Rational Analysis Notwithstanding

Seldom do we find our view of overall general conditions as inline with one of our research providers as it is presently with that of MRB Partners... I.e., the following snippets from their latest research report should sound very familiar to clients and regular blog readers:  

emphasis mine...

"The tight correlation between oil prices and global financial asset markets continues on a daily basis, subject to the ever-changing odds of a deal to re-open the Strait of Hormuz."

"Rational analysis points to a deal as high oil prices and, especially, dwindling supplies, have the potential to derail the global economic expansion, or at least undermine some significant parts of the global economy. Still, it may take a bout of risk-off to finally conclude an agreement to at least re-open the Strait (with an all-encompassing deal a long way down the line). It seems that whenever the U.S. equity market and economic data show resilience, the U.S.’ urgency to reach an agreement diminishes. 

The stalemate in the Strait has pushed global energy markets toward a potential tipping point that could increase anxieties over depleted global stockpiles. A scenario in which physical shortages of oil and other commodities necessitate rationing would likely trigger an economic growth scare and a risk-off phase in equity markets. 

So far, global bond markets have reacted to the ups/downs in oil prices via their link to headline inflation, rather than factoring in the demand destruction risk related to the current supply-induced shock. Headline inflation is indeed firming as higher energy prices show up in the data, and some central banks are mumbling about tightening policy in response to higher headline rates. 

However, the far more important issue for asset markets in the year ahead and beyond is: what is the underlying trend in developed market (DM) inflation?"

"A continued global economic expansion will spur higher inflation over time, first to the detriment of bond markets, and then to risk asset markets further down the road."

"More ominously for risk asset markets, DM bond yields have significantly diverged from policy rates since early-2025 (panels 4 and 5). Some of the recent rise in yields should unwind when the Strait is re-opened and oil prices settle lower. 

However, the underlying uptrend in yields will persist, as bond bulls and central banks belatedly realize that they are again offside on their inflation forecast. We would reduce duration exposure as yields ease in the near term."