UPDATE: RBS advises clients to ‘sell everything’ except haven debt

The Royal Bank of Scotland’s credit team has advised clients to brace for a “cataclysmic year” and a deflationary crisis, warning that major stock markets could fall by a fifth and that the crude oil price may nearly halve, again, to $16 per barrel.

The bank’s credit team said markets are flashing stress alerts akin to the turbulent months before the Lehman Brothers crisis in 2008.

“Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small,” it says in a client note.

Andrew Roberts, the bank’s credit chief, expects Wall Street and European stocks to fall by 10%-20%, with an even deeper slide for the FTSE 100 given its high weighting of energy and commodities companies.

RBS forecast that yields on 10-year German Bunds, or government bonds, would fall to an all-time low of 0.16% in a flight to safety, and may break zero as deflationary forces tighten their grip. The European Central Bank’s policy rate will fall to minus 0.7%.

Indeed such bonds, and a few of their developed-market counterparts are about the only things RBS would be long of. It says be long “10-year gilts, USTs, Bunds and BTPs [Italian government bonds]”.

READ: Time to buy baked beans and a shotgun? 

It also recommended being long of shorter paper “as deposit rate cuts remain on the table,” especially in the eurozone, but also perhaps in the UK , which looks cheap as the few remaining Bank of England hawks (ie those who want to see higher rates) “get bounced from the table”.

“And mostly, beware of the risk-on optimists,” the bank goes on.

“One lesson from 2Q 2015 and the Bund sell-off we got caught in, is that we need to always ask ourselves what the exit door is with any trade – as we said into the credit crunch in 2008, this will be as much about limiting losses as making gains.”

This post first appeared here: https://news.markets/bonds/rbs-client-note-makes-waves-sell-everything-advice-8243/

Rand weakness ‘inevitable’, says Commerzbank economist

The commodity price slump is hitting the South African rand more than most currencies

South Africa’s rand, or ZAR, is certain to fall according to Peter Kinsella, head of research on emerging market economies and currencies at Commerzbank.

“The combination of commodity price declines, a widening current account deficit and higher expected inflation implies that further ZAR weakness is inevitable,” he writes.

Kinsella argues that the ongoing commodity price slump affects the rand more than most currencies. “As a commodity exporter with strong links to the Chinese economy, ZAR depreciated by nearly 20% against the EUR over the last 12 months. With no end in sight for the commodity slump, this implies that ZAR will continue to lose ground in the short term,” he writes.

Moreover, South Africa persistently runs a sizeable current account deficit, which is expected to widen towards 4.5% of GDP over the coming quarters. “This makes South Africa and ZAR vulnerable to an increase in external financing costs, which is exactly what manifests at present with higher US interest rates,” he writes.

“In the event of materially higher US interest rates, this poses a key risk for ZAR. In addition to this, South African inflation is expected to increase markedly over the coming months as the inflationary pass through from the weakening exchange rate manifests,” he adds.

As for the country’s central bank, the South African Reserve Bank, it surprised the market with interest rate hikes, but the inflation trajectory implies that real interest rates will be barely positive, writes Kinsella.

South African real interest rates will remain among the lowest in all of the emerging markets. This will burden ZAR over the coming months. The only risk to the above scenario is if the Fed takes note of the current emerging market jitters and refrains from hiking rates over the coming months. This could lead to some brief respite for ZAR. We illustrate a strategy which will protect investors’ interests in both cases.”

Kinsella’s recommendation is a “forward plus” in the euro/rand currency cross. “ZAR buyers are hedged at current spot prices and benefit if EUR/ZAR appreciates towards 19.00,” he writes.

The cross rate was trading at 17.3890 at midday on Friday.

This post previously appeared on news.markets: https://news.markets/forex/rand-weakness-inevitable-says-commerzbank-economist-8092/

 

Routed oil price may be close to trough

2015 has been another terrible year for oil prices, finished off in what seems like fitting style with an OPEC meeting that failed to reach a consensus on cutting production, leaving the cartel pumping at record levels just as Iranian crude is about to hit the market, freed from the straitjacket of international sanctions.

The cartel has spent much of this year pumping crude at elevated levels as its producers aim for market share at the expense of higher-cost areas such as the US shale fields and the North Sea.

“Oil price weakness reflects the realisation that without the Saudis acting as swing producer to offset the unfettered production of other OPEC members such as Iraq and Iran, OPEC as a price-setting cartel is basically non-existent,” write Steve Platt and Mike McElroy of ADM Investor Services.

“The market is now subject to the laws of supply and demand, which dictate that price be the final arbiter of what makes economic sense.”

The market has proven a hard taskmaster, with oil prices down more than $70 per barrel from their 2014 peak, a fall in magnitude nearly double the current price of a barrel of benchmark crude.

However, Joseph Triepke, managing director of the Oilpro journal, has some Christmas cheer for the market.

“On an absolute basis, little downside remains” for the price of crude, he writes. He notes that current prices are below breakeven rates for many new US oil projects, and that some more companies will probably go bankrupt. However, he still thinks that 2016 will be the year when things finally stop getting worse.

“Every economic metric used to measure the oil and gas industry should trough in 2016,” he writes, “for declines cannot be infinite.”

Signs of a little stability in the oil market as the year bows out may suggest that the process is already starting.
 

This post is taken from the news.markets site: http://news.markets/commodities/routed-oil-price-may-close-trough-7296/

Gold can do well even when US rates head higher

As the most venerable financial asset, gold staggers under the weight of a fair bit of folklore and received wisdom.

And one bit of such wisdom, which has stymied its progress this year, is that gold doesn’t do so well when the Federal Reserve is raising US interest rates.

The thinking behind this is reasonable enough. When the Fed hikes, the yields on safe assets like US Treasuries go up as well, which makes them look more attractive than gold, which is safe too but yields nothing. Moreover, an inflation-fighting Fed (not that there’s much inflation to fight), means investors have much less need of inflation hedges, something gold is often held to be.

Taking a further step back, rising interest rates are a sign that an economy is doing reasonably well, so investors have much less need of haven assets, and can afford to go out into riskier markets with confidence.

However, as the chart below from zerohedge shows, the received wisdom isn’t really worth much of a bet.

Gold can in fact thrive when the Fed funds target rate is rising, and can lose out when it isn’t.

There’s clearly more at work here, and, with the Fed now all but certain to be alone among the major economies in raising rates for the foreseeable future, the oldest asset of the lot may not be in quite as much trouble as it appears to be in.

 

Republished from news.markets: http://news.markets/commodities/7302-7302/

US crude trades at brief, rare premium to Brent

US crude oil prices rose briefly to a premium over the international Brent benchmark following news of a surprise fall in US stockpiles.

Inventories fell by 3.6 million barrels in the week, to 486.7 million, according to the industry group the American Petroleum Institute, compared with analysts’ expectations of a rise of a little over a million. Official data will follow later on Wednesday.

Front-month US West Texas Intermediate crude futures were trading at $36.38 per barrel at 0340 GMT, up 24 cents from their last settlement price. Brent crude earlier traded as low as $36.28, briefly taking WTI from a discount to a slight premium for the first time since November last year.

Before the onshore shale boom was up and running in 2010, WTI was usually at a premium to Brent. However, thanks to shale, US imports have fallen from a peak of almost 14 million barrels per day to around nine million, according to government data.

 

Now, with shale output contracting in the face of low-cost competition, the US market could tighten while supplies globally keep ballooning on the back of soaring output from producers like Russia and the OPEC group. Congress this month voted to lift the 40-year old ban on exporting domestic crude supplies, and although no major large-scale exports are expected, some American oil will hit the oversupplied global market next year.

 

First published here: http://news.markets/commodities/us-crude-trades-at-brief-rate-premium-to-brent-7282/

Putin puts on a brave face, but the tumbling ruble tells Russia’s real story

Russian President Vladimir Putin held forth with customary brio at his meet-the-press session on Thursday. This, now annual, event allows him to answer questions of the “Mr. President, exactly why are you so wonderful?” sort from adoring local journalists.

However, not even Putin’s presentation skills can paper over the cracks in Russia’s economy, which are growing alarmingly.

The country was never going to do well in the face of a commodity price rout, and sure enough the ruble has been the worst-performing emerging market currency over the past month, falling 6% against the dollar. Indeed, it is now hovering around record lows, with the greenback getting you RUB71.018.

This is hardly surprising given the ruble’s link to global oil prices, well illustrated by the chart below.

Source: Capital Economics

And things don’t look that much better for the Russian currency or the economy underlying it in the New Year.

“Looking ahead, the combination of persistent capital outflows, a fragile economic recovery and political concerns, mean that the ruble is likely to remain under pressure,” writes Capital Economics’ Liza Ermolenko in a note on Friday.

What makes matters worse for Russia is that oil prices are falling at a time when Europe is also using a lot less of Russia’s natural gas thanks to a relatively mild winter and easy access to a cheaper energy alternative in oil.

Russian consumers are also taking a hit, with both wages and retail sales collapsing. For all Putin’s showmanship, it seems very unlikely that Russia or its currency are going to loom large in the analysts’ New Year recommendations.

Originally published here: http://news.markets/commodities/putin-puts-brave-face-tumbling-ruble-tells-russias-real-story-7056/

Fed rate hike boosts stocks, bonds and the dollar; hits commodities

European financial markets’ reaction to Wednesday’s widely forecast US interest rate increase suggests that, far from clarifying the outlook for 2016, the Federal Reserve has raised more questions than it has answered.

The decision by the US central bank to raise rates by a quarter of a percentage point was widely seen as a ‘dovish hike’, implying that any further rate increases will be modest and spread over time. That has lifted stock markets around the world, with European bourses following their counterparts in the US and Asia higher.

By 1130 GMT, London’s benchmark FTSE 100 was up 1.4%, Frankfurt’s DAX up 3.3% and Paris’s CAC 40 up 2.6% following gains on Wall Street and through Asia.

Similarly, in the European government bond markets, 10-year yields were lower all round on the prospect of further rate rises arriving only slowly. Money that was parked in cash ahead of the Fed’s decision may also have been put back to work in bonds as well as shares.

“The decision to raise rates for the first time following almost a decade of crises and unconventional policy measures is being welcomed as much for its end to uncertainty as its vote of confidence in US economic recovery,” writes Mike van Dulken, head of research at Accendo Markets.

However, the dollar – far from weakening as it does usually when bond yields decline – was actually stronger all round; gaining against all the other major currencies such as the euro, the yen, sterling, the Swiss franc and the Australian and New Zealand dollars.

That may have been a simple response to higher US rates and relief that the Fed’s decision is now out of the way, or it may have been because the Fed still sees rates rising more quickly than the markets are pricing in.

“The hike, usually bad news for stocks and good news for the currency, saw both rally as relief that the central bank hadn’t disappointed was clear to see,” writes James Hughes, chief market analyst at GKFX.

The rise in the dollar may explain a strongly adverse reaction in commodities, which are largely priced in dollars and therefore tend to fall in price when the greenback advances. Brent crude oil recovered earlier losses but Comex gold was down 0.9% and the overall Bloomberg commodities index was 0.4% weaker.

“In the wake of the FOMC decision, base and precious metals along with oil prices are all trading lower,” writes Brenda Kelly, head analyst at London Capital Group, referring to the rate-setting Federal Open Market Committee.

She adds that Goldman Sachs’ call that iron ore will likely remain below $40 over the next three years is also weighing on sentiment.

This article originally appeared here: http://news.markets/bonds/fed-rate-hike-boosts-6994/

Fund managers predict three or more US rate hikes in next 12 months

More than half the global investors polled by Bank of America Merrill Lynch in its latest Fund Manager Survey expect the Federal Reserve to raise US interest rates three times or more in the coming 12 months.

In total, 58% told the bank’s researchers in December that was what they expected, while 53% described “long US dollar” as the most crowded trade in the markets, up from 32% last month.

“The strong dollar view is writ large across all asset, regional and sector allocations. It will take a very dovish Fed and weak US earnings to reverse the strong dollar view in 2016,” writes Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.

Ahead of Wednesday’s decision by the rate-setting Federal Open Market Committee, which is expected to raise the Federal funds rate for the first time in almost a decade by a quarter of a percentage point, investors are defensively positioned even though the Fed is also expected to accompany the increase with generally dovish comments.

Editor’s blog: How to trade this week’s US rate rise

Risk taking fell, reports BAML, and cash holdings rose to 5.2% of portfolios from 4.9% in November.

Elsewhere, a net 43% of regional fund managers said they expect China’s economy to weaken in 2016, up from a net 4% last month, and the weighted average economic growth projections for China in 2018 fell to 5.5% from November’s 5.9%.

A net 29% of asset allocators were underweight commodities, up from a net 23% in November, and while investors increased their underweight positions in US equities, Europe and Japan were the most favoured regions for overweight positions in 2016.

Investors also emphasised a focus on quality, with a net 65% saying that high-quality earnings stocks will outperform low-quality earnings stocks next year.

“European equities remain in favor despite disappointment over the ECB decision,” writes James Barty, head of European equity strategy at BAML. On December 3, the European Central Bank dashed many investors’ hopes with a less aggressive than expected package of measure to boost the eurozone economy.

Republished from news.markets: http://news.markets/bonds/fund-managers-predict-three-us-rate-hikes-next-12-months-6822/

Plunging oil prices needn’t keep BoE rate setters awake at night

Plunging oil prices may not lead to a huge fall in overall UK inflation, and so are unlikely to stay the Bank of England’s hand when it comes to raising interest rates.

That’s the message in the latest research from Pantheon Macroeconomics’ chief UK watcher Samuel Tombs and it comes as the international Brent crude benchmark falls to around $40 a barrel, from $50 just a month ago.

Tombs’ point is that while changes in oil prices feed through “quickly and mechanistically” into the price of petrol, they have much less influence elsewhere. Bluntly, firms are reluctant to pass on savings they make on input costs such as oil when signs of resilient consumer demand suggest they don’t have to.

“Airfares, for instance, have increased by nearly 10% over the last year, rather than falling by the 10% implied by their previous relationship with oil prices,” Tombs writes.

Moreover, while oil prices have fallen, sterling has slipped too. The pound’s slide to the $1.50 area from $1.54 in the past month will make imports to the UK more expensive and provide an inflationary offset to oil-price weakness.

None of the above is to suggest that oil will never fall to the point where Bank of England rate setters have to worry about them, however.

Of course they might.

“A further plunge in oil prices to below $30 probably would keep consumer price inflation below 1% and likely would persuade the [Monetary Policy] Committee to stand pat for a few more months,” Tombs goes on.

“But the MPC would then have to raise interest rates more quickly than they otherwise would have done, as lower crude prices will have little bearing on inflation or interest rates two to three years out.”

In Pantheon’s view then, the renewed fall in market interest rate expectations over the last few days in response to the fall in oil prices does not look entirely warranted.

Original article published by news.markets: http://news.markets/bonds/plunging-oil-prices-neednt-keep-bank-of-england-awake-at-night-6392/