Oil Rally Fuels Stocks

A rally in oil helped major stock indices higher on Tuesday, after international news agency Interfax reported that Saudi Arabia and Russia have reached a consensus to freeze oil production. It’s worth noting that the agency cited comments from an unidentified source, although price action suggests the market hasn’t noticed (or doesn’t really care).

Higher oil gave some traction to US markets despite an underwhelming earnings release by Alcoa. The up and coming earnings season is eagerly awaited by investors as it is deemed crucial for direction after a bumpy quarter. Positive trade data from China helped Asian equities rally overnight, giving a major boost to European stocks this morning.

In Europe the Italian bourse was a notable underperformer yesterday, dragged down by weak banks and offsetting the gains made by basic material stocks. The plunge in Italian banking stocks this year has – some would say finally – prompted the nation’s strongest banks, insurers and asset managers to create a €5 billion bail-out fund, or a ‘backstop’ which will be used to prop up several distressed small lenders.

Shares in the biggest contributors to the fund – UniCredit, Intesa Sanpaolo and UBI Banca – have sold off between 4% and 5%, but the banking sector is still up since initial rumours of the report surfaced last week. Yet, despite the positive impact on struggling lenders, many have expressed concern that there is no real plan for reform. It would seem that the good banks are being made to invest in the bad banks, and with no real commitment to fix the sector the oft-used phrase of ‘kicking the can down the road’ may seem like a suitable fit.

Tougher bankruptcy laws are also expected to be passed by the end of the month, together with more provisions for a speedier recovery of bad loans, a phenomenon the Italian banking sector. The average of non-performing loans in terms of gross loans in Italy is almost 18%, more than double the EU average. It also takes much more time to recover a bad loan – 8 years on average – almost trebling the EU average of 2 to 3 years.

Sushi Rolls Lead to Trouble

What does it take to corrupt a LIBOR rate submitter? Yesterday’s sushi rolls, apparently. Paul White, formerly the prime submitter of Royal Bank of Scotland’s daily estimate for LIBOR rates, was banned and censored by the Financial Conduct Authority for lack of integrity. The watchdog found White guilty of rigging borrowing rates in the interbank market in Japanese yen and Swiss francs between 2007 and 2010. White was spared a £250,000 fine on the basis of financial hardship – quite fitting considering he was willing to risk his job for a free lunch…

The ban comes after similar action was taken against traders at Rabobank and Deutsche Bank. A parallel investigation by the Serious Fraud Office led to the first conviction in the LIBOR rigging scandal, as former UBS and Citigroup trader Tom Hayes is now serving an 11-year prison sentence. The case has involved many banks worldwide, and paid-up penalties have already reached approximately $9 billion.

IMF Makes it Black on White

Hands up if you recently heard the phrase ‘worries about global growth’. If you haven’t raised your hands you’re still living in 2015 or you’re really, really tired. Either way, the International Monetary Fund cut its global growth forecast for the fourth time in a year in a sign that it’s not just worries but the truth. The IMF cited China’s slowdown, stubbornly low oil prices and anemic growth in advanced economies as the major drivers of its downgraded forecast. No surprise there. Perhaps the most worrying analysis come from IMF Chief Economist Maurice Obstfeld who said that the low growth environment has “scarring effects” which could lead to a vicious cycle of erosion in aggregate supply and demand.

Plunging oil prices were also the main driver behind Fitch’s decision to downgrade Saudi Arabia’s long-term issuer default rating to AA- from AA. The rating agency said its assumptions for oil prices have “major negative implications” for the country’s fiscal and external balances. The outlook is negative, meaning Fitch does not expect near-term developments to lead to an upgrade.

The IMF also sounded a stern warning to the UK that leaving the EU will severely damage its economy. This is the first time the institution has expressed on official view on ‘Brexit’, although IMF head Christine Lagarde had already expressed herself along these lines. The IMF believes an exit would create too much uncertainty for investors and disrupt trade relationships not only for the UK but for the global economy, as any post-exit arrangements would likely be protracted. Pro-Brexit campaigners counter that an independent UK would be more dynamic in economic terms, although it did concede that there would be a temporary shock to the economy.

This article was issued by Andrew Martinelli, Trader at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is 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.