The Organization of the Petroleum Exporting Countries and its partners (OPEC+) have agreed to increase oil supply by 0.4 million barrels per day (mb/d) each month from August to December adding a total of 2mb/d by the end of the year. Remaining production cuts of around 3.8mb/d will be brought back online gradually by September 2022. This was expected and already priced in by markets before the last round of talks ended in a stalemate at the start of July. What is more important, and perhaps unsurprising still, is that United Arab Emirates (UAE), Iraq, Kuwait, Saudi Arabia, and Russia have been granted a higher ‘basis’ to calculate their pandemic supply cuts from. In other words, these countries have been given higher supply allowances to reward them for all the investment they have made in expanding their capacities. This deal settles the discord within the group, for now, and raises the prospect of an additional 1.6mb/d of oil ultimately flowing into the market due to the increased allowances.

The year started with value stocks delivering strong gains before growth stocks started to catch-up in the second quarter of the year. The recovery in growth has yet to help lift emerging markets which continue to reel from Delta variant concerns and broadly flat performance in Chinese stocks in recent weeks. US equities, in the meanwhile, have extended their lead over emerging markets (and most other developed markets too) with information technology and consumer discretionary sectors leading within the S&P 500 Index over the last month.

Delta variant, global economic growth concerns, and ongoing dovishness from the US Federal Reserve are the key forces in play keeping US Treasury yields from rising. On 19 July, 10-year US Treasuries briefly fell below 1.2% for the first time since February. In context, 10-year Treasury yields were hovering around 0.5% around this time last year and rose to around 1.75% towards the end of March this year before declining again. 

Gold’s gains in recent weeks are a function of three things: 1. Gold’s strong adverse reaction to last month’s Federal Reserve (Fed) meeting created an attractive entry point for many investors. 2. Rising inflation numbers from major economies around the world are reinforcing the importance of inflation hedges. 3. Growth concerns have helped lift defensive asset classes including Treasuries, US dollar, and gold in recent weeks. As a result, net speculative positioning in gold futures has bounced back in July.

In the month between 15 June and 14 July, the MSCI World Growth Index outpaced the MSCI World Value Index by nearly 6%. This is in stark contrast to the first five months of the year when value strongly outpaced growth. Among geographies, this pro-growth rally has been evident in the strong performance of US equities although emerging markets continue to be held back. Emerging market equities face headwinds from relatively slower than expected Chinese growth, Delta variant concerns, and stable US dollar.

The growing risk of the Delta variant derailing the ongoing global economic recovery is getting priced into US Treasury yields. US Treasury yields have remained low despite the most recent US reading of 5.4% year-on-year Consumer Price Index inflation in June. While equities have not pulled back materially in recent days, growth concerns are becoming apparent through low US Treasury yields and strengthening US dollar. 

Despite widespread concerns among investors regarding rising levels of inflation, US Treasury yields have retreated further at the start of July dropping below 1.3% (as of 07 July) for the first time since February. The US dollar, however, has been relatively stable after making gains during the month of June. As of 07 July, the US dollar Index stands just below 93, compared to just under 90 at the start of June (Source: Bloomberg).

The surge in commodity prices is stoking concerns of higher inflation being passed onto the consumer in China, the world’s largest commodity consumer. This was evident after China’s producer price index, which is strongly correlated with commodities prices, surged 9% in May to the highest level since 2018. China’s recent efforts to dampen commodity speculation has cooled the metals rally to some degree but reflecting on their attempt back in 2010, we expect it to be short-lived considering the loose monetary policy worldwide and the large stimulus packages in the US. More details here. 

Falling US Treasury yields indicate that markets expect the US Federal Reserve to gradually normalise its ultra-accommodative monetary policy. The recent compromise from the Biden administration on the proposed infrastructure plan (slimming it down to $1trillion from the previously proposed $2.3trillion) has potentially eased some nerves among those contemplating inflationary pressures in the coming months. Tech stocks have been the biggest beneficiaries of this in recent days.

Aluminium futures have risen sharply in the last week of June as news of a potential export duty in Russia has emerged on aluminium, nickel, copper, and steel. Russia is the world’s second-largest aluminium producer after China and the export duty has raised concerns that Russia might export lower quantities of the metal from August. Aluminium’s futures curve has gone into sharp backwardation between September of this year till 2026 (Source: Bloomberg). This signals potential tightness for a protracted period.