Monthly Archives: May 2016

OPEC led on production

Oil prices fell slightly amid investor doubts that OPEC will agree to a production cut large enough to make a significant dent in the global glut of crude as U.S. drilling rises.

Members of the Organisation of the Petroleum Exporting Countries(OPEC) will meet next week on November 30 in Vienna to decide on the details of an agreement to cut output that the group has been trying to hammer out since September.

Oil prices fluctuated throughout the day, starting lower in the morning and later briefly turning positive after the Energy Information Administration said US crude stocks unexpectedly fell 1.3 million barrels last week after three straight weeks of builds.

Reports that US drillers added rigs this week tempered the gains ahead of the settlement.

In the US market, West Texas Intermediate (WTI) crude oil futures settled down 7 cents, or 0.2 per cent, at $US47.96 a barrel.

Brent crude futures settled down 17 cents, or 0.35 per cent at $US48.95 a barrel.

Calendar spreads, the difference in price between one month and the next in the futures market, showed little signs that traders are pricing in a big change in market fundamentals.

The front to second-month WTI calendar spread traded at its widest level in seven months on Tuesday, although it narrowed slightly on Wednesday. The one to six-month spread traded at one of the widest levels since August.

The WTI cash roll, which allows physical traders to roll long positions forward, traded down to negative $US1.80 a barrel on Tuesday, the weakest since March.

All are indications that traders expect little change in oversupply in the market in the near term.

“Looking at the forward curve, the spread has gotten substantially weaker on the WTI side … so that’s bearish and pressures the front of the curve,” said Tariq Zahir, an analyst at Tyche Capital Advisors in New York.

“There’s going to be some cut, but is Saudi Arabia really going to take the lion’s share of the cut?”

Doubts remain over whether the group will agree to a proposed cut of 4 per cent to 4.5 per cent that has been discussed. That would imply a supply cut of more than 1.2 million barrels per day, according to Reuters calculations.

Iraq has been one of the more reluctant members to agree to a cut, but Prime Minister Haider al-Abadi told reporters on Wednesday in Baghdad that they were willing to lower their output.

Separately, non-OPEC member Russia has said it would cut production, but domestic oil companies have not worked out details, muddying the outlook for cutting output.

US oil drillers added rigs this week, as shale producers boost spending to capture forecast higher crude prices in coming months. The increase thus far in November is the largest since July.

Drillers added three oil rigs in the week to November 23, bringing the total count up to 474, the most since January, but still below the 555 rigs seen a year ago, energy services firm Baker Hughes.

Favour as investors

The remarkable outperformance of small caps seems to have run out of puff, with investors finally turning their attention back to the growth potential of blue chips.

Since the beginning of October, there has been a clear divergence between the top 20 ASX companies and the small cap index. While the former have risen about 3 per cent, small caps are now off 1 per cent – and the difference is even more pronounced since the US election.

That’s in sharp contrast to the previous 18 months during which small caps rallied about 13 per cent, while the top 20 stocks collectively fell 15 per cent, weighing on the benchmark S&P/ASX 200 Index.

“We’ve had a reversal of the lower-for-longer, pay-up for certainty, safety yield thematics,” said Matt Sherwood, head of investment strategy at Perpetual Investments. “Investors have decided that trade is over and are buying up quality.”

Investors sold off bonds after Donald Trump’s surprise election victory, which saw the yield on Australian government bonds spike. This bodes well for Australian banks – that like to borrow at the short end and lend at the long end – meaning a steeper yield curve is good for the earnings. It also hasn’t hurt the local banks that President-elect Trump has vowed to slice regulation in the sector.

Big four lead way

As such, investors have poured money into bank stocks also as fears of further bank capital raising have eased both abroad and locally. The big four banks have led the local rally since the Trump election, each rising about 10 per cent as investors take advantage of the rotation out of yield plays.

Miners give back gains

Investors are taking profits in the mining sector, as early optimism on the ASX sours amid heavy selling in Aussie bonds, while Boral slumps following a capital raising.

  • Boral shares plunge 10% after resuming trade, says placement was ‘greatly oversubscribed’
  • Japanese stocks continue to rally, hitting their highest since early January on a weaker yen
  • Rio sells aluminium assets in Scotland, in a deal that Citi says is ‘value accretive’
  • Spot gold slides below $US1200, losing $US100 in three weeks and hitting gold miners
  • Bonds resume their sell-off, with the yield on the 10-year note climbing to 2.76 per cent

The election of Donald Trump has sparked worries of increasing trade protectionism, but the following chart shows that global trade has already been slowing since 2012.

Several factors are contributing to the sluggishness of world trade, BNP Paribas notes: there’s cyclical reasons such as sluggish eurozone growth, the slowdown in the emerging economies and the changed composition of demand in favour of household consumption and public spending.

But other factors are structural, the bank’s economists say.

“Indeed globalisation is losing steam, and, in recent years, we have seenhigher wage costs in China. All of these factors hamper the international segmentation of the supply chain and trade.”

BusinessDay columnist Elizabeth Knight explains why James Packer’s casino wounds have been re-opened:

This week’s formal arrests by Chinese authorities of 18 Crown Resorts staff more than a month after they were detained highlight the particular problem for the James Packer-controlled casino operator. Each new incremental bit of news reignites investor concerns about the ramifications of losing a large part – if not all – of the Chinese VIP market.

There is so much unpredictability about what will happen to this lucrative source of gambling customers – to say nothing of the fate of those now arrested – that it’s difficult for the company to provide any meaningful guidance on what it means for earnings this year or next.

The information vacuum from the Chinese authorities only compounds the issue.

However, Crown does know how many Chinese VIP players have signed on since the Chinese raid last month. But it’s not telling.

The Crown share price, which fell 20 per cent in response to the initial arrests, has already factored in an almost total drying up of the Chinese VIP market. That has cost the market value of the company half a billion dollars.

It has a legal team in China dealing with the situation and it will also have a better handle on the staff’s situation and prospects. However, it is understandable that Crown is heralding its legal tactics at the risk of inflaming the Chinese authorities.

It also knows the activities that its China-based staff were engaged in on the mainland and if they were actively or aggressively marketing to locals.

Since the raids, there has been numerous – and often contradictory – theories about why Crown in particular was targeted.

This week, one of the junker operators – the groups that market and arrange gaming clients to travel to casinos – broke ranks and said Crown was in effect operating outside the bounds.