Global Economy & Markets, Weekly Roundup 19/05/26
Long-term government bond yields at multi-year highs, with an easing of acute energy supply disruptions remaining elusive
Government bonds sold off on Friday May 15th (yields rose by +10 to +20 bps) as credible signs remain elusive that an end of the acute disruptions in the supply of major energy commodities is on the cards, leading to a further rise of their international prices (crude oil prices were up by c. +10% wow, with the Brent July 2026 futures contract hovering at $110 per barrel) feeding through, inter alia, to higher inflation expectations.
The meeting between the Presidents of the US Mr. Trump and of China Mr. Xi Jinping provided little to no indications that developments towards a resolution of the crisis may have taken a push forward.
US Treasury yields moved well past 4% (2-year tenor, highest since February 2025), 4.5% (10-year, also 15-month highs) and 5% (30-year, at 5.15% on May 18th, the highest since July 2007 at the onset of the Global Financial Crisis), the latter also due to substantial fiscal challenges.
According to pricing in Federal Funds Rate (FFR) futures markets, investors assign roughly split chances of a steady FFR up to end-2026 at a range of 3.50% - 3.75%, or a +25 bps hike, while Mr. Kevin Warsh is set to be officially sworn in as the new Chair of the Federal Reserve on Friday May 25th.
The bond rout weighed on risk appetite, prompting profit-taking in global equity markets on Friday (MSCI ACWI: -1.5%), albeit after fresh record highs, particularly for US bourses, on the back, inter alia, of robust corporate results for Q1, with attention now to Nvidia’s report on May 20th.
On the energy outlook, according to the International Energy Agency (IEA), the global daily oil supply decreased further in April, by -1.8 million barrels (“mb”) on average on a monthly basis to 95.1 mb, down by -12.8 mb from February, prior to the war in Iran. A decline of -14.4 mb in the Persian Gulf region since February, has only been partly offset by increases in other regions.
A further fall in daily supply is estimated for May, by -0.53 mb on average, mainly due to a -1.4 mb from Iran. Regarding the latter, the average daily production declined only slightly in April, by -0.12 mb month-over-month, albeit its exports almost drew to halt as of mid-April due to the blockade on its ports by the US.
In terms of the impact to global economic activity, apart from the rise in international prices of major energy commodities and the consequent hit to consumers’ purchasing power as well as the increase of firms’ energy costs, a pivotal issue is the extent to which energy demand destruction will be necessitated due to lagging supply.
For the time being, the adjustment of global oil demand has been substantially stemmed, given that the market entered the ongoing disruption meaningfully oversupplied (by close to 4 mb per day as of February) and due to an unprecedented usage of stocks (c. 4 mb per day in March and April, taking into account strategic as well as broader industrial/commercial reserves).
With oil reserves though being depleted fast, a more significant demand destruction will likely be necessitated in coming months. Recall that according to the IEA, the market will remain severely undersupplied through the end of Q3:2026, even under a benign assumption that the conflict (and effectively the closure of the Strait of Hormuz) ends by early-June.
Government bonds sold off on Friday May 15th (yields rose by +10 to +20 bps) as credible signs remain elusive that an end of the acute disruptions in the supply of major energy commodities is on the cards, leading to a further rise of their international prices (crude oil prices were up by c. +10% wow, with the Brent July 2026 futures contract hovering at $110 per barrel) feeding through, inter alia, to higher inflation expectations.
The meeting between the Presidents of the US Mr. Trump and of China Mr. Xi Jinping provided little to no indications that developments towards a resolution of the crisis may have taken a push forward.
US Treasury yields moved well past 4% (2-year tenor, highest since February 2025), 4.5% (10-year, also 15-month highs) and 5% (30-year, at 5.15% on May 18th, the highest since July 2007 at the onset of the Global Financial Crisis), the latter also due to substantial fiscal challenges.
According to pricing in Federal Funds Rate (FFR) futures markets, investors assign roughly split chances of a steady FFR up to end-2026 at a range of 3.50% - 3.75%, or a +25 bps hike, while Mr. Kevin Warsh is set to be officially sworn in as the new Chair of the Federal Reserve on Friday May 25th.
The bond rout weighed on risk appetite, prompting profit-taking in global equity markets on Friday (MSCI ACWI: -1.5%), albeit after fresh record highs, particularly for US bourses, on the back, inter alia, of robust corporate results for Q1, with attention now to Nvidia’s report on May 20th.
On the energy outlook, according to the International Energy Agency (IEA), the global daily oil supply decreased further in April, by -1.8 million barrels (“mb”) on average on a monthly basis to 95.1 mb, down by -12.8 mb from February, prior to the war in Iran. A decline of -14.4 mb in the Persian Gulf region since February, has only been partly offset by increases in other regions.
A further fall in daily supply is estimated for May, by -0.53 mb on average, mainly due to a -1.4 mb from Iran. Regarding the latter, the average daily production declined only slightly in April, by -0.12 mb month-over-month, albeit its exports almost drew to halt as of mid-April due to the blockade on its ports by the US.
In terms of the impact to global economic activity, apart from the rise in international prices of major energy commodities and the consequent hit to consumers’ purchasing power as well as the increase of firms’ energy costs, a pivotal issue is the extent to which energy demand destruction will be necessitated due to lagging supply.
For the time being, the adjustment of global oil demand has been substantially stemmed, given that the market entered the ongoing disruption meaningfully oversupplied (by close to 4 mb per day as of February) and due to an unprecedented usage of stocks (c. 4 mb per day in March and April, taking into account strategic as well as broader industrial/commercial reserves).
With oil reserves though being depleted fast, a more significant demand destruction will likely be necessitated in coming months. Recall that according to the IEA, the market will remain severely undersupplied through the end of Q3:2026, even under a benign assumption that the conflict (and effectively the closure of the Strait of Hormuz) ends by early-June.