WEBVTT - Purves on Oil and Implications for SPX (Audio)

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<v Speaker 1>You're listening to Taking Stock with Pim Box and Kathleen

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<v Speaker 1>Hays on Bluebird Radio Boil and oil prices, taking a

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<v Speaker 1>look at what is in store for the future of

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<v Speaker 1>crude oil. It is up more than one percent today

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<v Speaker 1>dollars a barrel. Michael Purvis is the chief global strategist

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<v Speaker 1>for Wheeden in Company and he joins us now. Michael,

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<v Speaker 1>thanks very much for being with us. Tell us your

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<v Speaker 1>thoughts on what is driving the price of oil right now? Well,

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<v Speaker 1>it's not the dollar, you know, the dollar in crude

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<v Speaker 1>and than you know, tight of the hit in so

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<v Speaker 1>many ways for so long, but the dollar has not

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<v Speaker 1>really been moving. It has a lot to do with

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<v Speaker 1>and you know, certainly not inventories either. We had actually

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<v Speaker 1>pretty bullish UM inventory report the other day. Um, what

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<v Speaker 1>the overarching issues are are we going to be getting,

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<v Speaker 1>you know, incrementally more supplied of Libya and Nigeria and

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<v Speaker 1>and also the demand picture, whether the demand picture is

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<v Speaker 1>really not going to be as robust um. You know,

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<v Speaker 1>various oil analysts have have looked at whether the you know,

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<v Speaker 1>the whole the larger you know, move above the sort

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<v Speaker 1>of forty trading range is going to really get deferred

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<v Speaker 1>further back, and I think that's also, you know, helped

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<v Speaker 1>push down some bullish sentiment here. Okay, Michael, Well, your

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<v Speaker 1>role as chief Global strategy, of course you're trying to

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<v Speaker 1>applaud a lot of equity strategies in there, and I

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<v Speaker 1>assume that's why you're so focused on oil right now.

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<v Speaker 1>So take your view of oil and translate it to

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<v Speaker 1>what it means for the US equity market. Well, if

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<v Speaker 1>if oil is trading in the sort of forty to

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<v Speaker 1>fifty range, it means a lot less. But when oil

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<v Speaker 1>starts getting stressed um, in other words, down to forty

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<v Speaker 1>and even below US didn't late July, that's when you're

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<v Speaker 1>gonna start seeing, um, you know, the correlation of equities

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<v Speaker 1>and crude oil to the downside and particular pick up there.

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<v Speaker 1>So if you know right now it's oils um, you know,

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<v Speaker 1>being tossed around a little bit, uh generally over the

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<v Speaker 1>last few days, more down than up. But if it

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<v Speaker 1>does push towards forty, then that's going to be yet

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<v Speaker 1>another further headwind on on US equities. Michael Broader, US equities,

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<v Speaker 1>not just the energy equities, okay, not just energy equities,

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<v Speaker 1>and beg your pardon. Okay, So Michael, I'm what if

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<v Speaker 1>you could speak a little bit maybe bring into the

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<v Speaker 1>picture of the market volatility that we had on on Friday,

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<v Speaker 1>and uh maybe just link that to what you believe

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<v Speaker 1>is going on in the bond market right exactly, so

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<v Speaker 1>you know, uh them over the last couple of years,

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<v Speaker 1>that's really the dollar has been the sort of the

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<v Speaker 1>key pivot asset for defining you know, risk off moves.

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<v Speaker 1>If the dollar got too strong, that was really much

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<v Speaker 1>more at work. And frankly, longer term interest rates were

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<v Speaker 1>kind of you know, people were almost uh this sort

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<v Speaker 1>of complacent about that being you know, everyone sort of

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<v Speaker 1>thought they'd just be a lower a heck of a

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<v Speaker 1>lot longer, even if we got some rate hikes. You know,

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<v Speaker 1>the said moves the short term rates, but not necessarily

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<v Speaker 1>the longer term rates. But what was really I think

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<v Speaker 1>underscoring last ride. It was nothing to do with a

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<v Speaker 1>September or even a December hike, which rather sort of

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<v Speaker 1>the structural issues involved in the global bond market. And

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<v Speaker 1>what was I thought very interesting to see is that

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<v Speaker 1>if you looked at the ten year at UM futures

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<v Speaker 1>contract for the Japanese tenure bond that started breaking its

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<v Speaker 1>strengthening trend back and even early July and the aftermath

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<v Speaker 1>of Brexit um and then you saw that follow through

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<v Speaker 1>with the blond market in August and then again and

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<v Speaker 1>that's ultimately flows to our tenure um uh in early September.

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<v Speaker 1>And I think so you know, when you look at

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<v Speaker 1>the treasury yields, the tenure yield climbing you know, uh,

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<v Speaker 1>forty basis points since Brexit, a pretty major move that

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<v Speaker 1>owes a lot to what's been happening overseas in Japan

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<v Speaker 1>and Germany. Well yeah, and in fact, the bond strategists

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<v Speaker 1>and traders are saying it has everything to do right

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<v Speaker 1>now with the Bank of Japan being rumored to be

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<v Speaker 1>ready to cut its key rate more negative of and

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<v Speaker 1>uh not by as many long term bonds they want

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<v Speaker 1>to flatten their yield curve. They don't. They don't want

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<v Speaker 1>it actually want to step in the yiel curb. But

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<v Speaker 1>it seems into a certain degree then the Bank of

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<v Speaker 1>Japan is kind of taking the baton away from the Fed.

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<v Speaker 1>But does that mean to extend this to stocks again,

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<v Speaker 1>that equity traders are gonna start watching the Bank of Japan.

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<v Speaker 1>I mean, seriously, does it really make that much difference

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<v Speaker 1>to US stocks with the Bank of japandas well, Yeah,

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<v Speaker 1>it does. I mean it is indirect. I mean the

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<v Speaker 1>transmission mechanism for this. If the Japanese ten year puts

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<v Speaker 1>upward pressure on yields in that market, and also the

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<v Speaker 1>booned and treasury market, all these three markets tend to

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<v Speaker 1>move together. The spreads between the bonds often don't change

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<v Speaker 1>that much, but if the you have to keep you know,

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<v Speaker 1>keep in mind that the equity pushed fresh hides we

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<v Speaker 1>got this summer was really largely helped driven by the

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<v Speaker 1>by the record lows and the senior treasure yields we have.

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<v Speaker 1>We would not have those record lows and the senior

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<v Speaker 1>treasure yields without this extreme movements in in appanees and

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<v Speaker 1>and also German bunds. So if that whole um cork

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<v Speaker 1>is going to pop to the upside there and I'm

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<v Speaker 1>not saying it is, but that is really the risk

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<v Speaker 1>that if we start seeing that that whole yield environment

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<v Speaker 1>in Japan really start moving higher, there's no question that's

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<v Speaker 1>going to flow right into equities, and those these are

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<v Speaker 1>the it's it's a different set of questions that need

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<v Speaker 1>to be asked an answered. For the respect to the

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<v Speaker 1>ten year moving higher than it is with the dollar

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<v Speaker 1>moving higher. Well, if that's the case, Michael Purvis, are

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<v Speaker 1>we going to experience continued moves higher in volatility? And

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<v Speaker 1>if so, how can investors profit? Well? I think you

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<v Speaker 1>know right now, you know, after last Friday sort of

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<v Speaker 1>jarring wake up call to the end of summer with

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<v Speaker 1>the volatility really expanding, I think look that, you know,

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<v Speaker 1>when you look at the VIC surface um across the

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<v Speaker 1>VIX curve and you look at where the VIC is

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<v Speaker 1>likely to be, it's probably going into a higher place

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<v Speaker 1>because it's not just about the ten ure yields. It's

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<v Speaker 1>of course about elections in the in the United States

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<v Speaker 1>November's and it's also about the fate of our you know,

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<v Speaker 1>economic progress and of course uh interest rate hikes. Right,

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<v Speaker 1>So you put that all together, it's hard to imagine

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<v Speaker 1>the VIX is going to be in that sort of

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<v Speaker 1>twelve to fourteen range for too long in the in

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<v Speaker 1>the coming weeks there um, And I think what what

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<v Speaker 1>the question about the Bank of Japan and the ten

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<v Speaker 1>year yields? The domestically and globally really raises is jeez,

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<v Speaker 1>you know, can can we really get a two thousand

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<v Speaker 1>thirteen paper trans from again? Okay, Michael Purvis, thank you

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<v Speaker 1>so very much. Cheap global strategist, connecting the dots around

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<v Speaker 1>the globe for oil, for stocks, for bonds, and the dollar.

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<v Speaker 1>Chief global strategist at Wheaton. I'm Kathleen Hayze Long with

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<v Speaker 1>pim Fox. This is Bloomberg