Tag Archives: #opec+

The Issuance Tap

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The Saudis thought oil was cheap

So, figured that they’d rather keep

More stuff in the ground

And in a profound

Move, cut back production quite steep

 

 

Meanwhile now the debt ceiling’s gone

The Treasury’s set to turn on

The issuance tap

To refill the gap

In finance that started to yawn

 

The biggest story over the weekend was the Saudi’s decision to cut oil production by 1 million barrels per day as they are concerned the pending recession is going to further destroy demand and so are aiming to keep prices supported.  No other OPEC+ members joined with the Saudis as it seems they all want the money.  And who can blame them?  Not surprisingly, oil prices are firmer this morning, up nearly 2%, but remain far below levels seen prior to the last OPEC+ production cut when WTI was pushing $80/bbl.   However, if we look back to pre-covid times, oil was trading a full $10/bbl lower than the current level of ~$73/bbl.  In the interim, we have seen significant structural changes in the oil market, and I continue to expect these changes to force prices higher over time.

 

First, the election of President Joe Biden led to an immediate change in US energy policy with a destruction in production capabilities in the name of global warming.  Second, the Russian invasion of Ukraine and the ensuing sanctions on Russian oil (and NatGas) exports have helped reduce the amount of energy molecules available to be used worldwide.  Add to this the longer-term lack of energy infrastructure investment given the ESG push for the past decade, and the supply side of the equation does not look robust. 

 

On the demand side, however, things are likely to continue to trend higher for the foreseeable future.  Despite trillions of dollars of investment in alternative sources of energy, namely wind and solar, fossil fuels continue to represent more than 80% of total energy usage worldwide.  As well, every advancement in civilization throughout history has been driven by access to cheaper energy, and all those nations that we currently call emerging markets are quite keen to continue to advance their economies to the benefit of their populations.  They are far less concerned about global warming than they are about better living standards.  According to the IEA’s most recent forecasts, 2023 will set yet another record for oil demand regardless of the recession calls and the war in Ukraine.  Ultimately, this supply/demand imbalance is going to resolve toward higher prices still.  Mark my words.

 

As to the other discussion making the rounds in markets this morning, the upcoming deluge of Treasury security issuance, there are many claiming that this may have a significant impact on risk asset pricing, notably equities.  The idea is that as the Treasury refills its TGA (checking account) with up to $500 billion to get it back to its more normal balance, it will draw liquidity from potential equity investors who decide that earning a risk-free 5+% on their money is quite attractive, thus reducing demand for stocks.  However, this is a more nuanced discussion as there are other features in the money markets that will be impacted as well, and that are likely to offset a significant portion of that impact.

 

On the surface, that argument has validity, but digging a bit deeper is worthwhile to get a better understanding here.  The Fed runs a Reverse Repo program (RRP), where they essentially pay a small subset of investors to hold their securities at the Fed funds rate.  This program currently has about $2.2 trillion in it and is widely used by Money Market funds as an investment.  And that money in the RRP program is stuck at the Fed and not available for other investment.  However, T-bills have been yielding higher than Fed funds, and it is expected that those same Money Market funds will be snapping up the newly issued T-bills while running down their RRP balances, thus absorbing a great deal of the new issuance.  If this is the case, it will reduce the amount of available risk-free assets to which the equity investors described above will have access.  In other words, the feared demand drain is likely to be far smaller than the $1 trillion that has been bandied about lately.  Do not count on this as a rationale for equity weakness, although that doesn’t mean there are no problems ahead.

 

And, as we begin another week, those are really the noteworthy stories around.  After Friday’s blowout NFP number of 339K new jobs with a revision higher in the previous months, US equities took off and had a big day.  That has mostly been followed by Asia, which saw strength almost everywhere (mainland China being the most prominent exception) although Europe has had a less robust session today.  Arguably, that is because the Services PMI data in Europe released this morning was softer than expected across the board, and they had already reacted to the US payroll data on Friday as those markets were open during the release.  Meanwhile, US futures are either side of unchanged this morning, clearly not feeling any additional love from the payroll story.

 

Of more interest is the fact that bond yields are higher around the world this morning, with Treasuries (+5.4bps) seeing selling pressure along with all of Europe (Bunds +7.2bps, OATs +7.0bps, Gilts +5.8bps, BTPs +8.1bps) as it seems the flood of issuance due from the US is being felt everywhere.  After all, given the dollar’s recent trend higher, which is very evident today, for non-USD investors, higher yielding Treasury securities are likely to be very attractive. As to domestic investors, selling ahead of significant issuance is a time-honored tradition.

 

Aside from oil, metals markets are under very modest pressure this morning, which has more to do with the rising dollar than anything specific to those markets.

 

And speaking of the dollar, it is on top of the world yet again this morning, rising against all its G10 counterparts and almost all its EMG counterparts.  SEK (-1.1%) is the worst G10 performer, after its PMI data was substantially worse than forecast with the Composite index tumbling to 47.6, a level only ever achieved during Covid, the GFC and the Eurozone banking/bond crisis.  In other words, things don’t look too good there.  But even NOK (-0.55%) is under pressure despite the strong rally in oil.  This is unadulterated USD strength.  Similarly, EMG currencies are all under pressure save ZAR (+0.6%), which seems to have responded positively to news that there would be reduced blackouts going forward. 

 

On the data front, there is not very much this week, so activity is likely to be driven by other markets given the FOMC is in their quiet period.

 

Today

Factory Orders

0.8%

 

-ex Transport

0.2%

 

ISM Services

52.4

Wednesday

Trade Balance

-$75.5B

Thursday

Initial Claims

237K

 

Continuing Claims

1802K

Source: Bloomberg

 

And that’s really all we’ve got for today.  To me, the biggest risk to markets is the fact that US equity performance is entirely reliant on 7 companies, all of which are very good companies, but whose performance has been extraordinarily outsized and does not seem representative of the economy or market as a whole.  At some point, those stocks are likely to come back to earth and that will result in a very large adjustment to views about the Fed, the economy, and the stock market.  But for now, it is hard to fight the trend, and that includes the dollar higher trend.

 

Good luck

Adf

 

 


			

	
	



				
					


	

		

			Feathered and Tarred
		


				

			Posted on  by 		

			


		

		
The talk of the town is that Jay

Will outline the taper today

Inflation’s been mulish

And he has been foolish

-ly saying t’would soon go away


This outcome means Madame Lagarde

Remains as the final blowhard

Who claims that inflation

Is our ‘magination

Which might get her feathered and tarred


It’s Fed day today and the market discussion continues apace as to just what Chairman Powell and his FOMC acolytes are going to do this afternoon.  The overwhelming majority view amongst the economics set is the Fed will outline its plans to taper QE purchases starting immediately.  Expectations are for a reduction in purchases by $10 billion/month of Treasuries and $5 billion/month of Mortgage Backed Securities.  Many analysts also believe the statement will leave wiggle room for the FOMC to adjust the pace as necessary depending on the unfolding economic conditions.  Powell has been taking great pains in trying to separate the timing of reducing QE with the timing of raising interest rates, and I expect that will continue to be part of the discussion.  Of course, the market is currently pricing in two 25bp rate hikes in 2022, essentially saying the Fed will finish the taper next June and hike rates immediately.  This is clearly not Powell’s desired path, but the wisdom of crowds may just have it right.  We shall see.


In addition to that part of the announcement, we are going to hear the Fed’s view on how inflation will evolve going forward, although at this point, I think even they have realized they cannot use the word transitory in their communications.  Talk about devaluing the meaning of a word!  What remains remarkable to me is the unwavering belief, at least the expressed unwavering belief, that while inflation may print high for a little while longer, it is due to settle back down to the 2% level going forward.  I continue to ask myself, why is that the central bank view?  And not just in the US, but in almost every developed nation.  For instance, just moments ago Madame Lagarde was quoted as saying, “Medium-term inflation outlook remains subdued,” and “conditions for rate hike unlikely to be met next year.”


To date, there has certainly been no indication that global supply chains are working more smoothly than they were during the summer, and every indication things will get worse before they get better.  The number of ships anchored off major ports continues to grow, the number of truck drivers continues to shrink and demand, courtesy of literally countless trillions of dollars of fiscal stimulus shows no sign of abating.  Add to that the current environmental zeitgeist, which demonizes fossil fuels and seeks to prevent any investment in their production thus reducing supply into accelerating demand and it is easy to make the case that prices are likely to rise going forward, not fall.


There is a saying in economics that, ‘the cure for high prices is high prices.’  The idea is that higher prices will encourage increased supply thus driving prices back down.  And historically, this has been true, especially in commodity markets.  However, the unspoken adjunct to that saying is that policies do not exist to prevent increased supply and that the incentive of higher revenues is sufficient to encourage that new supply to be created.  Alas, the world in which we find ourselves today is rife with policies that may have political support but are not economically sound.  The current US energy policy mix preventing oil drilling in ANWR and offshore, as well as the cancellation of the Keystone Pipeline served only to reduce the potential supply of oil with no replacement strategy.  If policy prevents new production, then no price is high enough to solve that problem, and therefore the ceiling on prices is much higher.


I focus on energy because it is a built-in component of everything that is produced and consumed, and while the Fed may ignore its price movement, manufacturers and service providers do not and will raise prices to cover those increased costs.  The upshot here is that instead of high prices encouraging new supply, it appears increasingly likely that prices will have to rise high enough to destroy new, and existing, demand before markets can once again return to a semblance of balance.  Given the fact that fiscal largesse has been extraordinary and household savings has exploded to unprecedented heights during the pandemic and remains well above pre-pandemic levels, it seems that demand is not going to diminish anytime soon.  I fear that rising prices is a new feature of our lives, across all segments, and something we must learn to address going forward.  While there is no reason to believe we are heading to a Weimar-style hyperinflation, do not be surprised if the “new normal” CPI is 3.5%-4.5% going forward.  At the current time, there is simply nothing to indicate this problem will be addressed by the Fed although we are likely to see smaller, open economy central banks raise interest rates far more aggressively.  As that process plays out, the dollar will almost certainly weaken, but we are still months away from that situation.


So, ahead of the FOMC statement and Powell presser this afternoon, here’s what’s been happening in markets.  Despite record high closes in the US markets yesterday, Asia (Nikkei -0.4%, Hang Seng -0.3%, Shanghai -0.2%) did not follow through at all.  Europe, too, sees no joy although only the FTSE 100 (-0.2%) has even moved on the day with other major markets essentially unchanged.  US futures are also little changed at this time with everyone waiting for Jay.


Bond markets, on the other hand are continuing their recent rally with Treasury yields lower by 1.4bps and Europe (Bunds -1.5bps, OATs -2.0bps, Gilts -0.3bps) all rallying as well.  Peripheral markets are doing even better as it seems the European view is turning toward the idea that the ECB will be outlining their new QE program in December with no capital key involved.


Commodity prices continue to give mixed signals with oil (WTI -2.4%) falling sharply, ostensibly on comments from President Biden admonishing OPEC+ to pump more oil.  Will that really get them to do so?  NatGas (-0.7%) is also a bit softer, but the metals complex is actually firmer with copper (+1.05%, aluminum +1.45%, and tin +1.8%) all showing strong gains.  This as opposed to precious metals which are essentially unchanged on the day.


As to the dollar, it is hard to describe today.  While versus the G10, it is generally weaker (CHF +0.4%, NZD +0.4%, SEK +0.3%) it has performed far better against EMG currencies (TRY -0.8%, RUB -0.7%, KRW -0.6%) although PLN (+0.4%) is having a good day.  Unpacking all this the Swiss story seems to be premised on the idea that the market is testing the SNB to see if they can force more intervention while the kiwi story is a response to stronger jobs data overnight.  Sweden seems to be benefitting from the emerging view of tighter policy from the Riksbank as they reduce QE.  On the EMG side, Turkey’s inflation rate continues to be breathtakingly high (CPI 19.89%, PPI 46.31%!) and yet there is no indication the central bank will respond by tightening policy as that is against the view of President Erdogan.  Oil’s decline is obviously driving the ruble lower, surprisingly not NOK, and KRW saw an increase in foreign equity sales and outflows thus weakening the won.


Ahead of the FOMC we see ADP Employment (exp 400K), ISM Services (62.0) and Factory Orders (0.1%), but while ADP will enter the conversation tomorrow, once we are past the Fed, I expect the morning session to be extremely quiet ahead of 2:00pm.  From there, all bets are off, although my take is the level of hawkishness on the FOMC is edging higher.  Perhaps there is some dollar strength to be seen post-Powell.


Good luck and stay safe

Adf

			

	
	



				
					


	

		

			Bears’ Great Delight
		


				

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As Covid renews its broad spread

Investors have started to shed

Their risk appetite,

To bears’ great delight,

And snap up more havens instead


Risk is off this morning on a global basis.  Equity markets worldwide have fallen, many quite sharply, while haven assets, like bonds, the yen and the dollar, are performing quite well.  It seems that the ongoing increase in Covid infections, not only throughout emerging markets, but in many developed ones as well, has investors rethinking the strength of the economic recovery.


The latest mutation of Covid, referred to as the delta variant, is apparently significantly more virulent than the original.  This has led to a quickening of the pace of infections around the world.  Governments are responding in exactly the manner we have come to expect, imposing lockdowns and curfews and restricting mobility.  Depending on the nation, this has taken various forms, but in the end, it is clearly an impediment to near-term growth.  Recent examples of government edicts include France, where they are now imposing fines on anyone who goes to a restaurant without a vaccine ‘passport’ as well as on the restaurants that allow those people in.  Japan has had calls to cancel the Olympics, as not only will there be no spectators, but an increasing number of athletes are testing positive for the virus and being ruled out of competition.


A quick look at hugely imperfect data from Worldometer shows that 8 of the 10 nations with the most reported new cases yesterday are emerging markets, led by Indonesia and India.  But perhaps of more interest is that the largest number of new cases reported was from the UK.  Today is ‘Freedom Day’ in the UK, where the lockdowns have ended, and people were to be able to resume their pre-Covid lives.  However, one has to wonder if the number of infections continues to rise at this pace, how long it will be before further restrictions are imposed.  Clearly, market participants are concerned as evidenced by the >2.0% decline in the FTSE 100 as well as the 0.45% decline in the pound.


While this story is not the only driver of markets, it is clearly having the most impact.  It has dwarfed the impact of the OPEC+ agreement to raise output thus easing supply concerns for the time being.  Oil (WTI – 2.75%) is reacting as would be expected given the large amount of marginal supply that will be entering the market, but arguably, lower oil prices should be a positive for risk appetite.  As I indicated, today is a Covid day.  The other strong theme is in agricultural products where prices are rising in all the major grains (Soybeans +0.6%, Wheat +1.4%, Corn +1.7%) as the weather is having a detrimental impact on projected crop sizes.  The ongoing drought and extreme heat in the Western US have served to reduce estimates of plantings and heavy rains have impacted crops toward the middle of the country.


With all that ‘good’ news in mind, it cannot be surprising that risk assets have suffered substantially, and havens are in demand.  For instance, Asian equity markets were almost universally in the red (Nikkei -1.25%, Hang Seng -1.85%, Shanghai 0.0%), while European markets are performing far worse (DAX -2.0%, CAC -2.0%, FTSE MIB (Italy) -2.9%).  US futures are all pointing lower with the Dow (-1.0%) leading the way but the others down sharply as well.


Bonds, on the other hand, are swimming in it this morning, with demand strong almost everywhere.  Treasuries are leading the way, with yields down 4.7bps to 1.244%, their lowest level since February, and despite all the inflation indications around, sure look like they are headed lower.  But we are seeing demand throughout Europe as well with Bunds (-2.4bps, OATs -2.0bps and Gilts -3.6bps) all well bid.  The laggards here are the PIGS, which are essentially unchanged at this hour, but had actually seen higher yields earlier in the session.  After all, who would consider Greek bonds, where debt/GDP is 179% amid a failing economy, as a haven asset.


We’ve already discussed commodities except for the metals markets which are all lower.  Gold (-0.35%) is not performing its haven function, and the base metals (Cu -1.7%, Al -0.1%, sn -0.7%) are all responding to slowing growth concerns.


Ahh, but to find a market where something is higher, one need only look at the dollar, which is firmer against every currency except the yen, the other great haven.  CAD (-1.2%) is the laggard today, falling on the back of the sharp decline in oil and metals prices.  NOK (-0.9%) is next in line, for obvious reasons, and then AUD (-0.7%, and NZD (-0.7%) as commodity weakness drags them lower.  The euro (-0.25%) is performing relatively well despite the uptick in reported infections, as market participants start to look ahead to the ECB meeting on Thursday and wonder if anything of note will appear beyond what has already been said about their new framework.  In addition, consider that weakness in commodities actually helps the Eurozone, a large net importer.


In the EMG space, it is entirely red, with RUB (-0.75%) leading the way lower, but weakness in all regions.  TRY (-0.7%), KRW (-0.7%), CZK (-0.55%) and MXN (-0.5%) are all suffering on the same story, weaker growth, increased Covid infections and a run to safety and away from high yielding EMG currencies.


Data this week is quite sparse, with housing the main theme






Tuesday
Housing Starts
1590K





Building Permits
1700K




Thursday
Initial Claims
350K





Continuing Claims
3.05M





Leading Indicators
0.8%





Existing Home Sales
5.90M




Friday
Flash PMI Mfg
62.0





Flash PMI Services
64.5






Source: Bloomberg


The Fed is now in their quiet period, so no speakers until the meeting on the 28th.  Thursday, we hear from the ECB, where no policy changes are expected, although further discussion of PEPP and the original QE, APP, are anticipated.  So, until Thursday, it appears that the FX markets will be beholden to both exogenous risks, like more Covid stories, and risk sentiment.  If the equity market remains under pressure, you can expect the dollar to maintain its bid tone.  If something happens to turn equities around (and right now, that is hard to see) then the dollar will likely retreat in a hurry.


Good luck and stay safe

Adf