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Oil Prices Continue to Rise as the United States Exits the Iran Nuclear Accord

Equity investors overlooked President Trump’s withdrawal from the Iran nuclear accord and pushed stocks higher. Energy prices rose with increased tensions, with Brent crude oil prices hitting $77 a barrel. A subdued inflation reading Thursday added confidence that the Fed won’t accelerate interest rate hikes.

Weekly Returns

S&P 500: 2,728 (+2.4%)
FTSE All-World ex-US (VEU): (+1.3%)
US 10 Year Treasury Yield: 2.97% (+0.02%)
Gold: $1,319 (+0.3%)
EUR/USD: $1.194 (-0.2 %)

Major Events

  • Monday – Starbucks sold rights to sell its coffee and tea in grocery and retail stores to Nestle for $7 billion.
  • Tuesday – President Trump announced that the United States will withdraw from the Iran nuclear accord. Saudi Arabia and Israel applauded the move but it was rejected by Britain, France and Germany. U.S. oil prices passed $70 per barrel.
  • Tuesday – Takeda Pharmaceutical agreed to buy Shire for $62 billion.
  • Tuesday – Japan’s Recruit Holdings agreed to buy Glassdoor for $1.2 billion.
  • Thursday – Goldman Sachs and Apple announced they would launch a joint credit card with the Apple Pay brand.
  • Friday – President Trump said he would reign in drug prices, but stopped short of endorsing more radical ideas such as allowing importation of lower cost drugs and letting Medicare negotiate directly. Health Care stocks rose.

Our Take

In last week’s policy statement, the Fed appeared to strive to make very few changes to its previous outlook. That, coupled with this week’s subdued inflation report, suggests the most likely path forward is for two additional rate hikes this year, not three.

So far this year, stocks are up a little and bonds are down a little. Of course no one buys bonds to lose money, but recent developments should be encouraging to owners of bonds. Rates are higher than they were in the beginning of the year and that makes bonds more attractive on a forward-looking basis. Equity volatility has retreated after spiking in February and March, but it feels unlikely it will go into complete hibernation as it did in 2017. The right long term mix of stocks and bonds remains the most important decision most investors make and we recommend not losing faith in bonds because of low single digit losses over a few month period.

Oil just shot past $70, something many people thought would never happen again — few predicted the fall from $140 to $30 and few predicted the current rebound. This illustrates how hard (and usually counterproductive) it can be to bet on commodity prices. We don’t have an official forecast, but we note that many shale and other producers are profitable at about $50-$60. This means little in the short term when geopolitics are taking center stage, but taking a longer term view may mean prices should fluctuate somewhere modestly north of this range.

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