Good morning,

Oil bid up on demand and confidence

The oil story dominated markets yesterday with prices rebounding smartly through the day. A barrel of crude was 7% lower at one point yesterday but recovered to finish only down 0.6%. In the longer term we have to think that prices will remain supported as global demand catches up with a decreasing level of oversupply.

The increase in prices and maybe more pertinently, a lack of a collapse allowed equity markets higher and took some of the risk out of the air.

Commods get a run but a slap may be forthcoming

The dollar has slipped overnight across the board and while some of this will be driven by a rising oil price there are noises out there that suggest that volatility is likely to pick up through the summer.

The big mover has been the Reserve Bank of Australia which has underscored the belief that the AUD is needlessly strong, blaming a rebound in commodity prices and the slackening of rate expectations around a Fed hike. “Members noted that an appreciating exchange rate could complicate progress in activity rebalancing towards the non-mining sectors of the economy,” the minutes told us.

USD itching for a rebound

Likewise, Fed member Rosengren told reporters yesterday that he and private sector companies see a “much healthier US economy” than what interest rate expectations markets are currently pricing in. “The very shallow path of rate increases implied by financial futures-market pricing would likely result in an overheating that necessitates the Fed eventually raising interest rates more quickly than is desirable, which could endanger the ongoing recovery and continued growth,” Rosengren said last night although the US dollar has paid little notice. The disappointing inflation number last week is still lingering one feels and we will have to wait for a turn in the data for USD strength.

That being said a sudden repricing of a rate hike could be rather spicy; there is only a 13.7% chance of a hike in June and a 35.8% chance of a move in September. That’s a lot of room to run.

Remain ekeing out more of a lead

Here in the UK the argument over whether the Treasury’s analysis of a £4300 per year hit to households in the event of a Brexit has boiled down to the belief that while the numbers are likely inaccurate the overall trend is probably in the right direction. I highlighted yesterday that there is an inherent danger to all of this. The Treasury expects an exit from the EU to cost households 6 per cent by 2030, compared to what they believe households to be earning in 14 years’ time should we stay.

Given that we are voting in a little over 9 weeks’ time on our future in the EU I believe that there is a jump in logical expectations to forecast that the European Union will be exactly the same in 2030 not to say that oil prices will be within normal expectations, that a devastating tsunami hasn’t washed Indonesia away or a war with ISIS hasn’t begun.

The value of the analysis comes in the fact that slower growth in the short term will hurt but we are unlikely to know by how much and for how long and until we are in the midst of it. Such is life, such is economic forecasting.

The Remain camp will be happier than Leave this morning simply by the fact that a new telephone poll released overnight has given those wishing to stay a 9 point lead. Maybe Cameron’s leaflet actually worked?

The Day Ahead

The data calendar is quiet today apart from German ZEW and US housing starts at 10am and 1.30pm respectively.

Have a great day.