Monthly Archives: May 2015

Commodity Specialist

Oil price, where are we headed?

This article is an overview of the events occurred in the oil market over the last months, and a possible forecast of what might happen to oil price in the near future.

In particular, since August 2014, several factors have pushed the price per barrel down from $120 to almost $45. Why was that? Firstly, the shale boom, which led to an increase in oil extracted. Secondly, a slowdown in the economy of major importers, e.g. China, that decreased their demand. Lastly, the strengthening dollar. In addition, the OPEC, which made its intention clear, by saying that: “it will tolerate lower prices in order to do to shale firms’ finances what fracking does to rocks” (source FT). In fact, Saudi Arabia, the main player within the OPEC, wanted to keep its status of main oil producer. It must be said that the oil industry heavily relies on capex (e.g. to research new oil fields, to cover the fixed costs required to drill wells…), which are mainly funded through bonds. This business model has become highly risky, considering that the American shale oil can cost up to 150% more than the one extracted by the Saudis, whose main goal has become to kick the Americans out of the market, in order to defend their market share, by keeping production steady during a period of decreasing prices.

Consequently, capex has been decreased (in Canada, according to the FT, capex will decrease by 33% in 2015), projects have been put on hold or even shut down (especially in Canada, Norway, and in the Artic), and some shale firms have started facing default. In addition, layoffs have increased, and a storage technique called Fracklog, i.e. delaying extraction of oil from wells already drilled but not yet productive, has been introduced by the Americans in order to avoid being forced to sell at this low price.

So what can we expect over the next months? As of today, Brent is trading at around $65 a barrel. Keeping in mind that it is estimated that a price below $50 is considered unsustainable for the shale industry, and a sustained price above $65/$70 is considered profitable, it seems that the Saudi’s plan is to keep prices between $55 and $65 by controlling production. If prices increase at more than $65, the high inventory levels can cause prices to go down again. In addition, it still must be understood what might happen if the ban against Iranian oil will be lifted in the short run.

In conclusion, I expect oil to trade around $63/$66 in the short run, with a negative outlook for the following months.

Skand Narang, Incoming J.P. Morgan Intern

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WTI

Brent

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Day Topic: Greece Roller Coaster

European financial markets’ fluctuations have been strongly correlated to the outcome of the deal making process between Greece and its creditors. Yesterday, Wednesday 27 May, market makers bet on a positive final resolution over the Greek debt affair, pushing upward all major indexes. FTSEMIB reported a 2.29% daily gain, settling at 23861 and approaching the resistance point in area 24000. Today, very few minutes ago, Dow Jones Newswires reported a news where IMF authorities expressed their expectations of a Greek debt repayment. We have to remember that the deadline of the repayment is on 5 June. Today, indexes are showing some weakness due to the cloudy future of the Greece’s solvency.

Worldwide, between yesterday and today, global markets followed the bullish momentum of Europe and reported gains. Nikkei reached new multi-year highs, closing at 20473, +0.17%. NASDAQ performed a long green candle yesterday reaching multiyear high at 5106, +1.47%.

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Brief News, USA

Time Warner Cable will be bought by Charter Communications for $55bn or $195 a share. After the drop out from the deal of Comcast, Time Warner Cable have been approached  by Charter, which is the third largest cable television provider. The deal show how consolidation is becoming increasingly important in the Media Industry. The new giant will have to pass by the difficult waters of regulators, which have previously led the Comcast-TWC deal to a stalemate, and further to the drop out of Comcast. TWC’s share closed higher on Friday, and considering the premium Charter is willing to pay, todday Time Warner will soar. In Merger Arbitrage, normally the target company’s share soar following the ews and trying to adjust to the price of the acquiror, while the acquiror’s shares tend to decline.

In TMT, the bigger the better.

Charter Communications

Time Warner Cable

Market Movers Italy.

Banca Monte Paschi

BMPS.MI, the oldest bank in the world, has started its capital raising on Monday. After the stress tests, ECB imposed to two banks to increase their capital requirement in order to meet ECB’s criteria, CET1 at 10.5%. Just to remember CET1, which stands for Common Equity Tier 1, is the measure of Equity the bank has in comparison with the amount of assets weighted for their risk factor. Company, may have risk factor close to zero, while form of debt to junk companies may have 100%. The new capital raising amounts to €3bn, and is structured by a consortium of Banks led by UBS and Citigroup, who are the preferred advisors by the bank for capital raising and rights issue. This is the second day when both rights and shares are being traded. Today, rights and shares are down more than 10%. This capital raising presents many anomalies like the deep dilution of shares’ price, which are offered to shareholders at a price of €1.17. When there is a strong dilution, rights may float at higher prices than their theoretical value. Let’s see how is going to end this new operation that could be seen as an end of a nightmare for the Bank.

For those braves who feel at ease in riding the volatility, there may be some opportunities in the anomalies of price movement. Personally, I took some call warrants on BMPS.MI, because I am confident that, at this particular moment, the capital raising will be a success, and the bank could be again on track for a full recovery.

24th Semptember

Week Recap

This week, financial markets have been led in their upward trend by the voices coming from Central Banks. On Tuesday, two ECB officials, Coeuré and Noyer, declared that the European Central Bank is purchasing in May and June larger amount of assets, in order to cope with the issue of scarce liquidity in the bond markets between July and August. This news pumped up all major European Markets as leading the dollar into a new surge, reaching EUR/USD 1.1009. During this week, a various number of meetings occurred between Greece and European officials. In Monday, Athens officials assured the public that a potential deal with IMF and creditors was likely to be reached. From Wednesday, rumors spread the news that Greece will not be capable of paying back the $305m tranche to the IMF, which in later days appears to be confirmed. I agree with the voices that see the Exit of Greece, the so-called Grexit, as a potential Lehman Brothers alike financial disaster. Not considering the political disaster the crash of the European Union would mean this event would shake up all assets classes very badly. The anomalies in the German Bond Market in the past few weeks showed how fragile the situation is by now. At this level of prices, especially in peripheral Europe, Grexit (in my opinion) would cost a 30% crash in the markets, and unquantifiable difficulties in the real economy. In Markets, sell-offs are more brutal and violent then upward movements. A CRISIS CAN BE ANY MOMENT AT YOUR BACK. Plan Carefully. On the Macro side, the ZEW Index, which measures the Economic conditions of Germany, based on economists’ consensus, was below expectations: Economic Sentiment at 41.9, EXP 49.0. Nevertheless, German DAX was able to report a weekly 3.21% settling at 11815. FTSEMIB closed at 23782, +1.31%, IBEX 11554, +2.1%, FTSE100 7013, +0.76%, CAC40 5143, + 2.99%, Lisbon PSI20 6102, -0.3%.

On the US market operators’ sentiment was mainly driven by earnings’ results coming from Retail Giants, and macro data. Wal-Mart Inc., failed in meeting expectations, quarterly EPS was 1.03, EXP 1,04. Home Depot beat the estimates with q. EPS 1.16, EXP 1,15. Target on Wednesday beat the estimates with q. EPS at 1.1, EXP 1.03. Lowe’s missed analysts’ expectations, reporting q. EPS at 0.7, EXP 0.74. Retail Earnings are very important in America because they mirror the consumer’s spending attitudes. Retail Sales on a macro level fell. Wal-Mart showed lower sales growth rate than expected. Consumers do not seem aligned in giving up money for spending. On the macro side, from the housing market, Housing Starts MoM increased 20.2% and Building permits MoM 10.1%. Real Estate data are a very important indicator of the soundness of the Economic recovery in US. Increased starts mean more contracts signed and more inflows of liquidity, making the market more flexible to meet demand and to expand one of the invoices of Consumer Spending. The FED published the minutes of the FOMC on Wednesday, in which FED officials observed that a rise in interest rates may be expected for the next semester. No major macro indicator is expected to be published next week. Volatility in the market will be triggered by developments of the situation in Greece. DJI closed at 18351, reporting a weekly -0.22%, NASDAQ 5085, +0.81%, S&P500 2126, +0.16%.

On the other side of the financial world, the Nikkei topped multi-year high reaching 20264 and a weekly performance of +2.69%. Wednesday, GDP data have been released. Abe’s Japan topped estimates: 0.6% increase on a Quarterly basis, EXP +0.4%, and +2.4% on a Yearly basis. This long rally lead the Index to levels never reached after 2000. The Hang Seng closed at 27992, with a weekly +0.39%. KOSPI closed at 2146, with a weekly +1.89%.

CAC40DAX30DJIIBEXNasdaqNikkeiS&P 500

Euro Dollar. Bulls&Bears

EUR/USD Week Recap | 18th-22 th May 2015

This past week, The EUR/USD pair followed a bearish trend, starting its decline back on Monday going from 1,1466 to the three weeks lowest level of 1,1013 as Friday 22th. EUR depreciation was expected as an ECB Officer recently spoke about a boost of the QE in the months of May and June, as a manner of contrast to the expected bond market slowdown in July and August. QE is generally negative for a currency as it contributes to drive rates down. On top of this, Greece troubled position still remains unclear to the market and an exit could not still be excluded, and this event for some could be as harmful for the European Financial Markets as the Lehman’s chapter 11.

On the other side, US economy is performing weaker than expected as shown from data such as manufacturing and retail sales that led to a downward revision of the first-quarter annualized growth rate, initially estimated at 0,2%. Moreover, consumer spending is generally low, even though an increase due to low oil price was expected and this brought concerns about the status of real economy. Industrial and manufacturing production are still below expectations. For these reasons, several FED officers strongly believe that the interest rate hike will definitely be postponed.

Next week it is expected to be very calm for the EUR/USD pair, as very few new macroeconomic data of minor importance will be released. According to my analysis, unless some changes occur with Greece, the EUR/USD pair will keep stable with minimal EUR depreciation (EUR/USD goes down) as the overall outlook of the American economy seems more substantial and stable than the European one.

  EUR-USD

By:

Ludovico Buffo, Master Student

Ludovico.Buffo

Day Topic: Deutsche Bank Annual General Meeting, 20/05/2015

Today in Frankfurt the General Meeting of Deutsche Bank took place, more than nine thousands shareholders signed in for the event. At the very heart of the discussion there was the 2020 plus strategy agenda, the program has been discussed throughout the past years with also some extreme options considered, such as the exit of the firm from the investment banking industry. Alongside the topics related to the future strategy the result of the 2015 strategy have been presented and an important part of the presentation has been dedicated to the latest litigation for misconducts that have shaken the banking sector.

Looking at the past four out of six goals from the previous plan have been reached by DB management, the firm have experienced an increase of capital strength (result supported also by the first ECB stress tests) and a more efficient network, with a more focused approach on the company’s core areas (investment banking, corporate and private banking, retail banking and asset and wealth management). The management in 2012 has also launched a cultural change programme that is showing its first results, however fraudulent behaviours from employees are still taking place and they are generating a big chunk of the legal fees. Costs and legal fees are the areas where the management missed the expected improvement and they are the bridge between the past and the future strategies. For the future DB is expecting to tackle even harder its costs structure with a reduction of the IB division balance sheet and the closure of some branches around the world in order to allow a better focus on attractive areas. On the retail banking side the company is planning to split up Deutsche retail division and Deutsche PostBank given the low level of synergies between the two customer clusters and new capital legislation.

The Management has been put under pressure by unsatisfied shareholders judging results not in line with their expectations. The Co-CEO Anshu Jain in now the direct supervisor of the restructuring plan, which will follow the pillars of the new strategy plan as defined in the meeting. Management have been incapable of securing a good stock return the last year. Deutsche Bank’s shares are one of the worst performers among peer in the last year. The new strategy will require a massive €3.5bn cost-cutting program.

Financial performance of 2014 as also been presented to the shareholders, DB has hugely increased its pre-taxes and after-taxes results for the period with an improvement in revenues in all the core business areas but the achievements are also due to a decrease in legal fees and loan-loss-provisions for the previous period. However in the first quarter of this year litigation expenses are already bouncing back to historical highs mainly for the LIBOR and exchange rates scandal.

By

Andrea Mangone, Master Student

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Market Movers

In few hours, FED will publish the Minutes of the Federal Reserve Open Market Committee’s last meeting, which took place on 28th April, 2015. In these Minutes, there may be some precious pieces of information about the intentions of FED officials on Rate Hike. FOMC may have decided a possible date for a rise in interest rates. Key indicators influencing the postponement of a tighter monetary policy in US are the Labour Market conditions, which have improved but have shown lack of consistency in the last months, and Inflation. Although this flat rates environment, Inflation in US have not increased consistently enough to justify a unanimous and unconditional hike in interest rates. Let’s hear carefully what FED officials will say this evening, UK time.
Retail Giants are publishing their earnings this week. Today Target will publish its earnings. Tuesday morning (US time), Wal-Mart have published below expectations results, showing weak sales growth. Retail operator are under the radar of many analysts considering the sluggish results in Retail Sales.
Lawsuits and guilty pleas are shaking up the Financial Institutions world. Any further legal settlement for US and UK Banks may lead to increases in volatility, be careful.
$tay Tuned.

Tuesday 19th, Brief News

Today, GREAT NEWS.
Two ECB members, Coeure and Noyer reported that ECB will purchase more assets on May and  June in order to fight the low levels of liquidity in the markets in the following months, July and August. European Indexes are flying, with DAX as best performer. Athens Stock Exchange is up more than 3%.

Day Recap 2

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DAX, 18_05_15

Here some materials for you traders. R allows me to build up the graphs with few hours of delay. If you have any suggestions on how to improve the charts, with more technicals that you find essential for analysis let me know, and I will do my best. DAX yesterday pulled back to the highs of Friday. If it breaks the resistance point in area 11700, I may see space for rebounds. But I WOULD NOT DARE TAKING ANY POSITION BY NOW.

Here I attach the chart of Snam, the Italian utility company I bought yesterday (just few shares)

Snam

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