Fed official flags tight conditions Expectations of rate rise at March meeting retreat amid market turmoil
(…) Mr Dudley said: “We’re acknowledging that things have happened in financial markets and in the flow of the economic data that may be in the process of altering the outlook for growth and the risk to the outlook for growth going forward, but it’s a little soon to draw any firm conclusions from what we’ve seen.”
A few excerpts from a research piece by Goldman Sachs economists Jan Hatzius and Zach Pandl: Revising our Fed Call
We … now expect the FOMC to keep policy rates unchanged at the March 15-16 meeting … financial conditions have tightened meaningfully, and officials sound inclined to take more time … We therefore expect the next rate increase in June, and see a total of three rate increases this year.
… our forecasts remain well-above market pricing, which now shows only about a 50% chance that the Fed raises rates at all this year, and a 25% chance that the committee lowers rates. The first full rate hike is not priced in until about August 2017.
6 more weeks to wait!
The oil windfall remains elusive in Europe as well. As seen yesterday, core retail sales in the EA19 countries have been flat since August which is the period when Brent prices dropped 50%!
Retail sales in the euro area fell further in January, according to the latest Eurozone Retail PMI®, marking a third straight monthly decline. Each of the three largest eurozone economies saw downturns in sales, with ltaly recording the worst performance overall.
The headline Markit Eurozone Retail PMI – which tracks month-on-month changes in like-for-like retail sales in the bloc’s biggest three economies combined – remained below the neutral 50.0 mark in January, registering 48.9. This indicated a modest rate of decline that was little-changed from that recorded in December (PMI at 49.0).
Sales were up on an annual basis, however, the first time year-on-year sales growth has been recorded since October.
Phil Smith, economist at Markit which compiles the Eurozone Retail PMI survey, said:
“Sales were higher in January than the situation one year ago, although on a monthly basis they have slipped steadily since November. This loss of momentum is largely reflective of a slowdown in Germany, where sales have now fallen twice in the past three months, albeit marginally. Italy has also shown renewed weakness, while France continues to languish amid generally stagnant market conditions.”
Long but well researched piece worth reading. Some excerpts:
(…) In a “stress” test it conducted in November, the Russian Central Bank estimated that with Ural crude prices below $40 per barrel between 2016-2018, the Russian economy would contract five percent in 2016, inflation would run at 7-to-9 percent, and that these conditions “would also raise risks to inflation and financial stability. (…)
The situation of Russian energy producers is also difficult. The Telegraph (UK) in early January quoted Russia’s deputy finance minister, Maxim Oreshkin, as telling TASS earlier this month that low crude prices could lead to “hard and fast closures in coming months.” The article also said that in the key Soviet-era fields in western Siberia, the annual rate of depletion is averaging 8 percent to 11 percent, while new projects are being curtailed.
According to the Telegraph, Transneft, the Russian crude and product pipeline monopoly, estimated that Russian crude exports could decrease in 2016 by some 460,000 barrels per day, based on producer applications for pipeline capacity.
In an interview with TASS, the Russian news agency last week, Lukoil Vice President Leonid Fedun commented that Lukoil was unlikely to produce the one hundred million tons it produced in 2015. He also said that it made more economic sense to sell one barrel of oil for $50 than two barrels for $30.
The pain for Rosneft, the company which the Russian government hoped would gain the size necessary to compete on equal terms with Western oil majors, is particularly acute. As part of its effort to gain scale, the company in 2013 took on massive debt—$40 billion according to Reuters—to finance its acquisition of Russian competitor TNK-BP for $55 billion.
To help pay down debt, Rosneft, also in 2013, concluded an agreement with Chinese National Petroleum Corporation to supply 400 million metric tons of crude over twenty five years, under which Rosneft was entitled to receive prepayment equal to 30 percent of the contract’s value (Rosneft received RUB 1027 billion in 2015 Q3).
At the end of Q3, Rosneft’s net debt stood at $24 billion. Yet, Alexey Bulgakov, a fixed income analyst at Sberbank CIB estimates that Rosneft may already have accessed the maximum amount of cash it can under the deal, given the decline in price from ~$100-plus per barrel in 2013 to ~$30 per barrel now and the terms of the agreement. And, should crude prices remain at current levels, Rosneft likely cannot generate the cash to cover its investment, interest, and debt repayment obligations. (…)
The Saudis and their Gulf Arab allies also have compelling reasons to consider production cuts to balance the global crude market and raise prices. They depend on revenues from crude and crude product exports as much as if not more so than the Russian government to fund government spending. Like the Russian government, they face serious domestic and international challenges—including wars and domestic tensions—that they counted on the export of crude and crude products to fund.
As a result of lost revenues and deteriorating budget numbers, the government are drawing on foreign currency and sovereign wealth resources, seeking to cut spending, including in such politically sensitive areas as subsidies for individuals and businesses, and to defer or cancel important investment projects (the UAE in recent days suspended the tender process for stage two of a project to build a 1,350 mile railroad from Kuwait the Indian Ocean along the Persian Gulf).
OPEC dynamics are another important consideration. Other OPEC members—Venezuela, Algeria, Nigeria, Angola and Libya—repeatedly have called for output to be cut. In response, the Saudis have argued that OPEC cuts would be ineffective in the absence of simultaneous cuts from non-OPEC countries members. Were the Saudis and their Gulf Arab allies to reject a sincere Russian commitment to cut production, their credibility and authority within OPEC would suffer perhaps irreparable damage.
Also, for the Saudis, the plans to sell shares in Saudi Aramco and/or its downstream operations could play an important role. The price investors will be willing to pay for shares in these entities will depend on the value they place on the entities, and this value will depend on their assessment of the entities’ management, strategy, and prospects. If, for example, potential investors believe that management, at the behest of the Saudi government, will sacrifice growth, profits, and dividends to achieve Saudi foreign policy goals through low prices, investors’ interest might be tepid at best.
The Russians potentially enter any discussions with a weaker hand. (…) Possibly, if the Russian government believes its hand is weaker, it might consider it advisable to reach agreement expeditiously. After all, the Russian government should take into account that if Russian data during the first quarter shows declines in output and exports, as comments from Russian government and company officials cited above suggest might happen, and Q1 2015 financial reports show intensifying financial pressures on Russian energy companies, Saudis and their Gulf Arab allies might be tempted to decide to maintain pressure on prices and force Russia to absorb the cuts necessary to balance the global crude markets.
But what about Iran, the Saudis’ enemies and the 2016 oil flooders?
(…) Iraq, Algeria, Nigeria and Ecuador would join fellow Organization of Petroleum Exporting Countries members Iran and Venezuela and non-OPEC producers Russia and Oman if talks are scheduled, Venezuela said in a statement after its Oil Minister Eulogio Del Pino held discussions in Iran.
Del Pino, who was in Tehran Wednesday during a tour of OPEC and non-OPEC countries, stopped in Russia this week and held talks with officials including Igor Sechin, chief executive officer of the country’s largest oil producer Rosneft OJSC. Del Pino and Sechin talked about possible coordination to stabilize oil markets, Venezuela’s Oil Ministry said.
“The Russians have historically promised many times to cooperate with OPEC but never have,” Fereidun Fesharaki, chairman of energy industry consultants FGE, said in a Bloomberg Television interview on Thursday. “Nobody really believes that the Russians would actually deliberately cut production.”
As far as I have seen, Iran has not denied this.
The economy of the 19-country eurozone is expected to grow 1.7% this year. While that is a slight improvement from the 1.6% growth in 2015, it is somewhat lower than the 1.8% expansion the commission had forecast in November. In 2017, the eurozone economy will now likely expand 1.9%, the commission said, in line with earlier predictions.
Growth in the 28-country EU is expected stay at 1.9% this year, in line with in 2015, but down slightly from the commission’s November forecast. The commission sees the EU economic output expanding 2% next year, also slightly below the 2.1% forecast earlier. (…)
The commission now expects the rate of inflation in the eurozone to be just 0.5% this year, down from the 1% previously forecast. In 2017, inflation in the currency union is now seen at 1.5%, down from the 1.6% predicted earlier and still below the close-to-2% targeted by the ECB.
In the EU, consumer prices are expected to grow 1.5% this year and 1.6% next year. (…)
“The central scenario of a ‘soft landing’ in China is subject to substantial risks,” the commission said. (…)
“The main risks both externally and domestically are ‘political’,” wrote Marco Buti, the director general of the commission’s economy department. “Leadership at the global and European level showing that common actions are agreed and swiftly implemented would be the most effective answer to the present economic woes.”
- 273 companies (71.2% of the S&P 500’s market cap) have reported. Earnings are beating by 4.7% while revenues have surprised by 0.2%.
- The beat rate is 74% (76% ex-financials).
- Expectations are for a decline in revenue, earnings, and EPS of -3.2%, -4.8%, and -3.0%. EPS is on pace for -1.6%, assuming the current beat rate for the remainder of the season. This would be +4.4% excluding Energy. (RBC Capital)
Curiously, Thomson Reuters’ estimate for 2015 EPS has increased in recent days from $117.11 on Jan. 29 to $118.33 yesterday.
The Arab world’s sentiment indicator:
Shares in the Swiss bank tumbled 9% on Thursday, after it announced a bigger-than-expected net loss, and suffered wealth management outflows similar to those reported this week by rival UBS Group AG. (…)
UBS, which has sharply reduced its own investment bank, reported billions of dollars in outflows from its core wealth management business, as clients pulled money out amid challenging markets or declined to invest.
On Thursday, Mr. Thiam said, “the environment has deteriorated materially during the fourth quarter of 2015 and it is not clear when some of the current negative trends in financial markets and in the world economy may start to abate.”
Like UBS, Credit Suisse cited a lower level of activity among its clients in the quarter. Credit Suisse’s private banking businesses in Switzerland, and at the international wealth management unit, each reported net asset outflows in the period. (…)
The huge money outflows at CS and UBS do not seem to have found other homes. Could be Middle Eastern sovereigns pulling money out by necessity.
Franklin Resources Inc. said Wednesday that investors withdrew $20.6 billion in the fourth quarter, the latest asset manager to highlight the issue of redemptions. Affiliated Mangers Group Inc. said on Tuesday that it had outflows of $6.8 billion, while Waddell & Reed saw $5 billion in withdrawals, contributing to the biggest drop in its stock since the financial crisis of 2008.
Money managers are hurt by slumping stock markets worldwide, which have prompted investors to dump anything perceived as risky. The firms are getting squeezed by sovereign wealth funds in need of cash after oil prices plunged, and the shift by investors from active funds to cheaper ones that track indexes. The preference for passive products and exchange-traded funds has created winners, including Vanguard Group Inc. and BlackRock Inc. (…)
The 19-member Standard & Poor’s index of custody banks and asset managers lost 16 percent this year through Feb. 2, bringing the measure back to where it was in April 2013, according to data compiled by Bloomberg. (…)
Aberdeen Asset Managment Plc last month cited the cash needs of sovereign wealth funds as one of the reasons the firm experienced 9.1 billion pounds ($13.2 billion) of withdrawals in the fourth quarter. The wealth funds from oil-producing nations, which boosted their investments when energy prices were high, are taking money back to fill the budget shortfalls created by cheap oil. (…)
Foreign funds cut China investment quotas First fall in demand for securities for a decade
Global demand for once sought-after quota to buy Chinese securities has fallen for the first time in the scheme’s decade-long history, even as Beijing, eager to support its currency and equity prices, signals it will offer bigger allocations. (…)
In January the total quota allotted to foreign funds dropped to $81.068bn, down $30m on a month earlier. (…)
In the last three months of 2015, analysts estimate between $150bn and $400bn flowed out of China thanks to fears over renminbi depreciation and the slowing economy. In response, the government has tightened schemes that allow for outbound investment while also temporarily shutting down foreign exchange businesses at three global banks.