scenario could bring significant deflationary pressure given reduced demand. It could lead to a strong central bank response and rates would likely continue their way down.
Disclaimer
This commentary is intended for NON-PROFESSIONAL investors only within the meaning of MiFID II. It is provided for informational and educational purposes only and is not intended to serve as a forecast, research product or investment advice and should not be construed as such. It may not constitute investment advice or an offer, invitation or recommendation to invest in particular investments or to adopt any investment strategy. Past performance is not indicative of future performance. The opinions expressed by La Française Group are based on current market conditions and are subject to change without notice. These opinions may differ from those of other investment professionals. Published by La Française AM Finance Services, head office located at 128 boulevard Raspail, 75006 Paris, France, a company regulated by the Autorité de Contrôle Prudentiel as an investment services provider, no. 18673 X, a subsidiary of La Française. La Française Asset Management was approved by the AMF under no. GP97076 on 1 July 1997.