Markets jitter: oil, bonds, banks

Oil, bonds and bank stocks all swung at once on April 13 as traders priced in a new Middle East supply shock and a longer stretch of high inflation. (Reuters via newsbreak.com) Brent crude jumped more than 7% to about $102 a barrel after weekend peace talks between the United States and Iran failed and Washington moved toward a blockade on Iranian shipping through the Strait of Hormuz. Reuters reported the move could remove roughly 2 million barrels a day of Iranian supply from the market. (Reuters via newsbreak.com; International Business Times) Government bonds fell instead of rallying. Bloomberg reported investors in the $31 trillion Treasury market focused on the risk that higher energy costs would keep inflation elevated and delay Federal Reserve rate cuts, while the 10-year Treasury yield reached about 4.30% on April 13. (bloomberg.com); U.S. Department of the Treasury; (ycharts.com)) That reaction broke the usual war-market script. Instead of treating Treasuries as a shelter, traders treated pricier oil as a fresh inflation shock that could keep borrowing costs higher for longer. (bloomberg.com); markets.financialcontent.com) Regulators are now flagging the same pressure points. In a letter published April 13 ahead of a Group of Twenty meeting on April 16, Financial Stability Board Chair Andrew Bailey warned that stretched asset prices, leverage in nonbank finance and liquidity mismatches could combine with market volatility into a “double or triple whammy.” (Financial Stability Board) Bailey singled out government bond markets, saying high leverage by a limited number of funds using similar strategies across countries could trigger a disorderly unwind and drain liquidity from core sovereign debt markets. He also said private credit was already under pressure before the conflict and could face weaker asset quality if debt-servicing costs rise further. (Financial Stability Board) Banks offered a mixed read on the same day. Goldman Sachs reported first-quarter net revenue of $17.23 billion, net earnings of $5.63 billion and earnings per share of $17.55 for the quarter ended March 31, topping analyst estimates. (Goldman Sachs; (cnbc.com)) But Goldman’s shares fell nearly 4% on April 13 as investors focused on a 10% drop in fixed-income trading revenue to $4.01 billion and a rise in provisions for credit losses to $315 million. Reuters said the stock decline came even as dealmaking and equities trading beat expectations. (cnbc.com); Reuters via msn.com) The next test is whether oil stays above $100 and whether bond yields keep climbing after the Group of Twenty meetings on April 16. For now, the market is treating the blockade risk as both an energy shock and a financing shock at the same time. (Reuters via newsbreak.com; Financial Stability Board)