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At the risk of being shallow, a quick spin around some of the many things demanding your attention this morning .....

May 16, 2018

 

ref :- The Financial Times, Markets and Investing Section

 

Louis Armstrong used to sing about having "so little time, so much to do" ..... we know how he felt. There's really quite a lot to take in this morning, but we'll just point you towards the FT's Markets and Investing Section where not only is there the usual market round-up but also a couple of more detailed articles on subjects much in the news.

 

**** Note, just for good order's sake : The print version of the FT goes to press pretty early, so quoted trading ranges for example may not incorporate later market moves, particularly in the US. ****

 

The most eye-catching market action yesterday was driven by the release of April US Retail Sales data. Not only did they rise by a greater-than-expected 0.3%, but the numbers for the previous two months were also revised higher. We are regularly cautioning against reading too much into one set of data but inevitably the release prompted speculation that the Q1 GDP estimate is now also likely to be revised upwards, and that the Fed might also adopt a more hawkish policy approach. To all intents and purposes, that would mean a further three 25bp rate rises this year rather than the two hikes currently signalled by the Fed's own forward guidance.

 

Cue : a jump in US yields, with the closely watched 10yr US Treasury yield making a high of 3.09% , a rise of 10bp and a high since July 2011. We've been watching the 10yr yield indecisively flip-flopping either side of the psychologically important 3.00% level, but even though it's backed off a touch to 3.06% this morning one could argue that yesterday's move opened the way for the next move higher. That in turn boosted the US Dollar, with the Dollar Index making a 2018 high, USD / JPY hitting a 3-month peak and EUR / USD falling back through $1.18. Gold, quoted in US Dollars of course, fell back through $1300 for the first time this year.

 

The Turkish Lira, which now ranks a close second to Argentina as an example of an emerging market nation saddled with dollar-denominated debt as US's rates and currency rise, made another record low with USD / TRY threatening to break up through TRY4.50 (3.50 one year ago). Crude oil , another commodity quoted in dollars, ignored the strength of the US unit and saw Brent crude approach $80 per barrel while WTI crude nibbles at the $72 level. Both Turkey and Oil are the subjects of other articles in the FT, so without further ado .....

 

By and large currency traders are a worldly-wise, possibly even slightly cynical demographic. You wouldn't think there was much that could surprise them. But you might have seen a few jaws hit the floor as Turkey's President Erdogan lectured an audience in London yesterday on how lower rates beget lower inflation, a suggestion 180 degrees at odds with the most basic and fundamental economic theory.

 

Investors in any country in which the leader subscribes to such an outlandish point of view might be pretty horrified, but hopefully they'd at least have the comfort of an independent central bank at the helm of monetary policy. If it's Turkey they've invested in however, it looks like they're going to be out of luck. Mr Erdogan, nothing if not an autocrat, has vowed to take more control over monetary policy should he win upcoming presidential elections ..... which of course is a foregone conclusion.

 

Turkey has been given more time than most of the markets on account of its strong banking system and relatively responsible fiscal policies. But ultimately its overheating economy that has encouraged high inflation and a large current account deficit threatens to bring on an investor exodus. As if the rising US dollar and rates weren't bad enough for a country with such high levels of foreign debt, the current account deficit is reflective of Turkey's almost total reliance on imported oil .... and of course what's been going on in that market is just another toxic element in a combination of factors that has the potential to evolve into a perfect storm as far as investors are concerned.

 

And so what about oil, and more particularly what about Venezuelan oil ? Venezuela, by the way, has the largest proven reserves of crude in the world (about 20% of the global figure .... just in case anybody was thinking this is just a sideshow). Never mind Turkey and Argentina, if you're really looking for basket-cases, look no further than Venezuela for the ultimate example. The tragedy is that it was all so avoidable, but you'll have your own thoughts on the politics of the region and on issues such as corruption, jobs for the totally unqualified boys etc.

 

We can just look at some numbers ..... Venezuelan oil exports have dropped by 40% in just a year to 1.1m barrels per day  --  that's roughly a third of the sales figure reached twenty years ago. At a time when Iranian oil sales are once more threatened by sanctions, that has obvious implications for global oil prices and for the crisis affecting ordinary Venezuelans. Worse, things look likely to get worse.

 

The PDVSA is Venezuela's cash-strapped national oil company, and since November has been run by Major General Manuel Quevedo who was appointed despite having precisely zero experience in the oil industry. Despite all its problems, until last year the PDVSA had sought to keep its creditors onside in an attempt to get its oil to market and maintain its income stream, reduced though it may have been. The Major General, perhaps displaying his military background rather than any commercial know-how, has decided to "go to war" with his creditors, refusing to repay loans or to settle arbitration cases brought by those creditors and found comprehensively in their favour in international courts.

 

Unsurprisingly, PDVSA is running short of willing partners in the sale of the oil it is still producing, and creditors are beginning to queue up to seize PDVSA assets. It doesn't bode well for the prospects of Venezuelan oil exports, or for the size of the pool of companies willing to risk doing business there.

 

 

Last month, two Venezuelan nationals who were executives with Chevron were arrested and charged with treason for refusing to sign blatantly overpriced supply contracts. Nothing could be a better example of the state of the Venezuelan oil industry ..... or for that matter, of Venezuela itself. Despite all the bullish noises currently surrounding the oil market ($100, some say), there are perfectly legitimate reasons for taking an alternative view ..... but Venezuela is not one of them.

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