The Lowdown on Markets to 19th February 2016
World Markets at a Glance
In this week’s issue
- Global equity markets rise on the back of an upsurge in the weekly price of crude oil.
- The Saudis and Russia agree output freeze but will other members accept to the terms.
- It would appear that the PBOC have no intention to persistently weaken off their currency.
- Will the European Central Bank announce a further stimulus package next month?
- Meanwhile in the US the Fed appear to be between a “rock and a hard place” on rate hikes.
- Equities remain the asset class of choice but investors must be prepared for more volatility.
“Global equity markets rally on the back of Opec and rising crude oil prices”
Global equity markets closed out the week in positive territory as the lingering concerns about the future price of crude oil continued to play a significant part in the direction of markets. Finally, the plunging oil price has led to the likes of Saudi Arabia, Russia, Venezuela and Iran to try and negotiate an agreement so as to freeze output, given that the world is awash with crude oil and because of the devastating collapse in the price it is now threatening to have catastrophic consequences for many of the members of Opec.
Clearly, there are major geo-political issues between many of the member states with none bigger than those between Iran and Saudi Arabia. Indeed, the Saudi’s have already cut off there diplomatic relationships with the Iranians back in January, following a mob attack on their embassy in Tehran, resulting in the execution of a leading Shia cleric, Nimr al-Nimr, in Saudia Arabia’s eastern province.
“Last week’s move on the face of it seemed hopeful, which in turn, led to a thumping great rise in the price of Brent crude oil”
However, despite these sorts of issues last week’s move on the face of it seemed hopeful, which in turn, led to a thumping great rise in the price of Brent crude oil on Wednesday. In essence, what happened was that the Iranian oil minister, Bijan Zanganeh, came out of a two hour meeting with some of his Opec members to approve a deal that had been brokered by the Saudi’s with non-Opec member Russia the day before.
Equally, it still remains unclear what will happen, given that whilst Iran will support any stabilisation methods to improve the price of crude oil, Mr Zanganeh, has given no indication that they would be prepared to limit their own production. Indeed, Iran which has the fourth biggest oil reserves in the world, has actually spoken about its desire to expand its output, following the lifting in January of western sanctions imposed over its nuclear programme. Consequently, their still seems to be much uncertainty surrounding the issue of production levels , in fact, the Saudi’s and Russia have also said that they would only hold their January output levels firm, only if other Opec members were to do likewise.
“It is worth remembering that the kingdom, Opec’s biggest oil exporter has enormous public spending commitments”
Meanwhile, it is worth remembering that the kingdom, Opec’s biggest oil exporter has enormous public spending commitments and requires the oil price to be nearer US$100.0 a barrel, hence the recent supposed sell off of asset from some of the largest sovereign wealth funds in the region to bolster up the short-fall of income lost from the collapse in the oil price. Unquestionably, even if there is a resolve and we see a sustained cut back of supply, which in turn, has a positive effect on the oil price, it would not be long before the American oil shale producers came back on the scene which would be counterproductive if they then flood the market with oil.
This has led too much speculation as to where the price of crude oil might be heading over the rest of the year with wide spread of views from US$25.0 to US$50.0 a barrel. However, what we might have seen is a bottoming out of the price at around US$26.0 as Opec and the American oil producers lock horns over the coming months.
On the other hand, what might be more important over the coming months is whether any of the large international European oil groups cut their dividend payments to their shareholders given that many of the larger oil groups have become some of the biggest dividend payers in their relevant countries indices. Already, companies such as Royal Dutch Shell, who are about to complete their takeover of BG, and Chevron have said that they will keep their dividends unchanged, even though they are probably failing to cover their payments from cash flow.
“The issue of cutting dividend pay outs from this vast sector is a tricky one”
Regrettably, some oil companies have already cut their dividends such as Eni of Italy, ConocoPhillips, and Anadarko Petroleum that are listed in the United States all of which are seeking to keep their borrowings down, or under control, whilst investing towards future production. Clearly, the issue of cutting dividend pay outs from this vast sector is a tricky one, given that the largest five western oil companies last year paid out around US$46.0 billion [£32.0 billion], therefore, for many investors any dividend cuts might lead to them selling their positions in favour of companies that are growing their dividends.
Another issue of controversy for the financial markets over the last few months has focused around China’s economy, and whether we would see further monetary actions taken by their central bank, the PBOC. Indeed, a concern of whether they might devalue the yuan [renminbi] again has featured very highly in the minds of the world’s central bankers, foreign exchange analysts and professional investors. However, in a press interview last week, Zhou Xiaochuan, governor of the Peoples Bank of China reiterated the Chinese view that there was no intention from them to persistently depreciate their currency. This in turn, saw the yuan [renminbi] rally against the US dollar with its biggest rise in more than a decade.
“The Federal Reserve’s January gathering was seen to be a rather dovish affair”
Once again, the markets seem to have been focused upon the words and statements from central bankers around the world and it was not only the PBOC that voiced their views. In Europe, Mario Draghi, president of the European Central Bank, hinted that further stimulus measures might be disclosed next month, supporting last month’s ECB minutes. Meanwhile, in the United States the Federal Reserve’s January gathering was seen to be a rather dovish affair as concerns about the weakness of the global economy might begin to impinge on the US economy.
Clearly, the Federal Reserve Bank are still between a “rock and a hard place”, on the one hand, they are seeing global economic weakness, central banks around the world cutting interest rates to near zero, or “negative interest rate protocol”, with the possibly of further quantitative easing from the likes of Europe and Japan. And on the other hand, they have seen US core consumer price inflation hit a three-and-a half-year high of 2.2 per cent in January, and unemployment continue on its path of recovery.
“It is unlikely that the Fed will raise US interest rates again in March”
Therefore, whilst it is unlikely that the Fed will raise US interest rates again in March, rising domestic pricing pressures will certainly have an effect on the Fed official’s minds after that date, especially, if fears of recession, China, and crude oil prices recede or stabilise. However, given the uncertainty on financial conditions around the world, markets are likely to remain quite volatile, and unpredictable, over the coming months.
And on that very point, whilst we have seen most global equity markets begin to rally over the past few trading sessions, the trend still remains to the downside, given that a number of the markets are firmly in “bear market territory”. Unfortunately, the symmetry for equities is still overwhelmingly bearish and therefore investors must be mindful that these rallies tend to come on the back of harsh corrections, which in turn, can then lead to a short lived “bear market rally” followed by a further nasty decline. Clearly, last week could have been such an event with the likes of Japan up by 6.8 per cent, the UK by 4.3 per cent, Germany 5.0 per cent, France 5.5 per cent and China 3.5 per cent.
“Over the coming weeks events are likely to unfold which will give us a better idea as to the longer-term direction of most asset classes”
Undeniably, over the coming weeks events are likely to unfold which will give us a better idea as to the longer-term direction of most asset classes. However, taking much into consideration equities still remain the preferred asset class of choice, but there is likely to be a continuation of short-term selling, and volatility, as the macro events dictate the overall movement for global stock markets.
Clearly, the trend for markets is still towards the downside; therefore, it will be very important for global investors to be careful and to select their investments very prudently, whilst taking some advantage of any unwarranted weakness towards that particular investment. Understandably when times of panic come to the markets any investments can feel rather counterproductive but for those long-term investor’s times like these can turn out to be quite rewarding.
Peter Lowman Chief Investment Officer
Peter Lowman has been in investment management for over forty years and prior to becoming Chief Investment Officer for Investment Quorum, he worked within a larger asset managers, primarily as an Investment Director with Cazenove’s.
He is responsible for the overall investment strategy for Investment Quorum clients and sits on the Investment Quorum Committee.
This article does not constitute specific advice and investors should bear in mind capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority .