Tag Archives: #oil

A Year So Dreary

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(With apologies to Edgar Allen Poe)

‘Eighteen was a year so dreary, traders studied hara-kiri
As they pondered every theory, algorithm and z-score.
Interest rates were slowly rising, growth no longer synchronizing,
Brexit’s failures mesmerizing, plus we got a real trade war
Italy, meanwhile explained that budget limits were a bore
Europe looked aghast and swore.

Thus instead of markets booming, (which most pundits were assuming)
What we got was all consuming angst too great to just ignore
Equities reduced to rubble, high-yield bonds saw their spreads double
As the Fed inspired bubble sprung a leak through the back door
Balance sheet adjustment proved to be more harsh than heretofore
Stock investors cussed and swore.

But the New Year’s now commencing, with the markets’, trouble, sensing
Thus predictions I’m dispensing might not be what you wished for
Life’s not likely to get better, ‘specially for the leveraged debtor
Who ought write an open letter to Chair Powell and implore
Him to stop his raising rates so assets grow just like before
Would that he would raise no more.

Pundits far and wide all wonder if Chair Powell’s made a blunder
Or if he will knuckle under to entreaties from offshore
Sadly for mainstream investors, lest our growth decays and festers
Powell will ignore protestors though they’ll raise a great uproar
Thus far he has made it clear that neutral’s what he’s shooting for
Jay, I fear, sees two hikes more.

At the same time Signor Draghi, who’s EU is weak and groggy
Using words in no way foggy, told us QE’s dead, he swore!
Plus he strongly recommended that when summer, this year, ended
Raising rates would be just splendid for those nations at the core
Even though the PIGS keep struggling, this he’s willing to ignore
Higher rates might be in store.

Lately, though, are growing rumors, that six billion world consumers
Are no longer in good humors, thus are buying less, not more
This result should be concerning for those bankers who are yearning
Rates to tighten, overturning years when rates were on the floor
Could it be what we will see is QE4 as an encore?
Maybe low rates are called for.

What about the budget shortfall, in the States that’s sure to snowball
If our growth rate has a pratfall like it’s done ten times before?
While this would be problematic, growth elsewhere would crash to static
Thus it would be quite pragmatic to assume the buck will soar
Don’t believe those euro bulls that think rate hikes there are in store
Christmas next we’re One-Oh-Four.

Now to Britain where the story of its Brexit’s been so gory
Leaving Labour and the Tories in an all out civic war
Though the deal that’s on the table, has its flaws, it would help cable
But when PM May’s unable to find votes here’s what’s in store
Look for cable to go tumbling well below its lows of yore
Next December, One-One-Four.

Time to focus on the East, where China’s growth just might have ceased
Or slowed quite sharply at the least, from damage due to Trump’s trade war
Xi, however’s not fainthearted, and more ease he has imparted
Trying to get growth restarted, which is really quite a chore
But with leverage so extended, how much more can they pay for?
Not as much as days of yore.

With growth there now clearly slowing, public cash is freely flowing,
Banks are told, be easygoing, toward the Chinese firms onshore
But the outcome’s not conclusive, and the only thing conducive
To success for Xi is use of weakness in the yuan offshore
I expect a steady drift much lower to Seven point Four
Only this and nothing more.

Now it’s time for analyzing, ten-year yields, so tantalizing
With inflation hawks advising that those yields will jump once more
But inflation doves are banking that commodities keep tanking
Helping bonds and Bunds when ranking outcomes, if you’re keeping score
Here the doves have better guidance and the price of bonds will soar
At what yields will they sell for?

Slowing growth and growing fear will help them both throughout the year
And so it’s not too cavalier to look for lower yields in store
Treasuries will keep on rising, and for now what I’m surmising
Is a yield of Two point Five is likely come Aught Twenty’s door
Bunds will see their yields retreat to Zero, that’s right, to the floor
Lower ten-year yields, look for.

In a world where growth is slowing, earnings data won’t be glowing
Red ink will, for sure, be flowing which investors can’t ignore
P/E ratios will suffer, and most firms will lack a buffer
Which means things will just get tougher for investors than before
What of central banks? Won’t they be able, prices, to restore?
Not this time, not like before.

In the States what I foresee is that the large cap S&P
Can fall to Seventeen Fifty by year end next, if not before
Europe’s like to see the same, the Stoxx 600 getting maimed
Two Fifty is where I proclaim that index will next year explore
Large percentage falls in both are what investors all abhor
But its what I see in store.

Oil’s price of late’s been tumbling, which for drillers has been humbling
OPEC meanwhile keeps on fumbling, each chance to, its strength, restore
But with global growth now slowing, storage tanks are overflowing
Meanwhile tankers, oceangoing, keep on pumping ship to shore
And more drilling in the States means lower prices are in store
Forty bucks I now call for.

One more thing I ought consider, Bitcoin, which had folks on Twitter
Posting many Tweets quite bitter as it tumbled ever more
Does this coin have true potential? Will it become influential?
In debates quite consequential ‘bout where assets you may store?
While the blockchain is important, Hodlers better learn the score
Bitcoin… folks won’t pay much for

So instead come winter next, Bitcoin Hodlers will be vexed
As it suffers from effects of slowing growth they can’t ignore
While it might be worth Two Grand, the end result is that demand
For Bitcoin will not soon expand, instead its like to shrink some more
Don’t be fooled in thinking you’ll soon use it at the grocery store
Bitcoin… folks won’t pay much for

Fin’lly here’s an admonition, if these views do reach fruition
Every single politician will blame someone else for sure
I’m not hoping for this outcome, I just fear the depths we might plumb
Will result in falling income and recession we’ll explore
So if risk you’re managing, more hedging now is what’s called for
Fear and risk are what will soar!

For you folks who’ve reached the end, please know I seek not to offend
But rather try to comprehend the state of markets and some more
If you read my thoughts last year, I tried to make it very clear
That economic trouble’s near, and so that caution is called for
Mostly though I hope the time invested has not made you sore
For you, my readers, I adore!

Have a very happy, healthy and prosperous New Year
Adf

 

More Concern

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The tide is beginning to turn
As hawks at the Fed slowly learn
Their earlier view
No longer rings true
So they’ve now expressed more concern

These days there are three key drivers of the market narrative as follows:

The Fed – There is no question that the tone of commentary from Fed speakers has softened over the past two weeks, certainly from the way it sounded two months ago. Back then Chairman Powell explained that the Fed Funds rate was “a long way” from neutral, implying numerous further interest rate hikes. Equity markets responded by selling off sharply and talk of a yield curve inversion leading to a recession was nonstop. Meanwhile, the dollar rose nicely vs. most of its counterparties. A funny thing happened, though, on the way to that next rate hike due next week; economic data started to soften.

Softer housing data as well as declines in production numbers and survey data like the ISM have resulted in a more cautionary stance by these same Fed members. While the doves (Kashkari, Bullard and Brainerd) had always shown some concern over the pace of rate hikes given the absence of measured inflation, the rest of the Fed were happy to hew to the Phillips curve model and assume that the exceptionally low unemployment rate would lead to much higher inflation. This latter view encouraged them to gradually raise rates in order to prevent a failure on that part of their mandate.

But whether it is a result of the sharp declines seen in equity prices, the ongoing bashing from President Trump or simply the fact that the growth picture is slowing (I certainly hope it is the last of these!), the tone from this august group is definitely less aggressive. And while yesterday Chairman Powell reiterated that the economy was “very strong” on many measures, he was also clear to indicate that there was much more uncertainty over what the future would bring. This change of tone has been well received by the punditry, and quite frankly, by markets, which saw a sharp late day equity rally sufficient to reduce early session losses to nearly flat.

The Fed’s problem is that they created a monster with Forward Guidance, which was great when it helped them to further their easing bias, but is not well suited to changes in policy. Futures markets are now pricing less than one rate hike in 2019, down from nearly three hikes just a month ago. Transitions are always the hardest times for any market and for all policymakers. It is no surprise that we have seen increased volatility across markets lately, and I expect it will continue.

Trade – The trade situation is extremely difficult to describe. In the course of a week, market sentiment has gone from euphoria over the reopening of talks between the US and China on Monday, to outright fear after the US had the CFO of one of China’s largest companies, Huawei, arrested in Canada regarding the breech of sanctions on Iran. There are two concerns over the trade issue that need to be addressed when considering its impact on markets. First is the impact on prices. Tariffs will unambiguously raise prices to someone as long as they are in place. The question is who will feel the pain. For importers, their choices are pass on the cost by raising prices, eat the cost by reducing margins or have their vendors eat the cost by renegotiating their prices. In the first case, it is a direct impact on inflation data, something that has not yet been evident. In the second case, it is a direct hit to profitability, also something that has not yet been evident, but it has been discussed by a number of CEO’s as they get asked about their business. In the third case, the US makes out well, with neither of the potential problems coming home to roost.

The second, knock-on impact is on growth. Higher prices will reduce demand and lower margins will reduce available cash flow, and correspondingly reduce the ability of companies to invest and grow. In other words, there are no short term positives to be had from the tariffs. However, if negative behavior can be changed because of their imposition, such that IP is protected and an agreement can help reduce all trade barriers, including non-tariff ones, then the ends may justify the means. Alas, I am not confident that will be the case. Looking at the market impact, theory would dictate the dollar should rise on the idea that other currencies will depreciate sufficiently to offset the tariffs and reestablish equilibrium. We have seen that in USDCNY, which has fallen about 8% from its peak in spring, nearly offsetting the 10% tariffs. Looking ahead though, if the tariff rate rises to 25%, it is harder to believe the Chinese will allow the yuan to fall that much further. For the past decade they have been fearful of allowing their currency to fall to quickly as it has led to significant capital flight, so it would be premature to expect a decline anywhere near that magnitude.

Oil – Oil prices have moved back to the top of the market’s play list as a combination of factors has lately driven significant volatility. It wasn’t that long ago that there was talk of oil getting back to $100/bbl, especially with the US sanctions on Iran being reimposed. But then political pressure from the US on Saudi Arabia resulted in a significant increase in production there, which alongside continuing growth in US production, turned fears of a shortage into an absolute oil glut. This resulted in a 33% decline in the price in less than two months’ time, with ensuing impact on petrocurrencies like CAD, RUB and MXN, as well as a significant change in sentiment regarding inflation. With global growth continuing to show signs of slowing further, it is hard to believe that oil prices will rebound anytime soon. As such, one needs to consider that those same currencies will remain under pressure going forward.

All of this leads us to today’s session where the primary focus will be on the employment report. Expectations are as follows:

Nonfarm Payrolls 200K
Private Payrolls 200K
Manufacturing Payrolls 20K
Unemployment Rate 3.7%
Average Hourly Earnings 0.3% (3.1% Y/Y)
Average Weekly Hours 34.5
Michigan Sentiment 97.0

It feels like the market is more concerned over a strong number, which might put the Fed on alert for further rate hikes. In fact, it seems like we have moved into a good news is bad situation again, at least for equities. For the dollar, though, strong data is likely to lead to support. My view is that we may start to see a softer tone from the data, which would lead to further softening in the dollar, but a rebound in stocks.

Good luck and good weekend
Adf

Into the Tank

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The German economy shrank
Japan’s heading into the tank
Italians declared
The budget prepared
Is gospel, and oil just sank

There are a number of stories this morning competing for market attention as investors and traders continue to try to get a reading on growth prospects going forward. Perhaps the most surprising story is that German GDP, which had been expected to print at 0.0% in Q3, actually fell -0.2%, significantly worse than expected. While every pundit and economist has highlighted that it was a confluence of one-time events that drove the data and that expectations for Q4 are far more robust, the fact remains that Q3 growth in Germany, and the whole of Europe, has been much weaker than anticipated. The euro has not benefitted from the news, falling 0.25%, and broadly continuing its recent downtrend.

Adding to the single currency’s woes is the ongoing Italian budget opera, where the EU huffed and puffed and demanded the Italians change their plans. The Italians, formally, told the EU to pound salt yesterday evening, and now the EU is at a crossroads. Either the emperor has no clothes (EU does nothing and loses its fiscal oversight capability) or is in fact well dressed and willing to flaunt it (initiates procedures to sanction and fine Italy). The problem with the former is obvious, but the problem with the latter is the potential impact on EU Parliamentary elections to be held in the spring. Attacking Italy could easily result in a far more antiestablishment parliament with many of the current leadership finding themselves in the minority. (And the one thing we absolutely know is that incumbency is THE most important aspect of leadership, right?) The point is that there are ample reasons for the euro to remain under pressure going forward.

At the same time, Japanese economic data continues to disappoint, with IP declining -2.5% Y/Y in September and Capacity Utilization falling 1.5%. At the same time, we find out that the BOJ’s balance sheet is now officially larger than the Japanese economy! Think about that, Japan’s debt/GDP ratio has long been over 200%, but now the BOJ has printed money and bought assets equivalent to the entire annual output of the nation. And despite the extraordinary efforts that the BOJ has made, growth remains lackluster and inflation nonexistent meaning the BOJ has failed to achieve either of its key aims. At some point in time, and it appears to be approaching sooner rather than later, central banks around the world will completely lose the ability to adjust market behavior through either words or action. And while it is not clear which central bank will lose that power first, the BOJ has to be the frontrunner, although the ECB is certainly trying to make a run at the title.

Meanwhile, from Merry Olde Englande we have news that a draft Brexit deal has been agreed between PM May and the EU. The problem remains that her cabinet has not yet seen nor signed off on it, and there is the little matter of getting the deal through Parliament, which will be dicey no matter what. On the one hand, it is not wholly surprising that some type of agreement was reached, but as is often the case in a situation as fraught as Brexit, nobody is satisfied, and quite frankly, it is not clear that it will gather sufficient support from either the UK Parliament, or the EU’s other nations. This is made evident by the fact that the pound has actually fallen today, -0.2%, despite the announcement. I maintain that a Brexit deal will clearly help the pound’s value, so the market does not yet believe the story. At the same time, UK inflation data was released at a softer than expected 2.4% in October, thus reducing potential pressure on the BOE to consider raising rates, even if a Brexit deal is agreed. After all, if inflation falls to 2.0%, their concerns will be much allayed.

One other story getting a lot of press has been the sharp decline in the price of oil, which yesterday fell 7.1% in the US, and is now down more than 26% since its high in the beginning of October, just six weeks ago. There is clearly a relationship between commodity prices and the dollar given the fact that most commodities are priced in dollars, and that relationship is consistently an inverse one. The question, that I have yet to seen answered effectively, is the direction of the causality. Does a stronger dollar lead to weaker commodity prices? Or do weaker commodity prices drive the dollar higher? While I am inclined to believe in the first scenario, there are arguments on both sides and no research has yet been able to answer the question effectively. However, it should be no surprise that the dollar continues to rally coincidentally with the decline in oil, and other commodity, prices.

I didn’t even get a chance to discuss the ongoing slowdown in Chinese economic growth, but we can touch on that tomorrow. As for today’s session, this morning we see the latest CPI readings (exp 0.3%, 2.5% Y/Y headline, 0.2% 2.2% core) and then as the FX market gets set to go home, Chairman Powell speaks, although it is hard to believe that his views on anything will have changed that much. In the end, the big picture remains that the dollar should continue to benefit from the Fed’s ongoing monetary policy activities as well as the self-inflicted wounds of both the euro and the yen.

Good luck
Adf