Seems like Glencore has had the bloodbath. The market is definitely fearful. Seems like the big, slow money is starting to get scared as well. The market now wants the FED to raise rates. Read the below analysis for a great insight. We're not out of the woods yet. Wish I could get my timing right and not always call things too early.
The herd is getting restless
Stock markets have not done well this year. They are well off the highs, some meeting the technical definition of correction and others creeping into bear territory, but there has never been a sustained heart stopping sell off. We are due for one, not simply because father time tells us so but because the drip, drip, drip of negative news will bring the ceiling down at some point.
The mood towards QE for example is turning. The drug is becoming less effective and the voices warning of a timebomb in the making are getting louder. Even stock market bulls can see that QE and low interest rates are artificial aids that can only work for so long before the side effects outweigh the benefits. Zombie companies are kept alive, risk is mispriced and savings and pensions devastated. Central banks are desperate for inflation to take hold. It is, but it is the wrong sort, consumer price inflation is desirable, asset inflation is not. Share prices are being hyped by share buybacks and M&A activity, not by thriving revenues and rising profits.
Europe make no mistake is in crisis. The Greeks will not implement their reforms and the Catalans may have wounded Spain's recovery after yesterday’s vote. The migrant crisis has opened up huge divisions within the EU. The Hungarian prime minister accuses Germany of "moral imperialism". President Hollande has all but invited Slovakia, Hungary, the Czech Republic and Romania to leave the EU saying that "Europe is a community of values. Those who do not share these values and principles have to question their presence in the EU". How about those countries with an aversion to paying taxes Francois, do you put them in the same boat?
Angela Merkel offering to take 800,000 refugees may win her humanitarian plaudits and prizes but it will not win her popularity amongst European electorates. It is the height of arrogance to make such an offer without consultation with the Schengen agreement in place. Germany may take 800,000 but once registered in the EU they can freely move elsewhere, hence we saw border restrictions imposed last week. This is another lady whose water walking abilities are beginning to fail her.
The French and Germans may agree on how to respond to the migrant crisis but they are at loggerheads on fiscal union and it came out into the open again last week. French economy minister Emmanuel Macron speaking in London said that the eurozone will fall apart if Germany does not give up its opposition to fiscal union and transfers to poorer regions. He sees the battle lines as between Calvinists who he describes as those "who want to make others pay until the end of their lives" and Catholics. The gloves are off.
There will he argues be no convergence without fiscal transfers and if that does not occur the currency union might as well be dismantled. Difficult to argue with and as there will be no fiscal union without political union, and political union is inconceivable in the current nationalistic climate, there is only one conclusion to be drawn about the future of the eurozone. It will either limp along in its current format, rupture completely or shrink to a group of core zealots countries.
The last thing the European economy needed on top of everything else was a home-grown VW engineered corporate and sector crisis. Then there is China delivering another poor PMI as did Japan; Norway and Taiwan cutting interest rates; emerging market currencies at record lows against the dollar and the UK recovery faltering. The bulls have been restless for quite some time, nervously grazing but still inclined to buy dips. There is a scent in the air of a change in direction, of a stampede in the offing.
On Friday European markets rallied 3% after Janet Yellen signalled an interest rate increase is still on for this year. That means monetary divergence and a weaker euro. US stock markets were far less happy at the prospect of a stronger dollar eating into exports. The search for growth has come down to the dangerous game of robbing Peter to pay Paul. For the week as a whole stock indices for both regions were down.
Oil caught up in the mix
The atmosphere is febrile and oil is caught up in the mix driven by oil fundamentals one minute and macroeconomic fundamentals the next with cross currents coming from financial sentiment, currency volatility and technicals. Should any credibility be attached to Iran's claim that by the end of the year it will have added 500,000 bpd by the end of the year and 1 mbpd by next Spring? Perhaps not but we have been warned. With global stock levels at all-time highs and a huge ongoing excess of supply over demand now and through 2016 bullish inclinations need to be reined in.
There are positive straws in the wind from four consecutive weeks of Cushing stock draws, from falling US domestic production and from robust US gasoline demand but, whilst encouraging, the crude excess is so high that another substantial price fall cannot be ruled out. Cushing crude stocks for example have drawn by 3.7 million bbls in the last 4 weeks but in the same period total US commercial stocks have risen by 14 million bbls. Product stockbuilds are dwarfing the crude draw. It is significant that the large increase in WTI net speculative length over the last 5 weeks has far more to do with shorts covering than length being accumulated. The positive straws have persuaded shorts to take profit but not to go long.
What is apparent is a growing acceptance that oil prices are going to be lower for a much longer period than first thought and cloth has to be cut accordingly. The CEO of Total told investors last week that "we are preparing the group to face low oil prices for a long time". His policy cornerstone is to cut capital expenditure and costs so that Total can cover an unchanged dividend at $60 bbl in 2017 and at $45 bbl in 2019. Economic production has replaced production at any price as the watchword, which will be music to Saudi ears.
The forward price curve supports this view. At the end of last year the Brent futures forward curve was pricing 2015 on average at $61.73 bbl with 2016 at $68.85 and 2017 at $72.84. At last Thursday’s close the actual average price to date for 2015 was $56.78, only $5 bbl below the Dec 31 futures 'prediction'. However, 2016 had fallen to $52.83 (-16.02) and 2017 to $57.67 (-15.17). The price for 2020 has fallen from $78.89 to $62.96.
Oil prices emerged from last week unscathed, although not without a dip down to $47.70 on Brent and $43.71 on WTI. Gains on Friday left Brent +1.13 on the week at $48.60 and WTI + 68 cts at $45.70. There are clearly local trading issues at Cushing with the Oct/Nov cash roll rising to parity. That does not make any sense with Cushing stocks at 54 million bbls and 33.5 million bbls above last year’s levels, unless most is unsuitable for delivery into the WTI contract, an issue which the CME needs to offer more transparency on. The Nov/Dec WTI futures spread by contrast closed at -49 cts/bbl. The Baker Hughes rig numbers fell by 4 making it four consecutive weeks of small declines.
Gasoline was the week’s winner gaining 3.97 cts/gal with Heat + 3.18 cts/gal. It was the winner not only on price but in the battle with diesel. What price now on forecasts of diesel supply shortages? Peak diesel theories have been punctured by a classic black swan event.
