Market Update. September 2016.

Oil

Today OPEC met in Algiers to discuss the future of oil production. It has been announced that a deal has been met to cut exports of oil, however I’m sceptical this may be all smokes and mirrors. Iran came into the talks adamant to not strike a deal, and historically a deal in reducing production hasn’t been met in eight years. Saudi Arabia is also unlikely to back down on its agenda of suppressing U.S. fracking.

The current effect of the news of a deal has been a 4% rise in crude oil to $46.67 with a target range of 45-50 following an actual deal.

The U.S. markets finished up on the news, with companies such as Exxon Mobil up +4.41%. Oil is positively correlated to the markets, as a price rise signals greater profitability for energy companies thus improving their ability to repay their debts to banks and create new jobs. A boost in the fracking industry would no doubt help America back onto its feet.

As I mentioned I am cynical over an actual reduction in oil and expect oil to trade in the 40-45 bound over the next few months. If a deal is struck it is unlikely to be ground breaking.

Syria

Recent reports of Russian-backed airstrikes in Aleppo on rebel strongholds broke up talks being made for a cease fire in Syria. In one incident it has been suggested that Russian bombers killed twelve UN aid workers in an air strike, which if true would amount to war crime.

As tensions rise in Syria it is important to reflect on how this conflict fits into global conflict. Syria is becoming more and more a fighting pit between the U.S. and Russia, with the U.S. stuck in a corner of not wanting to get involved due to previous unintended consequences (see ISIS and Al’Qaeda) and Russia marking its stamp in eastern Europe.

As tensions rise it would be wise to keep an eye on BAE and Lockheed Martin, two of the biggest defense contractors in the U.S.. Especially if Donald Trump assumes presidency.

U.S. Presidency

Yesterday saw the first presidential debate between Hillary Clinton and Donald Trump. News outlets have argued that Hillary won this debate, keeping a cooler head and having sounder policy suggestions. However following BREXIT we mustn’t underestimate Trump’s potential to win this election. A recent poll by Bloomberg places Trump equal with Hillary, and the electorate are upset and aggravated at a lack of ‘real jobs’ – the 5.1% unemployment figure does not represent underemployment – and at the establishment, where it is clear they are stuck in a system of increasing inequality.

What will happen to the markets if Trump assumes presidency? There doesn’t seem to be that many clues, traders are waiting it out for now. However I’m fairly sure the market will fall due to concerns over Trump’s policies, such as de-globalisation, reducing immigration, and likely increased involvement in Syria.

Central Banks

Fed kept interest rates in the 25 to 50bps range this month, but is under pressure to hike over solid unemployment at 5.1% (with 6% previously being a marker for raising rates) and inflation, with core PCE, the Fed’s indicator, at 1.5%.

Globally Japan announced its decision to implement a policy of keeping the 10 yr bond yield near zero, hopefully reducing the rate of borrowing in order to boost expenditure and investment, and Carney has not ruled out further monetary easing if any BREXIT concerns arise. Alongside this the markets are pricing in a minimum 6 month extension to the asset purchasing program in Europe.

So we are stuck in the same position. The Fed needs to tighten, but likely will hold out until December earliest, and other global economies will continue to loosening monetary policy in the foreseeable future. As a result we will see a rise in the value of the dollar, through carry trades, and a global monetary imbalance that will probably cause the stock and credit market bubbles in the U.S. to inflate further*. And if the Fed don’t rise? The markets will continue to be complacent in purchasing risky assets, expanding the bubble further, and when inflation does eventually rear up the Fed will panic and raise rates too fast, causing the bubble to burst. Hike or maintain, either way its going to be a rough ride.

*a stronger economy and higher rates means an increased return on investment in the U.S., resulting in yields rising on government debt and stocks perform better due to stronger economic forecasts. Alongside this negative rates abroad mean borrowing foreign currency is essentially free and encourages investors to (e.g.) borrow Yen, buy Dollar assets, use the return on the Dollar asset to pay back the borrowed Yen, all the while pushing up U.S. assets further. This occurred pre-2007 and was a contributing factor to the financial crisis.

 

 

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