Scott Barlow
A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the Web
Before the recent plunge in oil prices, the conventional wisdom among economists was that while Canada and other oil producing economies would be hurt, cheaper fuel would boost most global economies. This theory is being re-written as the oil price and global equity markets have moved in tandem in recent weeks,
"It appears that four inter-linked phenomena are driving a negative feedback loop in the global economy and across financial markets," Citibank analysts write in a new report, citing the resilient U.S. dollar, lower commodities prices, weaker trade and capital flows, and declining emerging market growth.
"It seems reasonable to assume that another year of extreme moves in U.S. dollar (higher) and oil/commodity prices (lower) would likely continue to drive this negative feedback loop and make it very difficult for policy makers in emerging markets and developing markets to fight disinflationary forces and intercept downside risks," the analysts add. "Corporate profits and equity markets would also likely suffer further downside risk in this scenario of Oilmageddon.""
"Citi: 'We Should All Fear Oilmageddon'" – Bloomberg
"Morgan Stanley gives up on higher oil prices in 2016" – WSJ Marketwatch
The expected declines in global oil production have barely begun, according to respected industry consulting firm Wood Mackenzie,
"After a year of low oil prices, only 0.1 per cent of global production has been curtailed because it's unprofitable, according to a report from consultants Wood Mackenzie Ltd. that highlights the industry's resilience."
"How Much Global Oil Output Halted Due to Low Prices? Just 0.1%" – Blas, Bloomberg
It's important to stress that these allegations against exchange traded products are from anonymous sources and thus less credible, but as Josh 'The Reformed Broker' Brown notes, they are worth considering for their plausibility. Mr. Brown also recognizes that the allegations are for smaller ETFs and likely not a sign of systemic risk,
" "The vast majority of [exchange traded products] have very low levels of assets under management and illiquid trading volumes. Many of these have illiquid underlying assets and a large group of ETPs are based on derivatives that are not backed by physical assets such as stocks, bonds or commodities, but rather swaps or other types of complex contracts. Many of these products may have been designed to take what were originally illiquid assets from the books of operators, bundle them into an ETP to make them appear liquid and sell them off to unsuspecting investors."
"ETF Whistleblowers Make Explosive Allegations" – Reformed Broker
Also in the structured product space, Bloomberg reports that high net worth U.S. investors are switching to cost-conscious robo-advisor strategies and the major brokerages are getting nervous,
"It's real money moving," [Kendra Thompson, an Accenture Plc managing director ] said in an interview. "You're seeing experimentation from people with much larger portfolios, where they're taking a portion of their money and putting them in these offerings to try them out.""
"The Rich Are Already Using Robo-Advisers, and That Scares Banks" – Bloomberg
One of the reasons investors might take charges of shenanigans by structured product departments from major banks is that profitability in the global banking sector are under extreme stress, and many are motivated to generate profits at any cost (or risk level),
"Investors are starting to worry about more than just profit declines at the biggest banks. They're increasingly concerned about their ability to repay their debt.
A prime example can be found in Deutsche Bank, which is struggling in the face of falling debt-trading profits and an unclear strategy for increasing income. And investors have yet one more thing to worry about: Souring energy prices pose a risk for substantial losses.
Deutsche Bank may have "significant" energy exposure "that is not investment grade and is not well secured," Amit Goel and Jag Yogarajah, analysts at Exane BNP Paribas, wrote in a note on Wednesday. They predicted an increase in loan loss provisions that was larger than the average of a consensus of analysts, who forecast a 19 percent rise, to 1.14 billion euros this year."
"Credit Added to List of Bank Worries" – Abramowicz, Bloomberg
Tweet of the Day: "@qz Sorry, everybody: A US recession is back on the table qz.com/609117 " – Twitter
Diversion: "17 Oscar-Nominated Movies You Can Stream Right Now" – Wired
Scott Barlow