Comment on "Oil: The Donald And Demand Destruction"
We thank Alastair Newton for this comment on yesterday’s newsletter:
Following US Treasury Secretary Scott Bessent's 'elaboration' on Donald Trump's 'economic D-Day' against Iran Brent crude has slipped by around US$6pb. Given that no new sanctions were actually imposed, that Tehran has dismissed the whole caboodle and (perhaps most importantly) China has committed to retaliate if it is targeted with secondary sanctions, this may seem surprising. But strange things can happen in August when many fund managers are taking a break and this reaction feels very like the rapidly reversed rally Mr Bessent spurred last week in his equally dismal attempt to tame the bond market.
Reference to the bond market is very pertinent. The interest rate on long duration US government bonds (aka Treasuries) has been easing upwards for some time now but, unusually, this is not principally because of inflation expectations (even though these have recently started to creep up).
The substantive link between these two issues is a simple one, i.e. higher oil prices will drive up inflation which will then see investors demanding a higher return on US government debt, pushing what is known as the 'long end' (of the yield curve) higher still. This is precisely what Mr Bessent was trying to argue against last week - unsuccessfully even without the added complication of the threat of escalating economic pressure on Tehran.
Even before Mr Bessent intervention yesterday the FT's Katie Martin had written (on 22 August, in fact) of his bond market intervention as follows:
"Scott Bessent’s running battle with the bond market is starting to look like his boss’s war in Iran — started by his own hand with a tangled set of objectives, an underestimated opponent and an implausible path to victory. And like the conflict in the Middle East, we are all going to suffer its effects.”
That the two losing battles he is fighting have become increasingly entangled is therefore more than somewhat ironic.
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