Qatar's sudden exile was years in the making; Theresa May erodes her own base; US consumers leverage up; Spain's banks pass a test.
"We now have a minority Conservative government that is in office but not in power"
Oil and gas: Qatar walling The recent boycott of major natural gas producer Qatar doesn't bode well for OPEC's continued struggle to cut back on energy production. The oil market agrees, with both Brent and WTI crude oil futures under continued pressure – Brent is trading at $47.87 and WTI at $45.71. Further damage was caused on Wednesday with the release of US crude oil and natural gas inventories – both showing some 6% growth week on week, and both well above five-year averages. The long-simmering inter-Arab struggle was brought to a boil by an allegedly hacked press release, and made worse by the US taking sides in the argument – against Qatar, where the US Central Command, and 10,000 US troops are based.
UK election: The center – can it hold? Now that Theresa May's snap election has put her position at the mercy of ten Northern Ireland members of the Democratic Union Party, the upcoming negotiations with the European Union (EU) on Brexit will be even more fraught. To the extent that Thursday's vote reflected a growing "soft-Brexit" consensus, that could make the talks harder, since the EU is holding fast to their "hard Brexit" stance.
So far, financial markets are neither shaken nor stirred, with the exception of the British pound, which traded down as much as 2.5% to $1.2636 against the US dollar before regaining some ground; sterling fell some 2.35% against the euro to €1.1287 at its intra-day low.
Fed: In the balance The futures market for fed funds is trading as if a 25 basis point hike at next week's FOMC meeting is all but inevitable. But all eyes will be on what the accompanying statement – and the press release – reveals about the disposition of the central bank's $4.4 trillion balance sheet, much of which was accumulated during and after the 2007-8 Global Financial Crisis and U.S. recession. Bond bears worry that a flood of supply unleashed on the market would drive portfolio values down and yields up, due to the absence of buyers of similar size. But it might be important to note that China's foreign currency reserves are growing again, suggesting that there might be at least one large customer waiting. For the Fed's part, the stated objective is to make any reduction as uneventful as possible; this week's press conference will reveal how successful that effort may be.
Spain: A successful failure Financial markets passed the first test of the newest high-risk contingent convertible bonds (known as CoCos), which had been issued by Banco Popular before it failed. As designed, the bonds failed as well – and the market for the remaining CoCos continued relatively unperturbed. For its part, Banco Popular was absorbed by Banco Santander, which paid a nominal €1 for the bank, and must now fund a €7 billion hole in the combined bank's balance sheet with a rights offering. That will leave Banco Santander with the single largest market share in Spain – some 20 percent.