Monday 30th May 2016
NEWS TICKER, FRIDAY MAY 27TH: BGEO Group plc, the London listed holding company of JSC Bank of Georgia, has this morning announced that Bank of Georgia, Georgia’s leading bank, and the European Bank for Reconstruction and Development (EBRD) have signed a GEL220m (approximately £70m) loan agreement with a maturity of five years. EBRD obtained the local currency funds through a private placement of GEL-dominated bonds arranged by Galt &Taggart, a wholly owned subsidiary of BGEO. This is the largest and the longest maturity local currency loan granted to a Georgian bank, which will allow Bank of Georgia to issue longer-term local currency loans, providing essential support for micro, small and medium sized enterprises to converge to DCFTA requirements, as well as underserved women entrepreneurs. “We are keen to develop financial products and lending practices, to service specifically women-led SMEs, which will ultimately increase their involvement in developing Georgia’s private sector”, says Irakli Gilauri, CEO of BGEO Group - The UK’s CBI has responded to analysis from the Treasury showing that a vote to leave the European Union could negatively impact UK pensions. Rain Newton-Smith, CBI Economics Director, says that: “All pension schemes benefit when funds can be invested across a stable, growing economy, to best support people in their retirement years. Any financial market turmoil caused by a Brexit is likely to have a negative effect on household wealth, the value of funds and damage pensions here at home, especially for those looking to retire within the next few years. The sheer weight of credible evidence points towards a serious economic shock if the UK were to leave the EU, meaning a hit to the value of our private pensions, jobs and prosperity.” - EPFR Global reports that Nine weeks into the second quarter mutual fund investors remain underwhelmed by their choices as they seek to navigate a global economy characterized by political uncertainty in Europe, lacklustre corporate profits and the prospect of another interest rate hike in the US, economic stress in major emerging markets and Japan's experiment with negative interest rates. During the week ending May 25 all nine of the major EPFR Global-tracked Emerging and Developed Markets Equity Fund groups posted outflows, as did Global, High Yield, Asia-Pacific and Emerging Markets Bond Funds, seven of the 11 major Sector Fund groups and three out of every five Country Equity Fund groups. Alternative Funds look to have taken in over $1bn for the fifth time in the past 14 weeks. Overall, EPFR Global-tracked Bond Funds added $2.6 billion to their year-to-date tally while another $9.1bn flowed out of Equity Funds. Some $12bn was absorbed by Money Market Funds with US funds attracting the bulk of the fresh money. EPFR Global-tracked Emerging Markets Equity Funds remained under pressure from many directions. China's economic data and policy shifts continue to paint a mixed picture for growth in the world's second largest economy, the US Federal Reserve is talking up the prospects of a second rate hike this summer, Europe's recovery appears to be running out of stream and the recent recovery in commodities prices is being viewed with scepticism in many quarters. All four of the major groups recorded outflows during the week ending May 25, with the diversified Global Emerging Markets (GEM) Equity Funds seeing the biggest outflows in cash terms and EMEA Equity Funds in flows as a percentage of AUM terms. Latin America Equity Funds extended their longest outflow streak since late 3Q15 as investors who bought into the prospect of political and economic change in Brazil confront the messy reality. However, year to date Brazil has been the top emerging market for all EPFR Global-tracked Equity Funds as managers bet that the impeachment proceedings against President Dilma Rousseff will open the door to more centrist economic policymaking says the funds data maven. Among the EMEA markets, the firm reports that GEM managers are showing more optimism than investors. EMEA Equity Funds have now posted outflows for five straight weeks and investors have pulled over $300m out of Russia and South Africa Equity Funds so far this month, though GEM allocations for both South Africa and Russia climbed coming into this month. The latest allocations data indicates less optimism about China despite is still impressive official numbers - annual GDP was running at 6.7% in 1Q16 - and the edge the recent slide in the renminbi should give Chinese exporters. GDP growth in Emerging Asia's second largest market, India, is even higher. Elsewhere, India Equity Funds have struggled to attract fresh money as investors wait to for domestic business investment and the government's reform agenda to kick into higher gears says EPFR Global – According to New Zealand press reports, stock exchange operator, NZX, will initiate confidential enquiries into listed companies that experience large, unexplained share price movements, to determine whether they may be holding undisclosed "material" information even while remaining in compliance with the market's Listing Rules that require disclosure of material information at certain trigger points. In an announcement this morning, NZX also warned investors not to assume that a listed entity's Listing Rules compliance statements meant they did not have material information in their possession which would potentially require eventual disclosure - Asian stocks were modestly higher today, largely on the back of increasingly softening sentiment from the US Federal Reserve. Most people think there will be one rate hike this year, but likely it will be in July rather than June. Either way, it will be one and not two or three. Fed chair Janet Yellen is scheduled to talk about interest rates at an event at Harvard University today and the expectation is that a softer approach for the rest of this year will be writ large; a good signal of intent will follow today’s quarterly growth stats. The presidential election will encourage caution; continued market volatility will encourage caution and mixed manufacturing data will encourage caution. Japan’s benchmark Nikkei 225 index added 0.4% to touch 16,834.84 and Hong Kong’s Hang Seng rose 0.9% to 20,576.52. The Shanghai Composite Index gained 0.3% to 2,829.67. The Straits Times Index (STI) ended 6.65 points or 0.24% higher to 2773.31, taking the year-to-date performance to -3.80%. The top active stocks today were SingTel, which gained 1.05%, DBS, which gained 0.07%, UOB, which gained0.11%, Keppel Corp, which gained2.47% and Ascendas REIT, which closed unchanged. The FTSE ST Mid Cap Index gained 0.27%, while the FTSE ST Small Cap Index rose 0.30% - The European Bank for Reconstruction and Development (EBRD) says it is taking the first step towards developing a green financial system in Kazakhstan in partnership with the Astana International Financial Centre (AIFC) Authority. EBRD President Sir Suma Chakrabarti and AIFC Governor Kairat Kelimbetov signed an agreement today on the sidelines of the Foreign Investors Council’s plenary session to commission a scoping study for the development of a green financing system in Kazakhstan. The study, scheduled to be completed in 2017, will assess the demand for green investments, identify gaps in current regulations, and make recommendations for the introduction of green financing standards and for the development of the green bonds market and carbon market services. The development of a green financing system would be consistent with the COP21 Paris Agreement, aligning financing flows with a pathway towards low greenhouse gas emissions and climate resilient development. The AIFC Authority was put in place earlier this year and is tasked with developing an international financial centre in Astana. In March, the AIFC Authority, TheCityUK and the EBRD signed a Memorandum of Understanding to support the establishment of the financial centre and to encourage and improve opportunities for the financial and related professional services industries – Turkey’s Yuksel has issued notice to holders of $200m senior notes due 2015 (ISIN XS0558618384), and filed with the Luxembourg Stock Exchange, that the company has agreed a term sheet with the ad-hoc committee of noteholders and its advisors to implement a restructuring of the notes and is currently finalising the required scheme documentation with the Committee. Once agreed, the Company will apply to the English High Court for leave to convene a meeting of note creditors to vote on the scheme proposals as soon as reasonably practicable when the High Court reconvenes after vacation in June 2016 - Following the agreement in principle of the May 24th Eurogroup for the release of the next loan tranche to Greece, domestic authorities have intensified their efforts for the completion of all pending issues reports EFG Eurobank in Athens. According to Greece’s Minister of Finance Euclid Tsakalotos, on the fulfilment of all pending issues, €7.5bn will be disbursed in mid-June, of which €1.8bn will be channeled to clear state arrears – This weekend is the second UK May Bank Holiday. FTSE Global Markets will reopen on Tuesday, May 31st at 9.00 am. We wish our readers and clients a sunny, restful, safe and exceedingly happy holiday.

Latest Video

Commodities, prices and the crisis after this Photograph © Kirsty Pargeter/ Dreamstime.com, supplied October 2013.

Commodities, prices and the crisis after this

Tuesday, 29 October 2013
Commodities, prices and the crisis after this With Syria dominating the headlines commodities, especially oil and gold, are yo-yoing in sync with the news. Though this makes fertile trading ground for short term investors, for long term investors it is harder to separate the “noise” generated by the sabre-rattling from where long term commodities prices could realistically be. What’s the solution? By Vanya Dragomanovich. http://www.ftseglobalmarkets.com/media/k2/items/cache/e3e43e64ef51c1e045494b824af806e9_XL.jpg

With Syria dominating the headlines commodities, especially oil and gold, are yo-yoing in sync with the news. Though this makes fertile trading ground for short term investors, for long term investors it is harder to separate the “noise” generated by the sabre-rattling from where long term commodities prices could realistically be. What’s the solution?
By Vanya Dragomanovich.

The last few years have been thick with crises and conflict situations in the Middle East: Syria, Libya, Egypt and Iran, while Europe and the US have dished out their own market-moving contributions in the form of the Greek debt crisis, US debt ceiling negotiations and quantitative easing. All of the above will move commodities markets (mostly oil and gold) in the short term, typically up to 10% and occasionally, and then very short term, up to 20%.


Société Générale Investment Bank analysts have dissected the factors that influence the price of 22 com­modities and found that a crisis will increase the degree to which the fundamentals of supply and demand will influence markets.




In a normal situation, that is, a market not driven by geopolitical or important financial news or fundamentals (such as barrels of oil produced versus oil consumed by cars; or ounces of gold mined versus ounces of jewellery bought) will play the biggest role in price variations. Before the collapse of Lehman Brothers supply and demand accounted for about 80% of the price variation for commodities and the rest was made up from macroeconomic data, currency strength and market liquidity.


The financial crisis disrupted this pattern and after Lehman the average percentage of the price move explained by underlying fundamentals fell to 71%. However, as the global economic outlook is beginning to improve fundamentals are starting to play a bigger role again.  “Our analysis shows a clear regime change this summer in terms of what is driving commodities,” claims Michael Haigh, SGIB analyst in New York. Fundamentals now account for 83%, the highest level in the last seven years. News like that from the Middle East will tip the balance even further in favour of fundamentals, not only because there is an actual disruption in supply of oil but also because there is a threat of future disruptions.


“A couple of serious supply constraints in recent years confirm what we are seeing as a result of the Syrian crisis and uncertainty—the explanatory power of fundamentals because of geopolitics, for example, picks up when there is supply uncertainty,” says Haigh.


Before the chemical attacks in Syria in late August 2013, fundamentals explained 55% of Brent crude’s price movements but by late August, at which stage the Syrian conflict threatened to take on international proportions, fundamentals drove a highly significant 95% of the price. There was a similar pick-up for Brent crude during the Arab Spring in 2011 and for the grains markets in 2012 when the drought in the US was in full flow.


For instance, for gold, the role of supply and demand on average constitutes 81% of the price variability but can spike as high as 95%, according to SGIB. For Brent crude oil fundamentals make up on average 65% of the price and for copper 69%. For aluminium and silver this number is around 80% while for soft commodities such as coffee and cocoa, or grains and livestock, fundamentals account for over 90% of the price.


Other influencers are the dollar exchange rate, macroeconomics and market liquidity. The on-going normalisation of the global financial system after the 2008 meltdown suggests that the dominant role of fundamentals will stay in place for the foreseeable future. “If so, commodities should trade mainly on their respective fundamentals, allowing for significant dispersion between individual commodities and between commodities and other asset classes,” adds Haigh.


Gold & black gold
When it comes to oil the fundamentals are driven beyond anything else by national interest. 


The two top producers, Saudi Arabia and Russia, each producing around 13% of the global oil supply, have their national budgets linked to the price of oil and both are for similar reasons happy to have the oil price trade between $110 and $150 a barrel. Russia’s budget depends heavily on the country’s exports of gas and oil and as long as the country is careful with its domestic spending the budget breaks even when oil prices are around $100/bbl.


In Saudi Arabia the cost of oil production is not far from $20 a barrel, yet because of heavy domestic spending the country as the lead producer of OPEC polices the price of oil so that it is never far from $110/bbl. If oil prices start falling Saudi Arabia (and potentially the rest of OPEC) can cut production by one million barrels a day in a relatively short period of time. Equally, if prices start to rise too fast, the country can release another one million barrels into the global market.


In addition, both the US and Europe hold large strategic oil reserves which would be released in the case of either a significant shortage or prices rising so high that they hurt the macro economy in those countries. “One natural stabiliser for global oil markets is strategic petroleum reserves. Low commercial inventories could prompt a coordinated release of these government stocks just as we saw in the aftermath of the Libya crisis in 2011. At 1.6bn barrels (of OECD crude oil reserves excluding the US) this safety valve remains ample,” says Francisco Blanch, commodities strategist at Bank of America Merrill Lynch.


In addition the Arab Spring has resulted in the Saudi government pumping billions of pounds into social projects and welfare in order to prevent domestic unrest, “which means that it is now no longer happy with oil prices at $100/bbl or below but at $110/bbl, says Haigh. With political decision makers battle ready when it comes to oil, there is not much scope for prices to move below $100/bbl. That doesn’t mean that prices will not continue to gyrate in reaction to crises like Syria but it does mean that those moves are not likely to be long lived.


Bank of America Merrill Lynch’s Blanch estimates that oil could rally to $120/bbl, not just in reaction to Syria but also because of workers’ protests and port closures in Libya, pipeline attacks in Iraq and oil theft and pipe vandalism in Nigeria. If the Syrian conflict spread into the rest of the region, Turkey and Iraq, then prices could even spike to $150/bbl.


“However, you would only see such a large spike in prices if there was a major escalation of conflict. Otherwise it is much more likely that the price will move up some $10/bbl and that for a short period,” says SGIB analyst Jesper Dannesboe.


When it comes to gold, financial crises will play a much bigger role than geopolitics because demand is spread across the globe in very different ways. For instance demand in the US stems to a large extent from ETF investors, in Europe key buying is roughly evenly distributed between ETF investors and bar and coin buyers, while in India and China jewellery is the main reason to buy gold.


Financial crisis
David Lamb, managing director, Jewellery, at the World Gold Council says that although demand for physical gold rose sharply in the second quarter of this year, particularly demand for jewellery, bars and coins, “overall uptake of gold was down 12% on the year.”


Signs of economic recovery in the US followed by a sparkling rally in equities and bonds meant that ETF investors were no longer looking for safe-haven assets and have been pulling out of gold.

According to the latest quarterly report by the World Gold Council jewellery demand, bar and coin demand and ETF purchases accounted for inflows of $26m, $23m and an outflow of $18m, respectively, in the last quarter. Interestingly, at 110,000kg (3,536,582 troy ounces), US gold production was 8% lower in the first half of 2013, compared to the first half of last year, according to a US Geological Survey  (USGS) report. Nevada mines produced less gold during the first half of this year compared to the second half of 2012 “as a result of lower grades and recoveries in Mill 5 and Mill 6 and lower grade at the Twin Creeks autoclaves,” said the USGS. “Some of the losses were offset by new production at the Emigrant Mine and higher throughput at the Phoenix Mine.”


Since the conflict in Syria started making the headlines gold prices have risen 20% to just over $1,400 an ounce, but the bigger factor has been the Federal Reserve and its plans about quantitative easing and bond buying which has meant that ETF speculators, already negative about gold, are continuing to pull out of the yellow metal.


What then outside of a conflict situation can investors use as a reliable indicator in the sea of information about supply and demand? For oil, this would be weekly inventory data such as the change of inventory levels reported by the US Department of Energy. Analysts will typically look at the year-on-year change to remove seasonal influences, such as spikes in demand during the summer holiday season when more people travel and petrol consumption goes up. A rise in inventory level will point to either oversupply or lack of demand and either way will result in a decline in prices.


Similarly in base metals a reliable indicator is the level of stocks held in London Metal Exchange warehouses or cancelled warrants—stocks which are due to leave warehouses in the near future. Although this number does not explain how much copper or aluminium is produced or consumed globally at any given time it is a very good indicator if there is spare material in the system.


This should provide a good enough idea of where the base-line price for commodities should be and allow for adjusting for a crisis situation. At present all eyes are on Syria, but the crisis in the pipeline is likely to be cause by weakening of emerging markets currencies. If, for instance, the Indian rupee weakens significantly it would stifle the buying of not only gold and oil but of a whole host of metals and raw materials. The only question is will Europe and the US have enough time to recover by then to counteract a drop in demand.

Current Issue

TWITTER FEED

Related News

Related Articles