Global Investing

Three snapshots for Wednesday

Saudi Arabia has repeated publicly it would prime its pumps to meet any shortfall in exports from fellow OPEC member Iran, this chart shows their production since 1980:

Unwelcome news for British finance minister George Osborne ahead of today’s budget – February public sector borrowing comes in at £15.2bn against expectations for £8bn.

Along with the rise in bond yields, expectations for interest rates at end 2013 and 2014 have started to pick up:

 

 

Three snapshots for Thursday

The VIX volatility index has fallen below the average level seen during the 2003-2008 pre-crisis period.

The low level of the VIX is also being matched by moves down in other ‘safe haven’ assets. The dollar is near an 11-month high against the yen, and a rise in U.S. Treasury yields is pushing up the spread between U.S. and Japanese bond yields.

President Barack Obama and British Prime Minister David Cameron discussed the possibility of releasing emergency oil reserves during a meeting on Wednesday, two sources familiar with the talks said.

Oil prices — Geopolitics or growth?

It’s the economy, stupid. Or isn’t it?

Brent crude has risen 15 percent since the end of last year, focusing people’s minds on the potential this has to choke off the recovery in world growth. But some reckon it is the recovery that’s at least partly responsible for the surging oil prices — economic data from United States and Germany has been strong of late. There are hopes that France and the United Kingdom may escape recession after all. And growth in the developing world has been robust.

Geopolitics of course is playing a role  as an increasing number of countries boycott Iranian oil and fret over a possible military strike by Israel on Iran’s nuclear installations.  But Deutsche Bank analysts point out that world equity markets, an efficient real-time gauge of growth sentiment, have risen along with oil prices.

Their graphic (below) shows a remarkably close relationship between oil prices and the S&P 500. Click to enlarge

Slipping up on oil and Greece?

Thursday’s crude oil price surge to its highest in almost 4 years (apparently due to a subsequently denied report from Iran of a Saudi pipeline explosion…phew!)  illustrates just how anxious and dangerous the energy market has become for world markets yet again this year and HSBC on Friday spotlighted its threat to the global economy and asset prices in a note entitled  “Oil is the new Greece”. The point of the neat headline hook was a simple one:

With Greece disappearing, at least temporarily, from the headlines, investors have quickly found a new source of anxiety thanks to the recent surge in oil prices

Just like many investors and strategists over the past month, HSBC rounded up its various assessments of the impact and fallout from higher oil prices, stressing the biggest risk comes from supply disruptions related to the Iran nuclear standoff and that any major political upheaval in the region would threaten significant crude spikes. “Think $150 or even $200 a barrel,” it said. It reckoned the impact on world growth, and hence the broader risk horizon depended on the extent of this supply disruption and the durability and scale of the price rise.  Worried equity investors should consider hedging their portfolios by overweighting the energy sector. Obvious winners in currency world would be the Norwegian crown, Malaysian ringitt, Brazil’s real and Russia’s rouble, the bank’s strategists said. The most vulernable units are India’s rupee, Mexican and Philippines pesos and Turkey’s lira.

What chances true democracy in oil-rich Iran?

Truly, oil can be a curse. Having it may enrich a country (more likely its rulers) but it does not seem condusive to democracy. And the more oil a country produces, the less likely it is to make the transition to democracy, according to research from investment bank Renaisssance Capital.

So as Iran goes to the polls today, what are the chances it will become a democracy? (Iran itself could argue, reasonably enough, that it is the most democratic country in the region — everyone over the age of 18, including women, are allowed to vote, though the choice of candidates is restricted)

Surprisingly, the Renaissance report’s author Charles Robertson concludes, Iran does have a chance to achieve democracy, though probably not this year. He says no oil exporting country that produces more than 150,000 barrels per day of oil per million of population has ever achieved a transition to democracy (note Norway was already a democracy before it found oil). But others which produce less oil have done so, notably Algeria, Gabon, Congo Indonesia, Nigeria and Ecuador (Some of these democracies are clearly flawed). Robertson writes:

Emerging beats developed in 2012

Robust growth from the emerging market basket in January was always going to be tough to beat, but research from February’s gains show just how strong these markets are performing against developed ones, and not just from the traditional BRICs either, research from S&P Indices shows.

Egypt has been a prime example. Following a bout of political unrest and subsequent removal of Hosni Mubarak after nearly 30 years in power, Egypt’s market returns have rocketed, climbing 15.3 percent in February on top of January’s 44.3 percent take-off.

Thailand, Chile, Turkey and Colombia are also on the to-watch list as these emerging lights have all flashed double-digit returns in the first two months of this year, while all twenty emerging markets included in the S&P data were up, gaining an average of 6.62 percent, making gains in the year-to-date a mouth-watering 18.95 percent.

The haves and have-nots of the (energy) world

Nothing like an oil price spike to bring out the differences between the haves and have-nots of this world. The ones who have oil and those who don’t.

With oil at $124 a barrel,  the stock markets of big oil importers India and South Korea posted their first weekly loss of 2012 on Friday.  But in Russia, where energy stocks make up 60 percent of the index, shares had their best day since November, rising more than 4 percent. The rouble’s exchange rate with the dollar jumped 1.5 percent but the lira in neighbouring Turkey (an oil importer) fell.

Emerging currencies and shares have performed exceptionally well this year. Some of last year’s laggards such as the Indian rupee have risen almost 10 percent and stocks have jumped 16-18 percent. But unless crude prices moderate soon, the 2012 rally in the  stocks, bonds and currencies of oil-poor countries may have had its day. Societe Generale writes:

The missing barrels of oil

Where are the missing barrels of oil, asks Barclays Capital.

Oil inventories in the United States rose sharply last week, with demand for oil products  such as gasoline at the lowest in 15 years and crude stockpiles at the highest since last September. Americans, pinched in the wallet, are clearly cutting back on fuel use.

But worldwide, the inventories picture is different – Barclays calculates in  fact that oil stocks are around 50 million barrels below the seasonal average. And sustainable spare capacity in the market is less than 2 million barrels per day. What that means is that the world has “extremely limited buffers to absorb any one of the series of potential geopolitical mishaps.” (Barclays writes)

A big difference from the picture at the start of 2012. With the global economy weak, analysts predicted OPEC would need to pump 29.7 million barrels per day in the first quarter, more than a million barrels below what the group was actually pumping. Logic dictates inventories would have started to build.

Central banks and the next bubble (3)

Expectations are running high ahead of next week’s LTRO 2.0 (expected take-up is somewhat smaller than the first time and the previous estimate though, with Reuters poll predicting banks to grab c492 bln euros).

The ECB’s three-year loan operation, along with the BOJ’s unexpected easing, BoE’s QE and commitment from the Fed to keep rates on hold until at least end-2014 may constitute competitive monetary easing, Goldman Sachs argues.

As the moves to ease have been rolled out, we increasingly encounter the argument that such ‘competitive’ (non-coordinated) monetary expansions by developed market central banks are at best ineffective and at worst a zero-sum game at the global level—and perhaps a precursor of something worse, such as a slide towards protectionism.

Discovering the pleasure of dividends in Russia

American financier J.D. Rockefeller said watching dividends rolling in was the only thing that gave him pleasure. But it is a pleasure which until now has largely bypassed shareholders in most big Russian companies. That might be about to change.

Russian firms,  especially the big commodity producers, are generally seen as poor dividend payers. So dividend yields, the ratio of dividends to the share price,  have been unattractive.

On a trailing 5-year period, the average dividend yield in Russia was 1.8 percent compared to 2.5 percent for emerging markets, notes Soren Beck-Petersen, investment director for emerging markets at HSBC Global Asset Management. That absence of positive cash flow from companies is one reason why Russia has always traded so cheap relative to other emerging markets, he says.