Focus off PEOTUS Trump (phew!) .....

Tuesday 29th November 2016

Focus off PEOTUS Trump (phew !) ..... the market's got other things on its mind.

ref:- "Caution reigns ahead of Italian referendum and OPEC meeting", The Financial Times Global Overview, Markets and Investing

ref:- "OPEC said to remain split as Russia says it won't attend meeting", Bloomberg Markets

It may just be that things have been overdone ..... after all, technical overbought / oversold indicators have been suggesting as much for a while, especially in bond markets. It's certainly not unreasonable that the markets should be catching its breath finally and the so-called "Trump Trades" have been giving a touch back over the last 24 hrs or so. That is to say, US equities have come off their record highs of Friday, the US Dollar is a little lower, and so are bond yields. It's not as though there is any widespread reassessment of the likely ramifications to the markets of Mr Trump's high-spending, low-taxing, inflation-goosing policies going on *** see below***. Rather, it's a case of market moves (temporarily?) running out of puff as investors turn their attention at long last to other things.

As well they might .... tomorrow's OPEC meeting in Vienna and Italy's referendum on constitutional reform on Sunday are both pretty crucial. And talking of votes, there's also the small matter of Austria's re-run presidential election on Sunday, which commands a much lower profile but could confirm recent political trends in a manner that Brussels would find most uncomfortable.

So what's the latest on OPEC, and the chances of them cobbling together a deal? Looking at the price action alone, you'd say this was a long way from a "done deal" all of a sudden. Very roughly, the price of Brent crude rallied to over $53 back in early October after OPEC had announced its intention to cut back production to 32.5 - 33 million barrels per day. It subsequently fell nearly 10% in a month as it became obvious that key members were only keen on a deal provided that their own production levels remained unaffected. Cue more bullish noises from producers, and a week ago we were approaching $50 again. The price now? $46.40, and plainly there are still big issues to be settled and little time in which to do it.

From what we hear, the current position is: The Iraqis, who need to maximise revenues for their fight against Isis, will freeze current production levels but won't reduce them. Iran has offered to cap production at 3.975 million bpd (200,000 more than it currently produces), a proposal that the Saudis have countered by suggesting a number of 3.707 million barrels. In essence, Iraq and Iran both want concessions from OPEC on production cuts and to be treated in the same way as those much smaller special cases Libya and Nigeria. OPEC would like to see non-OPEC producers doing their bit too, and have proposed that Russia cuts by 600,000 bpd. The Russians have said that they would freeze production at current (record) levels, but have shown no interest in lowering output, and are not attending the Vienna meeting (as "observers").

All in all, it's a bit of a shambles .... predictably enough. It looks as though the only producers willing to take a haircut are the Saudis and neighbours U.A.E. and Kuwait., and you wouldn't expect their offers of restraint to last too long if they're not met by compromises from other members. There's a high stakes game of poker going on, and for now no one is prepared to back down. Saudi has for the first time suggested that it is prepared to walk away in the expectation that the global supply/demand balance will be restored in 2017 anyway by improving demand. That would be a game-changer.

It might seem inconceivable to some that OPEC will drop the ball once again given the likely price reaction to failure ..... a test of $30, according to brokers PVM. It could happen though, and Goldman Sachs now put the chances of a deal at no more than 30%.Is it too much to wonder if the future for OPEC should a deal fall through, rather than just its credibility, would be in question?

We discussed the Italian referendum at some length last week ..... today we'll just note the pounding being handed out to Italian bank shares. It's not hard to see why if you imagine one scenario:  a "NO" to constitutional reform in the vote, PM Renzi resigns, political deadlock ahead of new elections and the prospect of a rise in popularity of the anti-euro Five Star party, consequent loss of investor confidence leading to inability to raise enough from private sources to recapitalise the banking system, a further run on bank shares, a "bail-in" of  bondholders resulting in large losses for individuals, political backlash...... well, enough said (for now).

Austria? Back in May, Alexander Van der Bellen of the Greens Party "beat" Nobert Hofer of the right-wing Freedom Party in a run-off for the Presidency by just 31,000 votes. The courts subsequently ruled that there were enough questions over counting procedures to merit a new poll, taking place this weekend. How much importance should we attach to the event should Mr Hofer get elected? Mr Hofer is less strident than his abrasive party leader Heinz-Christian Strache, and more to the point the post of President is largely ceremonial. Nevertheless, a win for the Freedom party will be another unwelcome confirmation to the EU that populist, often strongly anti-European forces are on the move.

*** For an alternative view on the Trump effect and how it applies to the US Dollar, you should have a look at:

"Trump Bubble Burst Will Drive Yen to 98 per Dollar : UBS Wealth" Bloomberg Markets

UBS' Wealth Management team don't buy into the theory that Trump's high-spending plan that encourages inflation and higher interest rates automatically means a stronger Dollar ..... at least, not for much longer. With the USD / JPY rate having breached JY114.00 to the USD last week, that has plainly been the focus so far. But in forecasting the Yen to bust back below 100 per dollar next year, UBS reckon another factor will take centre stage ..... Trump's "America First" trade policy. An isolationist stance that scraps existing and potential trade agreements, slaps on punitive tariffs and builds walls along borders (okay, fences in parts) will be BAD NEWS for the dollar, they argue.

Sounds logical enough, particularly in isolation ..... and don't forget that this time last year most were long dollar / short yen and they got a very bloody nose.