(Bloomberg View) -- Oil is back in the spotlight. Crude fell to its lowest level in more than a month, and it wouldn't take much more of a decline for prices to reach levels last seen in November. Oil has been on a roller-coaster ride in recent months, going from $54 a barrel in February, down to $47 in March, back up to almost $54 in April before falling back below $48 today.
The implications of oil's gyrations extend far beyond simply whether it's good or bad for consumers and producers. Lower energy prices are one reason why the markets are pricing in benign levels of inflation for the rest of the year. If that comes to pass, it could mean the Federal Reserve doesn't raise interest rates as much as it currently forecasts. Oil's latest drop comes amid concern that increasing U.S. crude production will offset efforts by OPEC and its allies to eliminate a global supply glut, according to Bloomberg News' Mark Shenk. Industry data showed American rigs targeting oil rose to the highest level in two years.
OPEC will meet again May 25 in Vienna to decide whether to extend the cuts through the second half of the year. Although Khalid Al-Falih, the Saudi minister of energy and industry, said last week that there seems to be a general consensus to do so, others are not so sure. “There's growing skepticism about the effectiveness of the OPEC deal and whether they will be able to agree to an extension,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy.
WHAT TO MAKE OF A SUB-10 HANDLE FOR THE VIX
Investors and strategists are not quite sure what to make of the current low levels of volatility permeating most all markets. Some say these numbers reflect too much complacency. Others say they reflect the fact that central banks stand ready to pump even more money into the financial system at the first sign of trouble. Whatever the reason, the big question is what it means for markets going forward. To try and answer that, the strategists at Convergex took a look at CBOE Volatility Index, or VIX, which is also known as the "fear gauge." It dropped below 10 on Monday before closing the day just above that level. According to Convergex, there's really only three periods since 1990 when the VIX held below 10: December 1993, January 1994 and December 2006/January 2007. The firm concluded that a VIX below 10 signals the possibility of a pause in equity returns in the short term.
GREECE STAGES POWERFUL RALLY -- YES, GREECE
Markets in Greece soared after the nation resolved the latest impasse over the terms of its bailout program with international creditors in the early hours of Tuesday, unlocking the way for debt-relief talks and the disbursement of the next tranche of emergency loans. The late-night breakthrough ended months of negotiations with the euro area and the International Monetary Fund, according to Bloomberg News' Eleni Chrepa and Sotiris Nikas. The Greek government yielded to a number of demands including pension cuts and a lower tax-free threshold of around 5,700 euros ($6,221) to 6,000 euros from 8,636 euros now. The agreement will also allow more shops to open on Sundays in various parts of the country. Greece 10-year bonds yields fell below 6 percent for the first time since 2014. The country needs an installment of about 7 billion euros in aid to repay lenders in a few months, yet some euro-area governments, notably Germany, refuse to pay out until the IMF comes on board. The fund has said it won't join the latest bailout program until Greece's debt burden is eased, in addition to the reforms agreed to Tuesday.
MUNIS AREN'T IN THE CLEAR YET
Municipal bonds took a hit right after the U.S. elections because of worries that the Trump administration would cut back on their tax benefits. While munis have since rallied as those concerns eased, there's a new threat on the horizon. Almost eight years after the recession, the financial recovery for U.S. states is showing signs of sputtering, according to Bloomberg News' Elizabeth Campbell. Conning, which oversees more than $9 billion of state and local debt, says the credit quality of state governments is deteriorating as spending outpaces “sluggish” growth in tax collections. Revenue growth from income and sales levies was “virtually flat” last year, according to Conning's semiannual "State of the States" report. At the same time, some are drawing from their savings and facing pressure to pump more money into retirement plans, according to the company. “There's a number of states that seem to be taking away from reserves rather than building,” Paul Mansour, head of municipal research at Conning, told Campbell. “At this point in the economic recovery, you would expect reserve fund balances to be a lot higher.”
SHOULD YOU BELIEVE CHINA'S DATA OR MARKETS?
China's run of solid economic data has proved little consolation for its shaky financial markets. Economists are practically unanimous in saying that a shift in the leadership's focus toward reducing leverage would be good for China's longer-term health, but the big unknown is whether that can be done without a dose of short-term pain, according to Bloomberg News' Enda Curran and Eric Lam. As UBS Group analysts put it: if the initiatives are "not managed well, it could lead to a rise in credit events, excessive liquidity tightening, faster-than-intended slowdown of credit growth, and greater market volatility." What started in the fall of 2016 as a tightening in money-market liquidity has intensified to a broader attack by policy makers on the shadow-banking system, where patchy regulation has allowed investors to make leveraged bets. When President Xi Jinping last week warned top officials to crack down on financial risks, the benchmark equities index at one point gave up gains for the year, while bonds suffered their biggest tumble of 2017.
TEA LEAVES
The Federal Reserve expects to raise interest rates three times this year, but Wednesday won't be one of those days. That's when policy makers wrap up their monetary policy meeting and issue a statement on their assessment of the economy. Since the Fed boosted rates on March 15, we've learned that the economy grew at a meager 0.7 percent in the first quarter and markets see only a 50 percent chance rates will be increased two more times before year-end. For the Fed to follow through on that, as well as formally announce plans to start shrinking its $4.5 trillion balance sheet, the economic data needs to improve and fiscal uncertainty needs to subside, according to Bloomberg Intelligence. The fiscal part of the equation got a lot more cloudy today as President Donald Trump threatened a government shutdown later this year after congressional Democrats and Republicans struck a budget deal that largely neglected his priorities.
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Italy Will Be Europe's Next Big Problem: Ferdinando Giugliano
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Robert Burgess is editor of Bloomberg Prophets.
To contact the author of this story: Robert Burgess at bburgess@bloomberg.net.
To contact the editor responsible for this story: Max Berley at mberley@bloomberg.net.
For more columns from Bloomberg View, visit http://www.bloomberg.com/view.
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