Resurgent growth is reviving one of the past decade’s hottest trades.

Emerging-market investors are again piling into the so-called BRIC nations — Brazil, Russia, India and China — pushing monthly inflows and stock prices to nearly two-year highs. The bet is that a pickup in the global economy will fuel demand for the countries’ commodity exports, drive an expansion of middle-class consumption and help them shore up fiscal accounts.

Wooed by India’s efforts to streamline regulations, Brazil’s economic rebound, stabilizing prices for Russian oil exports and China’s stronger currency, traders are warming to the countries’ higher yields and better outlook for equities. It’s an abrupt reversal after they were scorched by a 40 percent drop in the biggest BRIC exchange-traded fund from the end of 2012 through early 2016 as Brazil lost its investment grade, Chinese growth slowed from a meteoric pace, Russia’s oil revenue plummeted and India’s current account deficit swelled.

“Improving fundamentals, attractive valuations, and high yields in a yield-starved world make emerging markets once again attractive, including some of the BRICs,” Jens Nystedt, a New York-based money manager at Morgan Stanley Investment Management overseeing $417 billion in assets, wrote in an email.

Non-resident portfolio flows into BRIC nations rose to $166.5 billion last month, up from $28.3 billion in outflows 12 months prior, according to data compiled by the Institute of International Finance and EPFR Global. Chinese equities saw their biggest quarterly inflows in two years, while traders piled into Indian bonds at the highest level in almost three years, Bloomberg data show.

Mark Mobius, executive chairman of Templeton Emerging Markets Group, favors Brazil, China and India, adding that Russia will also benefit from a growth rebound. Brazilian assets will benefit as Latin America’s largest economy bounces back from two years of contractions, while Chinese investment will pick up as its foreign reserves recover from a six-year low in January, according to Steve Hooker, who helps oversee $12 billion of assets as an emerging-market money manager at Newfleet Asset Management.

Fastest Growth

Coined in 2001 by former Goldman Sachs economist Jim O’Neill, “BRICs” became a ubiquitous shorthand for the fastest-growing emerging economies (other investors later capitalized the S and added South Africa to the mix).

In the decade ending Dec. 30, 2012, developing-nation equities had annual returns of 17 percent, twice those of developed nations. That changed in the taper tantrum years amid fears that the Fragile Five, which included Brazil and India, would struggle to meet high external funding needs. Responding to changing sentiment, Goldman Sachs Group Inc. shut its BRIC fund in October 2015 after losing 88 percent of its assets since a 2010 peak.


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Russian Grain Gain

Russia’s wheat fields are expected to see warm, dry weather in the next two weeks, a relief for farmers that have struggled with a cold and soggy planting season.

Wet fields of winter wheat will start drying out, which would benefit the crop to be harvested next month, according to Commodity Weather Group. Later in June, most models show rain will return, which would replenish soil moisture and keep the crop in good shape, said David Streit, a forecaster for the Bethesda, Maryland-based firm.

“Russia has a good soil moisture supply in place going into this drier spell that the wheat can tap into,” Streit said, adding that the dry weather will help prevent disease.

Bad weather has lowered expectations for Russia’s total grains production, and traders are closely watching weather forecasts ahead. Earlier this month, the Agriculture Ministry cut production estimates to as low as 100 million metric tons from a previous forecast of 110 million tons, according to a report from Tass news service, which cited an interview with the minister.

Cold, Wet

Earlier in the year, cold weather in central and southern Russia, the main areas for winter wheat, raised the risk of delays to the wheat and barley harvest. It’s also possible that central and eastern Ukraine, and central portions of Russia’s North Caucasus could see lower yields, said Kyle Tapley, a senior agricultural meteorologist at MDA Weather Services.

“I don’t see major problems for the winter wheat except for some falling behind with vegetation, but it is not the major issue,” said Dmitry Rylko, director general of Institute for Agricultural Market Studies in Moscow.

The weather could be a bigger problem for spring crops, such as wheat, barley and corn, which are falling behind in planting and development, he said.

In the spring-wheat areas of Volga region and the Urals, the fields will likely remain cold and wet over the next 10 days, which could slow planting and early crop growth, said Tapley of MDA. However, conditions could improve later in the season, he said.

Sowing of spring wheat, the smaller of the two main wheat harvests in Russia, are lagging behind last year’s pace. Plantings account for 12.5 million hectares (30.9 million acres) as of June 2, compared with 13.3 million hectares a year before, according to the Agriculture Ministry.

Spring wheat, mainly grown in Siberia, usually accounts for a third of Russia’s total harvest.


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Private Russian Oil

The chief executive of Russia’s second largest crude oil producer said on Thursday that he fully supported calls from the Kremlin’s former finance minister to privatize the country’s oil companies.

“You know that I was ideologically behind the privatization of the Russian oil industry, so I have always supported this trend,” Vagit Alekperov, chief executive of Lukoil, said via a translator on Thursday.

While speaking at the St Petersburg International Economic Forum, Alekperov pointed out that Russia’s privatization of oil companies had started over 20 years ago and stressed he expected the process would “continue further”.

Russia’s state news agency, TASS, previously reported the country’s former Finance Minister, Alexei Kudrin, had urged President Vladimir Putin to consider transforming state-owned oil companies into private firms in order to boost ailing economic growth.

Oil sector should be ‘fully privatized’ by 2025

Kudrin, widely credited for helping Moscow reach record results during the first half of the Putin era, had been tasked by the long-time Russian premier to draft an economic program from 2018 to 2024. Incidentally, this happens to be the same timeframe for Russia’s next presidential term.

“The oil sector should be fully privatized in the next seven to eight years, no state companies are required there now as the statehood brings more harm than benefit to those companies,” Kudrin, was reported by TASS as saying Thursday.

Despite the calls for Russia to privatize its oil sector and the subsequent backing from the CEO of a Moscow-based oil giant, Putin’s press secretary, Dmitry Peskov, had said the government currently has no plans to do so.

“This is Kudrin’s well-known expert point of view, he defends it reasonably enough. There are other opinions as well. However, as far as I know, the government has no such plans yet,” TASS reported Peskov as saying on Thursday.

Russia emerged from a two-year recession at the end of 2016 yet economic growth remains relatively anemic and continues to languish significantly below the 3 percent target set by its government. Its economy grew 0.5 percent in the first quarter year-on-year, Reuters reported in May, citing data from the Federal Statistics Service.


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All Quite On the Oil Front

Earlier this year, Saudi Arabia’s Minister of Energy and Industry echoed Alan Greenspan in warning against “irrational exuberance” that his country, or OPEC, would support oil prices simply so rivals could get a free ride. In the weeks since, Khalid Al-Falih has swapped out Greenspan for another central banker: the European Central Bank’s Mario “whatever it takes”Draghi.

Just over a week ago, Al-Falih used that very phrase to emphasize OPEC’s commitment to draining the glut of oil inventories weighing on prices. And just this weekend, he apparently put substance behind the rhetoric: He said Saudi Arabia and Russia — which together produce more than a fifth of the world’s oil — favor prolonging through the first quarter of 2018 supply cuts they and other countries announced last November. As it stands, OPEC is due to meet on May 25 to decide whether to extend the cuts to the end of the year. Oil prices duly jumped.

“Jumped” maybe the wrong metaphor in this case, though; “stepped back from the brink” could be more apt:

The net long position of managed money in WTI and Brent crude oil futures shows the arc of belief in OPEC’s power from November to now. Like any good central banker, or aspiring one, Al-Falih’s verbal intervention was designed to revive flagging confidence in the power of his office.

Without it, prices might well have turned south again. The same weekend, it was reported that oil production in Libya, exempt from production cuts due to its civil strife, hit its highest level since October 2014, before the crash really hit its stride. This came after a report on Friday that Indian oil demand — a critical element of the bull case for prices — had risen in April after three months of declines, but was still lagging far behind the gains witnessed in 2016.

Saudi Arabia’s ultimate aim, along with that of fellow producers, is to shift the futures curve for oil to a point where it no longer makes sense for traders to put oil into storage and sell it for a higher price down the line. Undermining this carry trade means reducing the discount at which physical oil trades relative to longer-dated futures. You can see that this has moved somewhat in OPEC’s favor over the past week, helped by a drop in U.S. oil inventories reported last Wednesday and, of course, this weekend’s well-chosen words:

With 10 days to go until OPEC’s meeting, a combination of well-chosen words and the short positions built up by hedge funds suggest prices could go higher.

Yet it would be a mistake to conclude the tide has shifted in favor of Saudi Arabia, Russia and the rest.

That curve has flattened out before, almost flipping in February, only to dip again when it becomes clear there is no quick fix to what ails oil exporting nations. Higher prices, regardless of their foundation, encourage the rebound in U.S. shale development, which counteracts the supply cuts.

Above all, once the speculative heat around the May meeting dissipates, the reality of the situation should re-emerge, with Al-Falih’s own odyssey providing the essential narrative. In January, he speculated the initial cuts probably  beyond June. By March, he was sounding that warning about irrational exuberance. Come early May, he let it slip the cuts might extend into a vaguely defined “beyond.” And now, not long after, the cuts look set to push into 2018.

For those encouraged by the minister’s adoption of the Draghi doctrine, it is worth remembering the ECB chief took that stance as a desperate measure — and that, five years on, he is still playing backstop and choosing his words very carefully.


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Oil Traders Flag

OPEC and its allies are seeking to pump less for longer in a quest for higher prices. The world’s biggest independent oil trader says their efforts could be in vain.

Demand isn’t expanding as much as expected, and U.S. shale output is growing faster than forecast, according to Vitol Group. That’s increasing the burden on the world’s biggest producers, who need to stick to their pledges to cut supply just to keep prices from falling, said Kho Hui Meng, the head of the company’s Asian arm.

Oil has given up all its gains since the Organization of Petroleum Exporting Countries and other producers signed a deal late last year to limit supply for six months from January. Prices have been hit by surging output in the U.S., which is not part of the agreement. Any recovery in crude will depend on sustained usage by nations such as China, India and the U.S. as much as OPEC’s efforts to control supply.

“What we need is real demand growth, faster demand growth,” Kho, the president of Vitol Asia Pte., said in an interview in Kuala Lumpur. “Growth is there, but not fast enough.”

While consumption was forecast to expand this year by about 1.3 million barrels a day, growth has been limited to about 800,000 barrels a day so far in 2017, he said, adding that U.S. output had grown 400,000-500,000 barrels a day more than expected. “If demand goes back to where it should, where it’s forecast, then it’ll help, but my gut feel tells me it is still a bit long,” he said.

The International Energy Agency has trimmed its forecasts for global oil demand growth this year by about 100,000 barrels a day to 1.3 million a day as a result of weaker consumption in Organisation for Economic Co-operation and Development member countries and an abrupt slowdown in economic activity in India and Russia, according to a report last month. The Paris-based IEA cut its estimate for India’s 2017 oil-demand growth by 11 percent.

There’s also concern that consumption may slow in China, the world’s second-biggest oil user. Independent refiners, which account for about a third of the nation’s capacity, have received lower crude import quotas compared with a year earlier, promptings speculation their purchases could slow.

“The oil market is looking for growth but there’s no growth,” Vitol’s Kho said, adding that the refiners may only get approval for the same volume of imports as last year. And while U.S. gasoline consumption is expected to hit its seasonal summer peak soon, demand growth “is not there yet,” he said.

The world’s biggest crude exporter is nevertheless bullish. Saudi Arabia expects 2017 global consumption to grow at a rate close to that of 2016, Energy Minister Khalid Al-Falih said on Monday. “We look for China’s oil demand growth to match last year’s, on the back of a robust transport sector, while India’s anticipated annual economic growth of more than seven percent will continue to drive healthy growth,” he said in Kuala Lumpur.

While some fear a slowdown in Chinese oil demand, Sanford C. Bernstein & Co. doesn’t see any cause for concern. Growth in the nation’s car fleet will support gasoline demand, with increasing truck sales and air travel also helping fuel consumption, it said in a report dated May 9.

Saudi Arabia and Russia, the world’s largest crude producers, signaled this week they could extend production cuts into 2018, doubling down on an effort to eliminate a surplus. It was the first time they said they would consider prolonging their output reductions for longer than the six-month extension that’s widely expected to be agreed at an OPEC meeting on May 25.

Global oil inventories probably increased in the first quarter despite OPEC’s near-perfect implementation of production cuts aimed at clearing the surplus, the IEA said last month.

Shale Boom

“We’ve always talked about the call on OPEC, how much OPEC oil is needed to satisfy world demand,” said Nawaf Al-Sabah, chief executive officer of Kufpec, a unit of state-run Kuwait Petroleum Corp. “Now, in this new paradigm, it’s really becoming the call on shale. And the market is setting itself at the marginal cost of a shale barrel.”

U.S. output has jumped for 11 weeks through the end of April to 9.29 million barrels a day, the most since August 2015, Energy Information Administration data show. American benchmark West Texas Intermediate is trading near $46 a barrel in New York, while global marker Brent crude is near $49 a barrel in London. Both are more than 50 percent below their peaks in 2014.

“I am still watching the U.S. summer gasoline demand,” said Vitol’s Kho. “OPEC has said it will try and extend its output cuts beyond June. So if that happens, and the discipline is good, and if the U.S. lack of growth in demand changes into summer, then we may see oil go back to the low $50s, but the prevailing mood today is not.”


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Buy Gold

Gold posted a breakout session Tuesday as investors took risk positions off the table as geopolitical tensions rose.

Futures on the precious metal jumped 1.6 percent during the regular session, bringing their year-to-date gain to above 10 percent. The metal kept going higher in after-hours trading with the futures reaching an intraday high of 1,277.40, which was their highest level since Nov. 10.

Gold futures also surpassed their average price of the last 200 days, a common measure used by technical analysts to determine a trend.

Short and sweet today, buy gold.


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

Oil On Slide ?

Let’s talk about the recent declines in oil prices. More specifically, the fact that major oil players are bailing out of their long oil positions faster than you can say “crude.”

See, in the week ended March 14, hedge funds have slashed their net-long positions (the difference between bets of a price increase and a price reduction) by a record-breaking 23% to 288,774.

Meanwhile, producers and merchants have ramped up their short positions by 739,736, the highest level in a month, while net-long positions of Brent crude speculators also saw its biggest decline since November. Yikes!

Back up. What started all these anyway?

Remember that in November 30, 2016 the Organization of Petroleum Exporting Countries (OPEC) banded together with other major oil producers and agreed to cut their collective production by 1.8 million barrels per day (bpd) from January 1 to June 2017. The deal was expected to address an oil glut and hopefully push prices higher.

And push prices it did! Thanks to optimism over the deal, speculators betting on higher prices (which resulted to a self-fulfilling scenario), and major oil consumers like China and Russia showing better economic prospects, oil prices rose from around $49.44 per barrel during the OPEC meeting to $54.50 in late February.

What turned the tides against more oil rallies?

There’s no one big event. Instead, oil started getting slippery due to a couple of factors:

1. Increasing doubts over seeing an extension of the deal
Why not do more of it if it works, right? Unfortunately, not all of the major players are keen on extending the deal.

While Saudi Arabia is confident that OPEC and its allies “may prolong production cuts…if the world’s crude oil inventories remain excessive,” other oil bigwigs like Russia have yet to give their thumbs up on the matter. Russian Energy Minister Alexander Novak specifically said that “it was too early to discuss an extension!”

2. Libya’s is back with more supply!
Recall that Libya was granted a pass from the deal due to militant attacks disrupting its production. But instead of recovering, Libya’s National Oil Corporation had lost control of Es Sider and Ras Lanuf – its largest and third largest oil export terminals – which limited Libya’s production to about 600,000 bpd.

But forces loyal to Libya’s eastern-based military commander Khalifa Haftar regained control over the two ports on March 14 with an official saying that operations are expected to resume in 10 days.

3. U.S. stocks are cancelling out OPEC’s production cuts
Don’t say we didn’t warn ya! While OPEC members and their allies are busy hacking at their production, Uncle Sam was busy getting efficient and reaping the benefits of higher oil prices.

Add increased efficiency to crude refiners limiting their crude processing rates during the spring season and you’ve got lower production costs and high crude oil stocks. A Baker Hughes report showed that oil rigs have climbed for a ninth straight week last week, this time by 14. This puts the total active U.S. rigs digging for oil at an 18-month high of 631!

Meanwhile, a report from the Energy Information Administration (EIA) showed U.S. commercial crude oil inventories falling by 200,000 barrels during the week ended March 10, which just ended nine consecutive weeks of increases that put inventory levels to record highs. In its March 7, 2017 Short Term Energy Outlook, the EIA also forecasted all time record crude oil production in the U.S. of 9.7 million barrels per day in 2018, up 800,000 barrels per day from 2016 levels. Yowza!

4. Oil is just plain overbought
Another good explanation for the drop in long oil bets is that the bull pen is just plain crowded. See, as January transitioned into February and then March, oil bulls found it harder and harder to justify further oil rallies especially when global supply is building up and chances are iffy that OPEC’s deal will get an extension.

And we all know what happens when fundamentals don’t line up with prices! If you’ve guessed the “correction,” then give yourself a pat on the back.

Does this mean that oil prices will continue to drop?

Not necessarily. Though optimism for oil remains murky, the selloff for the past couple of days has also taken the edge off from its overbought conditions.

That is, bullish bets have been reduced and prices have corrected so analysts believe that its current prices are now more “balanced” and are less susceptible to sharper corrections.

All eyes will be on the OPEC meeting in Vienna in May to see if the oil giants will have enough firepower to close another production cut deal. Meanwhile, keep close tabs on the newswires for possible jawboning and/or insights from major oil-producing countries and their future production plans!


The Pinstripe and Bowler Club shares information with MF Solutions Ltd