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Oil surges on Saudi purge

Oil surges on Saudi purge, Reserve Bank of Australia on deck, and Trump heads to Seoul. Here are some of the things people in markets are talking about.

Oil’s Well

(Bloomberg) Brent and West Texas Intermediate futures jumped to their highest levels in more than 28 months on Monday. The purge of princes, current and former government officials, and high-level businessmen in Saudi Arabia – in what the kingdom’s attorney general described as  “phase one” of an anti-corruption drive – was cited as the proximate cause for the rally in crude. Investors have been getting enthusiastic about the commodities complex, with weekly inflows into the PowerShares DB Commodity Index Tracking Fund hitting their highest level in more than three years.

Aussie in Focus

The Reserve Bank Australia will release its interest rate decision at 12:30 p.m. Tokyo time on Tuesday. Economists surveyed by Bloomberg unanimously expect Governor Philip Lowe to keep rates unchanged at a record low of 1.5 percent amid sluggish inflation and softening consumer spending. The aussie has been on the back foot against the greenback recently despite the strong performance of iron ore, as the Federal Reserve’s policy rate is seen catching up to the RBA’s within a year. Also due out: Japanese wage growth, forecast to rise 0.5 percent annually as of September, but remain in negative territory after accounting for inflation.

Up Next: Seoul

U.S. President Donald Trump heads to Seoul on Tuesday for the second stop in his Asian tour, where he is expected to address South Korea’s National Assembly on Wednesday to discuss what can be done about the nation’s northern neighbor. Trump enjoyed a cordial visit in Japan with his counterpart, Prime Minister Shinzo Abe, that didn’t see any concrete progress towards rebalancing the two countries’ trading relationship. The president did push Abe to purchase U.S. military equipment to simultaneously bolster the American economy and Japan’s defenses.

Record Highs

The S&P 500 Index, Dow Jones Industrial Average, and Nasdaq Composite Index all set fresh all-time closing highs to start the week, with tech heavyweights and energy shares pacing gains. The U.S. dollar was the worst-performing G-10 currency, while 10-year Treasury yields retreated towards 2.3 percent. Citigroup and Twitter, two high-profile U.S. holdings in the investment vehicle of billionaire Saudi Prince Alwaleed bin Talal – who was among those arrested this weekend – lagged their peer groups. It’s shaping up to be a busy week for tax reform, with lawmakers and lobbyists set to seek changes to the plan recently unveiled by Republicans. Meanwhile, Goldman Sachs is warning that bitcoin, which fell by more than 1 percent on Monday, is due for a consolidation phase in the event it hits $8,000.

Futures Mixed

Nikkei 225 futures are marginally lower ahead of the open while S&P/ASX 200 futures are trading to the upside after both gauges were little changed to kick off the week. The continued rebound in iron ore bodes well for Aussie indexes, which boast some of the world’s largest producers.  Investors will also continue to watch Softbank Group, which fell 2.6 percent on Monday after talks to merge Sprint with T-Mobile completely fell apart.

 

And finally, here’s what David’s interested in this morning

 

When you look at your hand underwater, the image is warped, distance is distorted but you can be sure that your hand is still there. This might be a useful way to look at one of the financial world’s great debates – whether the flattest Treasury yield curve since the crisis is in fact telling us the next one is right around the corner. Callum Henderson, formerly of Standard Chartered and Bank of America and currently Global Markets managing director at Eurasia Group, told us on the show that a recession doesn’t look to be imminent. Certainly, recent growth indicators suggest the world is the furthest from one than at any time in the last decade. But since markets are massively overweight high-beta assets, he says it’s even more crucial to pay attention to the warning signs.

The distress-signaling ability of a flattening curve might simply be distorted by the presence and perceived continued presence of major central banks in the bond markets. It doesn’t mean it’s wrong. Think Dory in Finding Nemo – not the sharpest fish in the sea. Her massively short memory span means hers was a problem of lag and perception, not of the shark not being where it was. Once the distortions in the water start to clear, and that may well be a 2019 story, the question is how quickly things recalibrate and whether the flat curve of 2017 was in fact telling us danger was ahead.

 

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