Paul McCormick; Trader Morgan Stanley, Barclays, JP Morgan /Chase.
Commodities
Commodities are driving many markets right now with prices continuing to head lower resulting in a weaker inflationary impact on the global economy i.e. filling up your car with petrol or heating your home continues to get cheaper!
A big driver for commodity demand in the past has been China’s relentless growth but the latter is waning right now. China is the largest consumer of a wide range of commodities so any economic slowdown will have a direct impact on prices whether coal, copper or oil. International investors now view the economic uncertainty in China there as their main global investment concern.
Oil
Brent crude has traded through USD 50 per barrel marking a six month low following new estimates which showed the Organisation of the Petroleum Exporting Countries (OPEC) had produced around 32 Million barrels per day of oil in July, 2 million higher than the 12 member cartel’s target. US crude production also remains robust. Output data from other oil producers has not been supportive either with Iraq particularly, after a recent embargo-lifting deal with the West, also increasing production significantly.The markets are very well supplied for now.Oil prices fell almost 20% in July.
Equity Markets
China: Market volatility in China has spooked equity investors around the world with the Shanghai stock market falling over 8% in one session last week.This despite high levels of government market intervention. The Chinese equity bubble has well and truly burst with horrific stories of personal losses i.e. farmers investing their life savings to speculate in stocks.
UK: The FTSE 100 index is very exposed to commodity firms with the latter making up about 30% of the index. Consequently the FTSE is up only 2% this year compared to 14% for the German DAX index. UK listed companies such as BP, Royal Dutch Shell are all economically challenged currently. Many mining firms reacting by cutting sharply capital expenditure in a bid to lower costs.
Greece: Equity markets have suffered a bloodbath falling by a record 23 per cent when markets reopened for the first full post-crisis day of trading. Bank shares saw the largest declines dropping by a daily maximum limit of 30 per cent. The scale of economic damage since the imposition of capital controls saw manufacturers undergo their worst ever month in the single currency. Greek financial woes are far from over.
Interest Rates
US: The Federal Reserve desperately wants to begin ‘normalising’ interest rates to higher levels with the Federal Open Market Committee (FOMC) meeting next in September. However with inflationary pressures remaining subdued due to a strong dollar /weak commodity prices the probability of a rate hike dropped from 48% to 38 % (as priced by the futures market) during the past fortnight. The market is pricing in a much slower pace of rate increases than it was 3 months ago.
UK: Growth remains robust: We have now seen 10 consecutive quarters of uninterrupted growth – the third longest expansion on record – with second quarter GDP growth of 0.7% reported. GDP is now back to pre crisis levels. Speculation that rates may well rise soon increases although a US rate rise is expected ahead of any UK move.
Foreign Exchange
The US dollar continues to maintain this year’s strength especially versus emerging market currencies e.g. Brazil, Argentina, Russia, Mexico with the latter all under pressure as emerging market countries are big exporters of commodities; lower prices means lower income means a deteriorating balance of payments situation e.g. in Russia (a big oil and gas exporter) the Ruble is down almost 42% over the past 12 months as the currency continues to trade lower on the back of crude oil. A weaker currency also means higher inflation as imports costs soar. Interest rates are duly raised to protect the currency leading to all round economic woe.
Misc.
Tom Hayes, the 35 year-old former UBS trader was sentenced to a severe 14 years in prison for rigging LIBOR rates.(LIBOR is the London Interbank Offered Rate; a money market daily benchmark rate used to price trillions of dollars of financial product around the world). Clearly a message is being sent here to all you budding traders!
Equities
S&P 500: 2110
Nasdaq: 5130
Bonds – 10 Year Government Yields
US 2.20%
EU 0.68%
GB 1.90%
Foreign Exchange
USD/EUR 1.1050 (1 euro buys 1.1050 dollars)
GBP/USD 1.5600 (1 pound buys 1.5600 dollars)
Commodities
OIL: Brent: 50.00 (dollars per barrel)
GOLD: 1100 (dollars per ounce)
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Regards
Paul McCormick
