Australian Bond Exchange

Forget “ScoMo” and the future of budget forecasts, the real development last night was the removal of the Iran deal, and the oil price, as indicated below,

Overnight Oil Price
Overnight Oil Price

As Senator Richard Durbin said in a statement. “This is a mistake of historic proportions.” One needs to stop and really consider this … although the market has anticipated this development in the oil price.

The market tried to short an elevated oil price, or take profit on the rumour of this development occurring, however, the short appears to have backfired. The removal seems to favour the Saudis and the Saudi ambition is not for lower oil prices. If anything, sanctions will reduce volumes, and that may well be why the oil price has been rallying for some time, apparent from strong Asian demand.

Overall, the resilience of demand for oil appears to be a rather positive sign for the global economy; and not the best news for inflation. Selling holes like this usually indicate market positioning, and it looks like the market is looking to add to longs in oil, and that will imply higher inflation; all else being equal. Deflationary trends in wages and consumer items will be offset by inflationary trends in commodities; at least in the short term. Importantly, the imposition of sanctions on Iran will significantly increase tensions in the middle east over the northern summer, so developments probably will prove difficult and challenging over the next few months, as Iran seeks revenge on the US.

Bond pricing needs to seriously consider these developments; and some reflection of these developments may already be in overnight price moves in the ten-year treasury.