Saturday 29th November 2014
NEWS TICKER: FRIDAY NOVEMBER 27TH 2014: BofA Merrill Lynch Global Research’s latest report shows that investment flows this week starkly highlight the impact of negative interest rates in Europe. Money is moving up the value chain in search of substitute asset classes with suitable yield. Investment grade credit looks to be the greatest beneficiary of this at present, with inflows reaching $2-$3bn a week over the last month, a historic high. With around €450bn European govies trading at negative yields, investors have started shifting their attention to high-grade bond funds. The bank’s research team expects the recent strong trend of inflows to continue next year, with inflows to increase to $100bn into the asset class. So far this year high-grade credit has seen $63bn of inflows, while government bond funds have seen only $17bn. The low or negative yielding asset classes are all seeing outflows, reports Bank of America Merrill Lynch in the report. Government bond funds saw their fifth week of outflows, while money market funds saw their largest outflow ($19.5bn) since May this year. Flows into equities managed to bounce back to the positive territory, after three weeks of outflows - According to SwissQuote, in Switzerland, traders will be watching Swiss Kof leading indicator, which is expected to rise from 99.8 to 100.0 in November. However, the real focus will be referenda results this Sunday. The outcome should be released around 4pm CET on Sunday. The latest polls suggest that the “no” votes have the majority indicating that spillover into EURCHF and Gold should be limited. Elsewhere, Euro area flash HICP inflation is expected to drop from 0.4% y/y in October to 0.3% y/y in November. Swedish GDP growth is anticipated to weaken from 0.7% q/q in Q2 to 0.2% q/q in Q3. While OPEC decision not to cut will clearly be disappointing to Canadian policy makers, today GDP is expected to ease from 3.6% y/y to 2.1% y/y in Q3 - New research conducted by independent financial researcher Defaqto on behalf of NOW:Pensions reveals that advisers are gearing themselves up for the business opportunity that auto enrolment presents. Nine out of ten (88%) advisers who are currently advising small and medium sized companies on auto enrolment plan to continue doing so in 2015 when micro businesses will begin staging. Over half of the advisers surveyed (51%) think that auto enrolment represents a good opportunity for them to grow their business over the long term, with three quarters (76%) seeing it as a chance to both advise existing clients as well as grow a new client base. Over two in three (68%) advisers expect to be providing employers with advice on selecting a pension provider, while 72% expect to be advising them for the staging date, and 78% expect their services to be required on an ongoing basis after the staging date has passed. Seven out of ten (73%) believe they will need to advise on other corporate issues such as business protection insurance. Neil Liversidge, managing director, West Riding Personal Finance Solutions explains: "The need for help and advice around auto enrolment naturally brings together business owners, their employees, and advisers. As such it probably represents the single greatest opportunity most firms will have to generate new clients this decade." Not all advisers are in agreement, as nearly one in five (17%) of the 244 advisers questioned, do not intend to advise small and micro businesses on auto enrolment next year. Of these advisers, over half (55%) say they don’t think it will offer profitable business, while 28% believe there is too much admin involved, and 25% are deterred by how much time it will take. One in ten (10%) don’t believe they have the right knowledge to advise on it. Additionally, two in three (66%) advisers say that from their experience so far, employers are either not that engaged or not engaged at all with auto enrolment, while the same can be said for 83% of employees - Germany’s KfW IPEX-Bank and Africa Finance Corporation (AFC) have signed a Framework Financing Agreement (Basic Agreement) amounting to $300m. The facility will be accessible to infrastructure projects in Africa, developed by AFC, by providing long-term financing of European equipment and services imported for such projects. The basic agreement helps to address Africa’s infrastructure development needs while also supporting German and European exporters. Projects that will be financed under the agreement will be covered by guarantees from European Export Credit Agencies (ECAs) - A new active ETF issued by PIMCO Fixed Income Source ETFS plc has begun trading in the XTF segment on Xetra today. The ETF is the PIMCO Low Duration Euro Corporate Bond Source UCITS ETF Asset class, an active bond index ETF (ISIN: IE00BP9F2J32), with a total expense ratio of 0.3%. According to PIMCO, at least 90% of the investment portfolio underlying the active ETF consists of investment grade corporate bonds issued in euro. Up to 20% of the fund assets can be invested in the emerging markets region. The currency risk may amount to up to 10% due to corporate bonds not denominated in euro. The average duration ranges from zero to four years - Legal & General (L&G) has announced a restructure across its L&G Assurance Society (LGAS) division following the announcement of the impending departure of chief executive John Pollock next year. L&G’s savings business will be split into two businesses; mature and digital. Jackie Noakes, chief operating officer for LGAS and group IT director will become the managing director of the mature savings division (including insured savings and with-profit businesses). Mike Bury, managing director of retail savings at L&G will manage the digital savings arm, Cofunds, IPS, Suffolk Life and L&G’s upcoming direct-to-consumer platform –Orangefield Group has purchased Guernsey-based Legis Fund Services, expanding its fund services division and increasing its total assets under administration to more than $50bn. Legis will change its name to Orangefield Fund Services but will continue to be led by managing director Patricia White. The acquisition is part of a trend in mergers and acquisitions in the offshore fund administration sector, and was advised by Carey Olson. Carey Olson also recently advised Anson Group on the sale of its fund administration business to JTC Group and First Names Group on its acquisition of fund management business Mercator - The Straits Times Index (STI) ended +9.54 points higher or +0.29% to 3350.50, taking the year-to-date performance to +5.86%. The FTSE ST Mid Cap Index gained +0.14% while the FTSE ST Small Cap Index declined -0.52%. The top active stocks were Keppel Corp (-2.17%), DBS (+0.66%), OCBC Bank (-0.10%), UOB (+0.71%) and SingTel (unchanged). Outperforming sectors today were represented by the FTSE ST Technology Index (+1.03%). The two biggest stocks of the FTSE ST Technology Index are Silverlake Axis (+1.97%) and STATS ChipPAC (unchanged). The underperforming sector was the FTSE ST Oil & Gas Index, which declined -2.84% with Keppel Corp’s share price declining -2.17% and Sembcorp Industries’ share price declining-1.08%. The three most active Exchange Traded Funds (ETFs) by value today were the IS MSCI India (+0.38%), SPDR Gold Shares (-0.70%), STI ETF (unchanged). The three most active Real Estate Investment Trusts (REITs) by value were CapitaCom Trust (+0.30%), Suntec REIT (+1.29%), Ascendas REIT (+1.30%). The most active index warrants by value today were HSI24400MBeCW141230 (-6.67%), HSI23800MBeCW141230 (-5.13%), HSI23600MBePW141230 (+2.50%). The most active stock warrants by value today were DBS MB eCW150602 (+2.42%), KepCorp MBePW150330 (+13.85%), UOB MB eCW150415 (+1.24%).

Bunking the myth of oil price hikes and speculation

Monday, 05 March 2012
Bunking the myth of oil price hikes and speculation The question of whether speculators are responsible for the recent spikes in the price of oil has been one of the most hotly debated topics in the oil market in the last few years. Most recently it has prompted US regulators to put limits on some speculative positions and re-define what they consider to be speculative positions. Vanja Dragomanovich met up with Rita D'Eclessia, professor at the Department of Economic Theory and Quantitative Methods for Political Choices at the University of Rome and a visiting lecturer at Birkbeck University in London, who has run these theories through a set of mathematical tests and has produced some slightly surprising results. http://www.ftseglobalmarkets.com/

The question of whether speculators are responsible for the recent spikes in the price of oil has been one of the most hotly debated topics in the oil market in the last few years. Most recently it has prompted US regulators to put limits on some speculative positions and re-define what they consider to be speculative positions. Vanja Dragomanovich met up with Rita D'Eclessia, professor at the Department of Economic Theory and Quantitative Methods for Political Choices at the University of Rome and a visiting lecturer at Birkbeck University in London, who has run these theories through a set of mathematical tests and has produced some slightly surprising results.

Vanja Dragomanovich (VD): Why has the issue of oil prices attracted so much attention outside the actual oil market?
Rita D'Eclessia (RD’A): Analysis and empirical evidence shows that four out of the last five global recessions were preceded by oil shocks. In the case of the 2007-2008 crisis oil prices cannot be ignored as a culprit of what happened: the oil price increased over 300% and this caused the annual fuel bill of OECD countries to increase dramatically. Exceptional oil price volatility affects many economic variables and their related markets. Oil price fluctuations affect consumers, producers and marketers, especially in terms of costs, incentives to invest in technology and trading strategies. The importance of oil prices is further increased by the fact that other forms of energy such as coal, gas, and, to a lesser extent, electricity are sometimes priced in order to compete with oil, so that oil price fluctuations become reflected in broader energy price changes.

VD: As part of your research you looked into the link between the volatility in oil prices and the involvement of speculators in the market. Can you talk us through your findings?
RD’A: Economists and financial experts are divided over who they think was responsible for driving crude oil prices to their peaks in the first half of 2008. Basically trend-following speculation and institutional commodity index-buying have reinforced the output pressure on prices. In my research I tried to identify which economic and financial variables provide insights into understanding oil price dynamics. Our proposition was that the changes in the oil price are an example of an economic variable which is largely unpredictable. In such a context the role of futures markets, considered as a measure of the speculative component in the market, is also investigated. However, our conclusion was that using the data we had, we could not find any evidence that the oil price depends on speculative activity in the market.



VD: What data did you base your research on? For instance, how did you define speculators and how did you distinguish between speculative and non-speculative activity? Was your research based on information from several commodity exchanges?
RD’A: I set up an econometric model to capture possible long run equilibrium between some macroeconomic variables and some financial variables. The data used to measure speculation is the number of the benchmark US futures oil contracts, the West Texas Intermediate (WTI) spot crude oil held by speculators; this is data published by the US Commodities Futures Trading Commission (CFTC).
I used monthly West Texas Intermediate spot oil prices between 1993 and 2011 and assumed that speculators are participants who trade oil as an investment and not to hedge.

VD: Once you established that the link between speculative activity and oil price volatility was weak which other factors proved most influential in the oil market?
RD’A: Surprisingly, by far the strongest influence is the price of gold, followed by the strength of the euro against the dollar. For instance we found that for any one basis point move in the euro/dollar exchange rate the oil price moved by $2.8 dollars. Given that the euro was only introduced in 2000 we ran the analysis using the Deutschmark from 1993 till the introduction of the euro.
In all, we tried six different variables to try and find some meaningful correlation. We tried open interest, US interest rates, imports of WTI and WTI oil futures, all of which proved not to have a strong impact on the oil market.

VD: Your analysis was primarily statistical. However, in that period of time oil would have also moved for other reasons such as geopolitical crises, conflicts in the Middle East, economic crises, and political changes in Europe. How do those factors feature in your analysis?
RD’A: That is correct, but we can infer the influence of political events through the fluctuations of the dollar exchange rate and the price of gold. In any case the debate continues; oil price changes certainly cannot be explained solely by looking at the supply and demand dynamics.

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