Strange bedfellows: Soft oil, higher yields and strong risk – Deutsche Bank

According to Alan Ruskin, Macro Strategist at Deutsche Bank, risk appetite and most FX carry trades will not be knocked off course by lower oil prices as the scale of the adjustment in oil prices is modest, and like the USD is trading at levels that the US/global economies, and, markets like high yield, have already adapted to.  

Key Quotes

“Softer oil prices are a function of strong supply and not weak demand, and represent a mini supply side shock that is positive for global growth.”

“Lower oil prices will likely suppress the rise in inflation expectations, but oil’s link to US real yields is very weak, and without a much larger oil price decline, should not pull US nominal yields down. We believe Trump’s fiscal policy and ECB/BOJ QE policy will be far more important for real yields.”

“With lower oil prices not pulling down US real yields and not acting as a big drag on risk appetite, the JPY should not benefit nearly as much as it has in some circumstances when oil prices have declined in the past.”

“Rather than oil, the much bigger concern for Risk Appetite relates to a growing apprehension on the scale, composition and timing of Trump’s reflationary policies, notably fiscal reform.”