E It Is A Bit Early To Say We Have Seen The Last Summer Volatility / Risk-Off Moves

Markets appear to become more fragile heading into the low liquidity summer holiday period, as seen by the short-lived macro-driven risk aversion midweek when uncertainty triggered a re-pricing of the economic impact of the Delta variant (lower vaccine efficacy ) after reaching all-time highs.

The week's fixed income rally has been nothing short of breathtaking, but what is it telling us about the future and other asset classes? The debate among investors has been raging, with the consensus suggesting it was little more than a technical move. Still, ultimately the uptick in rates volatility and the ensuing turmoil means that things are becoming more difficult for risk and supportive for the dollar.

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Forex

It's probably a bit early to say we've seen the last summer volatility/risk-off moves, given we were not indeed in the heart of the summer holidays yet. Still, the actions did have a feeling of desperation (and, therefore, possibly haven't got further to extend). For the first time in a few years, almost a textbook "risk-off" move – Gold, CHF, JPY, US Bonds all rallied, while equities and EMFX sold off and credit widened on Thursday. 

Shale Oil 

According to the WSJ, despite the pick-up in oil prices in recent months, US shale drillers are not expanding output to the same extent and are instead finding other uses for the cash generated on the back of higher oil prices. It notes that Occidental Petroleum and Ovinitiv have said they plan to focus on reducing debt while other sizable drillers are diverting money away to paying dividends. The US is currently producing roughly 2mn barrels per day less than before the pandemic, with the number of active rigs drilling for oil at 376, down from 683 pre-covid. Part of the problem is that even if the shale firms wanted to increase drilling, many are finding it hard to secure funding as several providers have withdrawn from oil-related lending altogether.

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