Market commentary: Oil continues downward trend, investors bank on gold, bunds and yen

Global bourses gave up almost all the gains made this week as oil maintained yesterday’s downward trend, prompting investors to pile into gold, German 10-year bunds and the yen.

Black gold remains in the limelight – Saudi Arabia dashed what little hope remained of a meaningful recovery in oil prices whilst Iran went a step further, describing the proposal as “laughable”. OPEC and non-OPEC members have been trying to implement co-ordinated pruction freezes as a first step to stem the oversupply which has caused the price of oil to fall to 13-year lows.

Estimates of such excess production range from 1 to 2 million barrels per day. A reduction in daily output would close the widening gap between demand and supply, evidenced by the latest figures of US crude inventories which have risen more than double what experts were predicting. But even a freeze remains elusive, as countries are waiting on each other before committing to production caps.

More inventory data will be released this evening in the US, and with no realistic prospects of a production agreement and spring bringing a seasonal lull in demand oil prices could be headed for another turbulent period.

Major Merger

The London Stock Exchange and Deutsche Böerse are in talks for a deal which would create partnership which would rival market leaders CME and Intercontinental Exchange. Shares in both companies soared after the news went public.

The timing of the release, just hours after UK Prime Minister David Cameron announced a referendum on the UK’s possible exit from the European Union, raised some suspicion. However there is a strong business case behind the deal.

The exchange operators market is largely fragmented, and current banking rules are forcing market players to post large amounts of collateral and margin to back their derivative deals. For most investment banks, whose range of operations usually meant they were doing business on multiple exchanges simultaneously, this meant increased costs.

A deal would create significant benefits not only in terms of potential growth for the company, but also and predominantly in significant customer benefit due to the possibility of cross-margining – say between listed and OTC derivative clearing.

The deal is far from being done – Brussels would definitely want to have a look in the name of competition, but the two operators – by far the largest in Europe – are not really competing together at this stage, as their strengths lie in different areas in the exchange business.

Fed Watch

Many market participants are expecting the Federal Reserve to pause the rate hike cycle at their March meeting. The volatile start to the year and the drag form oil prices were quoted as sufficient cause for concern in the latest Fed minutes, although their impact on the US economy in terms of growth, employment and inflation remains to be seen.

Could the Fed still consider a rate hike? Fed speakers have not given away much since the meeting, but Kansas City Fed President Esther George is adamant that a rate hike should absolutely be on the table at the next meeting. Citing strong US fundamentals, George remarked that the last rate hike was belated and that it would be a mistake to wait too long to raise interest rates further.

Vice Chairman Stanley Fischer was more cryptic, saying Fed official simply do not know what the discussion will look like in three weeks’ time. He conceded that persistent volatility might lead to a recalibration of the existing monetary policy stance, particularly if it brought about tightening in financial conditions. However he also mentioned that similar periods of volatility in recent year have not deviated the underlying course of the US economy significantly. More specifically, he said that oil prices have not impacted gross domestic product or spending to the extent expected, adding that the Fed’s current policy still remains accommodative.

This article was issued by Andrew Martinelli, Trader at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.