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December 15, 2014
"Why should we cut production?"
The week in review...
Price: How low can you go? Crude oil reached $58.50 on Dec 12, 2014 (7:42 PM), the lowest price since July 2009, more than 44% below June 20's high of $107.26, capping a series new 5-year lows regularly since October. Kuwait, Saudi Arabia and Iraq have been discounting their prices to Asian customers.
Quantity: Open tap On Nov 27, oil cartel OPEC decided to cap its collective production at 30 million (mn) barrels a day (b/d); at least one survey estimates that the cartel has exceeded its production targets for six straight months. In the US, production rose to 9.12 mn b/d through December 5, the fastest ever rate since weekly records started in Jan 1983. US crude inventories rose by 1.45 mn to 380.8 mn barrels this past week -- stockpiles had been projected to shrink by 2.7 mn bbl. Did lower import prices feed the glut?
Venezuela: Under pressure Outspoken opponent of OPEC's open taps, the country's finances have been hit hard by this year's price drop. The upfront cost of contracts to insure the country's debt against non-payment for five years has jumped to 60%, pushing the implied probability of default to 94%, the world's highest.
US: Jobs news still improving the JOLTS survey for October showed US employers with 4.835 mn job openings, up from 4.685 million in September. The ratio of unemployed job seekers to openings fell to 1.86 from September's 1.98, lowest since February 2008. While the quits rate dropped 0.1 percentage point to 1.9%, that's still the second highest level since June 2008.
US: Household wealth still strong Net worth for households and non-profit groups for 3Q2014 was $81.3 trillion, 0.2% lower than in 2Q but still well above its pre-recession peak of $67.9 trillion. One reason for the slight drop: declining value of financial assets, including stocks and pension fund holdings. Household debt-cutting is leveling off as well, from a peak of 135% of disposable income in late 2007 to 108% this year through September -- the lowest sustained level since early 2003.
Argentina: Back from black? The 3-year-old ban on the sale of US dollars created a thriving black market in dollars. New central bank president Alejandro Vanoli has stepped up enforcement and coordination with other agencies; the peso has rebounded so far from September's 15.95 to the US dollar to 12.650. Tactics include hiking the savings deposit rate for small-scale savers, cutting bond arbitrage and boosting reserves some $814 mn by tapping a currency swap line with China. But inflation is still estimated at 40% per year, difficult to slow via currency moves alone.
China: Helping hand The People's Bank of China (PBoC) is reported to have added 400 bn yuan ($65 bn) into the banking system, just as 500 bn yuan in recent PBoC loans to the country's top five state-owned banks are coming due.
Japan: Election jitters The stakes in the Dec 14 general election: Prime Minister Shinzo Abe's ability to enact badly-needed economic structural reform. One of Abe's advisors said "It's all about the third arrow now," referring to the third of Prime Minister Abe's goals, after reversing deflation and reforming government spending.
European Banks: Waiting for a better offer? One of the ECB's support program for Eurozone banks, heavily discounted loans, is facing meager demand; banks borrowed €129.8 bn ($161.3 bn) in four-year loans, well below the expected €150 bn on offer. The lack of interest may paradoxically act as encouragement for the ECB to take on a more aggressive stance toward monetary stimulus.
Signs of the times:
Greek Crisis 2.0 Leaving Other Bailout Patients Unscathed – Bloomberg
Fall in Oil Prices Threatens Africa’s Economic Growth – Wall Street Journal
Detroit Emerges From Bankruptcy – New York Times
Yuan Has Real Shot at IMF Blessing on Reserve Status – Bloomberg
Sources: Bloomberg, Wall Street Journal, Financial Times, New York Times, China Daily, Xinhua Online, Deutsche Welle, China Daily, Asharq Al-Awsat (London, Mideast)
...And the week ahead:
GLOBAL ECONOMIC CALENDAR: Dec 14–20, 2014
Europe, UK, Africa, Mideast
Japan, Asia Ex Japan & Pac Rim
Japan: general election
China: foreign direct investment
Industrial production, capital flows
UK: housing prices
Japan: large manufacturer business confidence
UK: bank stress tests, inflation
Germany: ZEW index
China: manufacturing PMI
FOMC policy announcement, consumer prices
S Korea: producer prices
Japan: trade data
Jobless claims, leading indicators
Mexico: retail sales
UK: retail sales
Germany: business confidence
Ukraine: industrial production
China: property prices
Hong Kong: unemployment
Japan: monetary policy announcement
The Organization of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organization of 12 oil-exporting developing nations that coordinates and unifies the petroleum policies of its member countries.
The Job Openings and Labor Turnover Survey (JOLTS) is conducted by the US Department of Labor, producing data on job openings, hires, and separations.
The People's Bank of China (PBC or PBOC) is the central bank of the People's Republic of China with the power to control monetary policy and regulate financial institutions in mainland China.
The European Central Bank (ECB) is responsible for the monetary system of the European Union (EU) and the euro currency.
The International Monetary Fund (IMF) is an international organization of various member countries, established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements.
The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.
The Centre for European Economic Research (ZEW) is a public-private institute associated with the University of Mannheim, Germany.
Purchasing Managers Indexes (PMI) measure the manufacturing and services sectors in an economy, based on survey data collected from a representative panel of manufacturing and services firms. PMI greater than 50 indicated economic expansion; below 50, contraction.
International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
Fixed income securities involve interest rate, credit, inflation, and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
This material is for information only and does not constitute an invitation to the public to invest in any funds, securities, strategies or other products. You should be aware that the investment opportunities described should normally be regarded as longer term investments and they may not be suitable for everyone. The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Past performance is no guide to future returns and may not be repeated. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested.
Please note that an investor cannot invest directly in an index. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed and is not a complete summary or statement of all available data. Individual securities mentioned are intended as examples of portfolio holdings and are not intended as buy or sell recommendations. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice. The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
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