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Private credit alarms ring louder

By Jamie McGeever, Markets Columnist 

Oil prices rose sharply on Wednesday despite a record release of global crude reserves, stoking inflation fears and lifting two-year Treasury yields to the highest since September. The weight on stocks was too much, and Wall Street ended mostly lower.

In my column today I sketch out why structurally higher oil prices are bad news for U.S. corporate earnings, as businesses and consumers face far higher direct and indirect energy costs than they were budgeting for.

I’d love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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* Private credit strains deepen

Worries about the health of the $2 trillion private credit market continue to deepen. The latest red flags are: JPMorgan reducing the value of some loans to private credit funds, and reports of Cliffwater's flagship private credit fund capping redemptions.

Scarce or nonexistent liquidity, opaque pricing, limited transparency and spiking redemptions - this is how investors are increasingly viewing the sector. That may not be a wholly fair assessment, but right now, the bar to convincing them otherwise is getting higher.

* Oil can't get no relief

Oil prices spiked 5% on Wednesday, the same day the International Energy Agency agreed to release 400 million barrels of reserves in response to the crisis, the largest such move in its history. 

You can look at oil's reaction in two ways. It was equivalent to 'buy the rumor, sell the fact', as crude plunged the day before when this move was flagged. Or, it shows supply fears run much deeper than thought, and we are in for a sustained period of significantly higher prices.  

* Japan FX intervention risks rise

The Japanese yen is weakening rapidly, and is now within sight of 160 per dollar. It's at levels that prompted the New York Fed to 'check rates' in dollar/yen in January, seen as a warning of potential joint U.S.-Japanese intervention to support the yen.

Tokyo is in a bind though. Safe-haven demand is driving the dollar higher across the board and yen sentiment is particularly bearish because Japan imports 95% of its energy, which is now much more expensive. Would intervention be warranted if the 'fundamentals' justify a weaker yen? 

U.S. companies face structurally higher oil prices this year even if the Iran war ends soon, meaning investors may need to rethink those sunny 2026 corporate earnings forecasts.

Heading into the year, the consensus 2026 outlook for oil was fairly bearish, while the earnings forecasts for Wall Street were pretty optimistic. 

The latter hasn't changed. As of Friday, full-year 2026 earnings growth estimates, according to LSEG data, were nearly 16%, up from 14% last year and 12% the year before. 

While oil will likely drift lower when the war eventually subsides, the damage is done. Average oil prices this year will almost certainly be much higher than businesses were budgeting for on January 1. 

Companies will absorb part of that increase, and consumers will certainly feel the pinch. Either way, corporate earnings will be squeezed.