Global Round Up

Here are some of the key events coming up:

  • More Fed officials will be speaking as the FOMC’s June 13-14 meeting approaches. Robert Kaplan will be in New York on Wednesday.
  • The U.S. jobs report Friday may bolster the case for a rate hike, with a gain of 180,000 positions expected.
  • Brazil’s central-bank decision Wednesday will probably see a cut of 75 to 100 basis points from the current 11.25 percent, according to economists.
  • The EIA is due to release its monthly supply reports Wednesday.

Here are the main movers in markets:

Stocks

  • The MSCI Asia Pacific Index dropped less than 0.1 percent, paring its advance for May to 2.6 percent. The Stoxx Europe 600 Index fell 0.1 percent, trimming a monthly gain to 0.8 percent.
  • The Shanghai Composite rose 0.2 percent, after nearly wiping out an earlier gain of 1.1 percent. The manufacturing purchasing managers index remained at 51.2 for a second straight month in May, compared with a median estimate of 51 in a Bloomberg survey of economists.
  • Hong Kong’s Hang Seng was flat, heading for a fifth straight monthly gain, the longest winning streak since 2013, as improving earnings outweighed concerns about China’s campaign to cut leverage.
  • Japan’s Topix fell 0.3 percent, following two days of gains.
  • Futures on the S&P 500 rose 0.1 percent. The benchmark index slipped 0.1 percent Tuesday, retreating for the first time in eight days. The Nasdaq 100 Index advanced for an eighth day to an all-time high.

Currencies

  • The pound dropped 0.3 percent to $1.2817. The euro was little changed, heading for a monthly gain of 2.7 percent, its best performance in more than a year.
  • The yen weakened 0.1 percent to 110.93 per dollar after rising 0.4 percent Tuesday. The South African rand strengthened 0.4 percent, after tumbling for two days.
  • The onshore yuan climbed 0.4 percent, poised for its highest closing level since November.
  • The Bloomberg Dollar Spot Index was little changed for a third straight day. The gauge is down 1.3 percent for the month.

Commodities

  • Iron-ore futures in Dalian fell 5.4 percent to 429.5 yuan a ton, the lowest since Nov. 7.
  • Gold was little changed at $1,262.69 an ounce, extending a 0.4 percent loss Tuesday.
  • Oil dropped 0.6 percent to $49.35 a barrel after retreating 0.3 percent in the previous session. OPEC and Russia’s deal last week to extend output limits through March was met with a selloff as it didn’t include deeper cuts, a plan for the rest of 2018 or a new ally.

Bonds

  • The yield on 10-year Treasuries rose two basis point to 2.23 percent, after declining four basis points in the previous session.
  • Benchmark yields in the U.K. rose one basis point, after a drop of two basis points Tuesday.
  • Australia 10-year yields fell less than one basis point to 2.39 percent.

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions Ltd

Red Flag For Bonds

As of late Monday trading, the 10-year U.S. Treasury note was trading at a yield of 2.25 percent per year, while the two-year note yielded 1.28 percent per year. At 0.97 percentage point, the “spread” between the longer-maturity note and the shorter-maturity one is hovering at the lowest levels seen since October.

This is not only a titillating factoid to discuss with friends, but a sign that bond investors aren’t quite buying the idea that the economy is heating up.

Longer-term bonds generally command greater yields than shorter ones, and the more enthusiastic the expectations for inflation, the greater this difference tends to be. After all, an investor doesn’t want to lock up their money for a decade only to receive a sum that’s worth less in those future dollars. Since faster economic growth is thought to lead to greater inflation, and inflation expectations tend to change the yields for longer-term bonds more dramatically than that of shorter-term bonds, it is easy to see why the yield spread is commonly taken to be an indicator of economic growth expectations.

Right now, is doesn’t appear to be indicating anything good.

“The Treasury market is telling us a very different story about the big pickup in growth that the consensus is looking for in the second half of the year,” Matt Maley, equity strategist at Miller Tabak, wrote in a Monday commentary piece.

As Peter Boockvar of The Lindsey Group sees it, the spread is telling a story about both what traders think the Federal Reserve will do, and how they think the economy is likely to respond to those actions. As he alludes to, short-term bonds tend to be guided closely by expectations of Fed policy, while longer-term yields more purely reflect economic expectations.

When it comes to the falling spread, “It’s becoming clear the reasoning and that is a Fed that is intent on raising short rates due to their statistical employment and inflation hurdles having been met (and thus backward looking viewpoints) and market worries about how the economy will handle that reflected in the drop in long rates,” Boockvar wrote in a Monday note.

Others say the yield spread is not serving up a yield sign — yet.

The short end of the yield curve is “rising on expectations of tighter monetary policy, while the low end is more correlated to growth … so I think the case could be made that the curve continues to narrow,” Oppenheimer technical analyst Ari Wald said on Monday.

Yet this doesn’t worry Wald, who noted that the yield spread turned fully negative before each of the four most recent recessions.

“We don’t think the flatter curve is a warning,” he said. “As long as banks can borrow short[-term debt] and lend long[-term debt], we think the economy can do just fine and the stock market can do just fine.”

“In fact, the level and direction of the yield curve now looks a lot like it did in 1994 and it looks a lot like it did in 2004 — years where you still wanted to be invested in stocks,” Wald added.

Kevin Caron, a portfolio manager at Washington Crossing Advisors, agreed that only an inverted yield curve would be a real warning signal, and pointed out that a spread at this level has been seen “a couple times already in this recovery, and it didn’t indicate anything in the way of a recession.”

However, he granted that the decline in the yield curve is telling us something about investor sentiment.

“The flattening ties into the fading of expectations for some kind of fiscal push this year,” Caron said Monday . “This is the broader representation of a resetting of expectations, in the United States at least, and the expectation for maybe slower growth than what we expected just after the election.”

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions Ltd

 

Oil

OPEC and its allies extended oil production cuts for nine more months after last year’s landmark agreement failed to eliminate the global oversupply or achieve a sustained price recovery.

The producer group together with Russia and other non-members agreed to prolong their accord through March, but no new non-OPEC countries will be joining the pact and there was no option set out to continue curbs further into 2018. The market was unimpressed as prices tumbled more than 5 percent to under $49 a barrel in New York and more than a billion barrels were traded.

Six months after forming an unprecedented coalition of 24 nations and delivering output reductions that exceeded all expectations, resurgent production from U.S. shale fields has meant oil inventories remain well above the level targeted by OPEC. While stockpiles are shrinking, ministers acknowledged the surplus built up during three years of overproduction won’t clear until at least the end of 2017. The group is prepared for a long game.

“We’ve said we’ll do whatever is necessary,” Saudi Oil Minister Khalid Al-Falih said Thursday after the meeting in Vienna. “That certainly includes extending the nine months further. We’ll cross that bridge when we get to it.”

Al-Falih said the cuts are working, adding that stockpile reductions will accelerate in the third quarter and inventory levels will come down to the five-year average in the first quarter of next year. While he expects a “healthy return” for U.S. shale, that won’t derail OPEC’s goals and a nine-month extension will “do the trick,” he said.

Exemptions Remain

Nigeria and Libya will remain exempt from making cuts and Iran, which was allowed to increase production under the original accord, retains the same output target, Kuwait’s Oil Minister Issam Almarzooq said after the meeting. That deal gave the Islamic Republic room to increase output to a maximum of 3.797 million barrels a day.

The Joint Ministerial Monitoring Committee — composed of six OPEC and non-OPEC nations — will continue watching the market and can recommend further action if needed, said Almarzooq.

The market is already giving the committee plenty to think about. Futures dropped as low as $48.45 a barrel in New York on Thursday, before settling at $48.90.

“The market seems to be a bit disappointed as there is no ‘something extra,’” said Jan Edelmann, a commodity analyst at HSH Nordbank AG. “It seems as though OPEC fears letting the stock-draw run too hot.”

The Organization of Petroleum Exporting Countries agreed in November to cut output by about 1.2 million barrels a day. Eleven non-members joined the deal in December, bringing the total supply reduction to about 1.8 million. The curbs were intended to last six months from January, but confidence in the deal, which boosted prices as much as 20 percent, waned as inventories remained stubbornly high and U.S. output surged.

OPEC Digs In for Long Battle to See Off U.S. Oil Shale Producers

The extension prolongs a rare period of collaboration between OPEC and some of its largest rivals, including Russia. The last time both sides worked together was 15 years ago, and the agreement fell apart soon after it began. The current accord encompasses countries that pump roughly 60 percent of the world’s oil, but excludes major producers such as the U.S., China, Canada, Norway and Brazil.

Without a steer on what will happen beyond March, there’s concern that OPEC could return to the free-for-all production that caused prices to slump from 2014 to 2016, though Al-Falih has insisted the organization will maintain control.

“The fact that we have not elaborated on a specific strategy for the second quarter, the second half of 2018, should not be interpreted as that we don’t have a strategy,” he said. “We will develop it based on the conditions that present themselves at that time.”

Al-Falih earlier announced that OPEC is welcoming a new member, Equatorial Guinea, to its ranks. The African nation will be one of the group’s smallest producers, pumping about 270,000 barrels a day, a little more than neighboring Gabon. It was already participating in the cuts as a non-OPEC producer.

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

Today’s FOREX Trades

EUR/USD Intraday: towards 1.1280.
Pivot: 1.1210

Our preference: long positions above 1.1210 with targets at 1.1265 & 1.1280 in extension.

Alternative scenario: below 1.1210 look for further downside with 1.1170 & 1.1145 as targets.

Comment: the RSI is bullish and calls for further upside.

USD/JPY Intraday: supported by a rising trend line.
Pivot: 111.45

Our preference: long positions above 111.45 with targets at 111.90 & 112.20 in extension.

Alternative scenario: below 111.45 look for further downside with 111.10 & 110.80 as targets.

Comment: the RSI is bullish and calls for further upside.

GBP/USD Intraday: continuation of the rebound.
Pivot: 1.2960

Our preference: long positions above 1.2960 with targets at 1.3005 & 1.3020 in extension.

Alternative scenario: below 1.2960 look for further downside with 1.2925 & 1.2900 as targets.

Comment: the RSI is mixed with a bullish bias.

 

As well as these current currency plays we remain bullish on both gold and silver.

 

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

 

Short Pound

The pound is heading lower whatever the outcome of the U.K.’s elections, according to BlueBay Asset Management.

While the currency has rallied since the election was called, BlueBay began selling sterling last week, betting that the U.K. is set for a damaging Brexit process after the vote. Such a view chimes with Allianz Global Investors who recently used the rally in the pound to short it, and the median forecast of analysts in a survey, who see the pound declining about 3 percent by the end of 2017.

“We’ve literally gone short the pound at the end of last week,” said Mark Dowding, a fund manager at BlueBay, which oversees $55.5 billion. “We think you’re going to be facing a Brexit that to us looks like it’s going to be a hard Brexit.”

The pound, which tumbled following the U.K.’s decision to leave the European Union last June, has pared some of those losses as investors speculate that the earlier vote will ease pressure on U.K. Prime Minister Theresa May. The Conservatives are currently expected to comfortably win the June 8 snap elections with a large majority in Parliament.

Sterling reached a nine-month high of 1.3048 on May 18, and was at $1.2971 as of 12:06 p.m. in London on Tuesday. Even after rallying 5 percent in 2017, sterling remains about 13 percent weaker since the Brexit vote last June.

“There’s been this optimism in markets that a really big majority may actually strengthen Theresa May’s hand and make life a lot easier,” said Dowding, who predicts sterling could retest $1.20 toward the end of the year — an 8 percent decline from the current levels. “I’m not really sure it will make too much difference in practice.”

Tough comments from both sides of the negotiating table signal a choppy path ahead. Bundesbank board member Andreas Dombret said Tuesday divorce proceedings would likely be hard or very hard. Those comments came shortly after Brexit Secretary David Davis said the U.K. will walk away from talks unless the bloc drops its high financial demands.

“The most significant point that we would make on the U.K. is that, based on our discussions around Westminster and our discussions around Brussels, it feels that the deal that U.K. politicians think they can achieve seems an unrealistic pipe dream,” Dowding said.

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

Sugar Not So Sweet.

It’s not this year’s price crash that haunts the $150 billion sugar industry. It’s the fear of worse to come.

Raw sugar’s 16 percent drop ranks it bottom of the 22 raw materials on the Bloomberg Commodity Index. Shocks to demand in top consumer India and prospects of more European supply are helping shift the market to a surplus, hurting prices. Yet beyond such market dampeners, hang darker clouds.

After decades of stable demand growth, almost doubling per person since 1960, the world is heading for a tipping point as shoppers turn against the cola and candy blamed for an obesity epidemic in the rich world. At the same time, sugar has to compete with cheap syrups increasingly used in processed food.

Demand is rising by some estimates at the slowest since at least the global financial crisis as companies like Coca-Cola Co., consuming about 14 percent of all sugar traded, and Nestle SA, the world’s biggest food company, react to such trends. Group Sopex and Green Pool Commodity Specialists see growth in 2017-18 below the average 2 percent a year of the past decade or so. The U.S. Department of Agriculture sees the first drop in demand in a quarter century.

“Growth is not what it’s been,” Tom McNeill, managing director of Green Pool, said in an interview. “There is undoubtedly a move by global bottlers and by a lot of global food manufacturers to reduce the sugar content in their products.”

Consumption may sink below 1 percent for a second year in the 2016-2017 season, less than half the average pace in the previous decade, Sopex figures show. The slowdown may mark a turning point for an industry that’s seen near linear growth for half a century on an expanding world population and rising wealth, concentrated most recently in dynamic economies like China.

Indeed, food giants are only just beginning to respond to noisy calls from customers, lobby groups and lawmakers to cut empty carbs from products.

Coca-Cola has 200 reformulations of products in the works to lower sugar content, Chief Executive Officer James Quincey said in October. PepsiCo Inc. has vowed that at least two-thirds of the company’s volume will have no more than 100 calories from added sugars per 12-ounce serving by 2025.

Coca-Cola’s Biggest Challenge Under Next CEO: Cutting Calories

Nestle said late last year it had found a way to reduce sugar in chocolate as much as 40 percent and would lower sugar in the chocolate and confectionery it sells in the U.K. and Ireland by 10 percent. Globally, companies curbed ingredients that raise health concerns such as sugar and salt in about a fifth of their products in 2016, says the Consumer Goods Forum, a retailing lobby.

“We are hearing from right, left and center all the intentions of the industrial users — food and beverage companies — to reformulate their products,” said Sergey Gudoshnikov, senior economist at the International Sugar Organization, representing producing nations. “Sooner or later it will work.”

U.S. cities such as Philadelphia and San Francisco and countries such as France and Mexico have added “sin taxes” previously reserved for tobacco or alcohol to sugary sodas, with others lining up to join them. The World Health Organization says its research shows that a 20 percent increase in the retail price of fizzy drinks results in a proportional drop in demand.

The industry is now having to adapt to what some have dubbed a war on sugar.

Cutting sugar alone won’t solve obesity concerns, according to Courtney Gaine, president and CEO of the Sugar Association, a Washington-based lobby group. Replacing sugar with starches or fat doesn’t reduce total calories, she said.

Blame Game

“It’s very important that the sugar industry preaches moderation and doesn’t say, ‘Hey, it’s not our problem’ because it’s the whole food and beverage industry’s problem to try and help the world be a healthier place,” Gaine said. “I would like for sugar not to be blamed as the sole cause, but we are also not innocent.”

Beyond the developed world, consumption of sugar isn’t going to fall off a cliff as long as the world’s population is still expanding and there are burgeoning middle classes in Asian and African cities, according to Rabobank International.

Trends in richer countries with more money to spend are significant, nevertheless. Demand is set to sink in Germany, France and the U.K., according to Tropical Research Services data for the season that starts in October.

Some middle-income nations are also hurting from weak economies. Brazilian demand has dropped by about 1 million metric tons over the past three to four seasons, according to Sopex. It’s also down in Argentina.

More significantly, sugar is losing out to cheaper sweeteners as food manufacturers protect profit margins. Soda makers in China and the Philippines are using more high-fructose corn syrup. The processed sweetener, made from corn starch, is about 3,680 yuan ($534) a ton cheaper than sugar, Sopex says.

“That’s seriously eroding demand,” said John Stansfield, an analyst at Sopex who has worked in the sugar industry for two decades.

High-fructose corn syrup displaced 3.3 million tons of sugar in China alone in 2016, according to the USDA.

The drop in raw-sugar futures prices this year in New York to 16.26 cents a pound can mostly be blamed on short-term problems such as the weak Brazilian economy and currency policies in India that disrupted demand.

But beyond such squalls, others hear distant thunder.

“Some of the changes are temporary, others are not,” said Sean Diffley, head of sugar and ethanol research at TRS, which advises hedge funds. “I suspect the food and beverage industry doesn’t go back to larger bars of chocolate or full-sugar Coca-Cola.”

Cheerio

The Pinstripe and Bowler Cub shares information with MF Solutions Ltd.

UK Oil

BP started a project in the U.K. North Sea that will restore production halted since 2013 and help double the company’s output in the area by the end of the decade.

BP and its partners budgeted 4.4 billion pounds ($5.7 billion) for the Quad 204 project, which involved building a new floating production and supply vessel and redeveloping the aging Schiehallion and Loyal fields. Output from Quad 204 will ramp up to 130,000 barrels of oil a day this year, the London-based company said in an emailed statement Monday.

The producer plans to double its U.K. North Sea output to 200,000 barrels of oil equivalent a day by 2020, the company said. Volumes from the region, one of the world’s most expensive areas for finding and extracting oil, have shrunk in the past decade as older fields deteriorated and exploration spending dropped with crude’s three-year decline. BP partner Royal Dutch Shell Plc said earlier this year that it was selling a majority of its North Sea positions.

Among those divestments, Shell agreed to reduce its interest in the Schiehallion field, where it owns a 55 percent stake, while BP has 33 percent and Siccar Point Energy 12 percent. Once the deal is completed, Shell will hold 45 percent.

The Schiehallion and Loyal fields stopped production in 2013 as the sites needed redevelopment, new wells, replacement of infrastructure on the sea bed and a new production vessel. The new ship, the Glen Loyal, is 36 percent owned by BP, which is the operator, 54 percent by Shell and 10 percent by Siccar Point. The partners intend to drill 20 new wells there.

BP’s shares rose as much as 0.8 percent and Shell’s B shares added as much as 0.7 percent in London trading, in line with the gain in the Stoxx Europe 600 Oil & Gas index.

Quad 204 is the third of seven new projects BP plans to start this year. The company will restore its total oil and natural-gas production to about 4 million barrels a day by the end of this decade, a level it was at before the disastrous Gulf of Mexico oil spill in 2010 forced it to sell a third of its assets, Chief Executive Officer Bob Dudley said May 17.

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.