The Daily Dose; You Might Not Like “Normal”

-Geopolitical tensions return with a vengeance.

-Market perceptions collide with market reality.

Geopolitical tensions collided with economic pitfalls to drag on crude oil prices in early Friday trading. On Thursday, the White House spelled out a decidedly competitive policy on China, arguing US interests must be protected against Beijing’s ambitions of reshaping international norms. In the economy, the US federal reserve chief warned of uncertainties ahead and China held a general policy meeting without setting a target for GDP for the first time in 30 years. For India, the country’s central bank estimated growth would still be in negative territory next year. The rally in crude oil prices has been stunning so far in May, but perceptions of a sharp rebound to normalcy are butting up against reality.

Brent crude oil is set to end the week in positive territory, though weekly gains have ebbed from the 17% jump during the first full trading week of the month. The week of May 18 started with a 7% bounce in Brent, but economic and geopolitical tensions finally caught up with the market. Brent as of 8 a.m. ET was down some 3.6% to trade at $34.75 per barrel.

During a visit to the battleground state of Michigan, US President Trump saw the reopening of the state’s manufacturing centers as a sign of great things ahead for the US economy. There will be an “epic comeback,” he said during a tour of a Ford plant near Detroit. That came as another 2 million Americans filed for unemployment claims for the week ending May 15. Federal Reserve Chair Jerome Powell, meanwhile, said the economic disparity for US taxpayers was growing, the retraction was severe and the road ahead was uncertain.

“In addition to the economic disruptions, the virus has created tremendous strains in some essential financial markets and impaired the flow of credit in the economy,” he said.

Though an improvement from its mid-May guess of negative 42.8%, the Atlanta Fed revised its estimate for second quarter GDP to show a 41.9% contraction. Minutes from the April 30 meeting of the European Central Bank, meanwhile, suggested it was unlikely the euro area would experience a V-shaped recovery, with regional GDP declining by as much as 12% for the year. The amount of uncertainty ahead, the minutes read, was “radical” and the risks were “unquantifiable.” India’s central bank, for its part, said the economic impact from the coronavirus pandemic was more than expected and GDP growth would stay negative in 2021.

Optimism reigned supreme for most of May as producers slashed oil output, both voluntarily and under market strain. Demand destruction left storage levels close to the brim, though curtailments added up last week for a 5 million barrel draw from Cushing, the delivery point for US crude. Calendar spreads confirmed the trend, with tightening easing the oversupply concerns. And road travel is improving as most major economies move past peak infection rates of the coronavirus. Easing concerns about the pandemic, however, have opened room for the return of geopolitical strains. China’s tightening grip on Hong Kong and US praise for Taiwan’s leadership rekindled tensions between the two economic giants. US economic warfare on Chinese technology, meanwhile, has raised questions about the durability of the nascent trade deal that ended 18 months of turmoil.

The coronavirus pandemic erased the political and economic memory of most commentators. The Sino-American trade war threatened to upend one of the largest expansions in economic history. And while equities rallied hard, the problems on Main Street continued. Last year, the threat of open conflict between the United States and Iran was real. A Washington Post journalist was killed without consequence for criticizing Saudi Arabia and the rise of nationalist and populist leaders threatened to reshape the international order. The Syrian civil war continues. The global pandemic has left many wanting for a return to normalcy. Be careful what you wish for.


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