At their meeting in Vienna on Friday, the OPEC+ countries agreed on a production cut. Starting in January, the daily production volume will be reduced by 1.2 million barrels (1 barrel = 159 liters) for six months. Of these, the OPEC countries are cutting 800,000 barrels per day, with Saudi Arabia alone providing a 500,000-barrel cut. The 10 leading oil-producing countries outside of OPEC, which form OPEC+ together with the oil cartel, are to cut a further 400,000 barrels, with Russia reducing its output by 130,000 barrels per day.
Iran, Venezuela and Libya are exempted from the agreement. The production cut will be upheld for six months, and reassessed in April 2019.
At present, the 15 OPEC members alone produce around 33 million barrels of oil per day, covering around one third of the world's crude oil production. According to the International Energy Agency, however, the demand for 2019 is only 31.3 million barrels of OPEC oil per day, and current production levels are already based on a daily production limit of 32.5 million barrels. The restriction has been in effect since the beginning of 2017 and was only extended in June 2018 until the end of the year.
With this cut, OPEC aims to stabilize the crude oil market. However, analysts are skeptical about the cut and its proposed effect. According to market experts, around two million barrels of oil – almost twice as much as announced – would have to be withdrawn from the market every day in order to achieve a sustained positive effect on the oil price.
The reduction was also met with criticism in the USA. US President Donald Trump had already spoken out against possible production cuts in the run-up to the official decision, writing that OPEC would hopefully not cut their production. “The world does not want to see, or need, higher oil prices,” he added in a Tweet.
Brent bounces after 30-per-cent drop since early October
Following the decision, oil prices rose sharply on Friday in accordance with OPECs intentions. After the agreement was announced, Brent saw a 5-per-cent bounce and climbed to just over 63.0 USD. In early trading on Monday, the price pulled back a little to around 62.0 USD. Viewed over the year as a whole, however, the Brent oil price still shows a minus of just under 7 per cent. Since early October, the price has dropped by a whopping 30 per cent.
The fact that the lower price of crude oil does not manifest in lower petrol prices for car owners seems paradoxical at first, but is due to the low water levels of rivers important for the oil market. Refineries and depots distribute most of the processed crude oil by ship, but since river levels are very low this year along important waterways, ships can only travel to a limited extent or not at all. This hampers logistics and requires oil deliveries to be increasingly shifted to rail or truck, which is expensive and only possible to a certain extent due to limited capacity. This leads to a shortage of petrol and consequently to higher prices at the pumps.
The draft for Britain’s withdrawal agreement from the EU is in place. At the eagerly awaited EU special summit on Sunday, Britain and the EU agreed on their relations following Britain's exit from the EU at the end of March 2019. British government negotiators and the EU Commission had previously already agreed on a corresponding political declaration, in which many key points, such as British access to the EU’s internal market, remained undecided until just before the summit.
For British Prime Minister Theresa May, a lot is at stake. After the publication of the draft, she faced massive opposition from her own country: May’s opponents fear that the UK may be forced into a customs union with the EU for an indefinite period even after the Brexit, with Northern Ireland awarded special status. The treaty entails a one-time extension of the transitional phase, initially scheduled to last until the end of 2020. In addition, there will be no hard border with controls between Northern Ireland and Ireland.
Although May’s cabinet approved the draft on 14 November, three ministers, including Brexit Minister Dominic Raab, resigned on the same day. Less support for the draft, however, comes from Parliament, and a majority for the treaty is in doubt – whereas preparations to overthrow May are in full swing. A vote of no confidence is planned, but there are still not enough supporters for such a vote. In addition, calls for a second Brexit referendum are becoming louder. Parliament is to vote on the deal at the beginning of December – after the final treaty is approved at the EU summit.
In order to be able to sell the treaty to Parliament better, May was making an effort in the last few days before the EU special summit to secure extensive support from the other members regarding the future economic partnership. However, the EU is unyielding and unwilling to open a back door to its internal market for the British.
May is backed by businesses and the central bank
However, support for May for the draft comes from the British industry. The head of the Confederation of British Industry (CBI), Carolyn Fairbairn, greenlighted the previously negotiated contract on Monday. “It's not perfect, it's a compromise, but it’s hard-won progress,” she said. The deal, and above all its transition period, takes the UK a step away from the “nightmarish abyss of a non-treaty”. The CBI particularly welcomed the transitional period until the end of 2020, during which Britain will remain in the EU internal market and customs union in order to prevent a hard cut for the economy.
Supporting signals are also coming from the Bank of England (BoE). According to central bank chairman Mark Carney, an agreement with an interim solution will help the economy and facilitate EU withdrawal.
The markets are closely following the dispute over the Brexit paper. The British pound lost ground briefly in mid-November after the numerous ministerial resignations, but recovered somewhat shortly afterwards. By contrast, the sentiment on the stock markets has been restrained for some time now, not only due to the Brexit-related trials and tribulations, but also because of the budget dispute between the EU and Italy and disappointing results from US companies, particularly in the technology sector.
The outcome of the US Congressional election on Tuesday has caused some relief in the international financial markets. In the election, the Democrats won back the majority in the House of Representatives, the lower chamber in the US Congress, while the Senate remains in Republican hands.
Congress is the supreme legislative body of the United States and consists of two chambers, the House of Representatives and the Senate. Parliamentary work takes place through the interaction of the House of Representatives and the Senate, with the entire Congress being the government’s opponent in accordance with the Constitution.
The results of the Congressional election were as expected. According to analysts, this takes a lot of uncertainty out of the markets, which investors accordingly acknowledged with new entries, causing a 2 per cent rise in the leading US indices on Wednesday. Prices also recovered in Asian and European stock markets following the election. The US dollar, on the other hand, lost some ground against the euro, which temporarily climbed to just under 1.15 dollars on Wednesday.
US bond markets did not show much movement on Wednesday, although yields for medium and longer maturities pulled back a little. This is due to US President Donald Trump’s now somewhat less solid position in Congress. As the House is now dominated by the Democrats, the market expects a tighter rein on budgetary and fiscal policy. This could conceivably slow or halt new fiscal impulses, which in turn could not only slow economic growth in the country, but also the speed of the Fed’s interest rate hikes in the medium term. This outlook puts pressure on US bonds, reducing yields.
No trend reversal expected in US economic and interest rate policy
However, even though Trump’s policy is coming under stronger Democratic control, analysts do not believe that there will be a major turnaround in US economic and foreign policy. With regard to the US’s international trade conflicts, Trump is likely to continue as before. According to experts, he won’t have to face much resistance, as there are supporters of his protectionist tendencies in the democratic camp – especially in the conflict with China.
The US Federal Reserve policy is not expected to change much after the election either: according to experts, the Fed’s course will probably remain unaltered. At the interest rate meeting on Thursday evening the Fed left the key interest rate unchanged, as expected, but signaled a further hike for December. The last increase took place in September, with the interest rate range was raised to 2.00–2.25 per cent.
After a good start to the US reporting season, the tide turned last week. Disappointing figures from the technology sector overshadowed the good results from major US banks, obliterating the Dow Jones’ profits for the year and even dipping it into the red. The technology index Nasdaq Composite, on the other hand, still shows positive year-to-date figures, but has lost around 850 points in October alone, which could mean the weakest October since 2008. A brief surge on Thursday failed to recover the losses.
Towards the end of the week, the weak results of Amazon and Google’s parent Alphabet had a particularly strong impact. Despite billion-dollar profits, both companies disappointed the very high market expectations. The quarterly revenues of both companies failed to meet projections, and analysts and investors appeared to be disappointed in their growth rates. A few days prior, the results of IBM had disappointed investors with declines in both sales and profits, while positive figures from Intel and Facebook weren’t sufficient to mitigate the pessimistic sentiment.
Investors are already looking ahead to 2019
However, corporate figures are not the only reason for the current volatility in sentiment. According to experts, investors are already looking ahead to 2019 – where the outlook for corporate profits has recently become a little grimmer as a result of macroeconomic developments. Ongoing trade wars, more volatile oil prices due to political tensions between the US and Saudi Arabia, the budget dispute between the EU and Italy, and the faltering Brexit negotiations are fueling increasing concerns about the state of the global economy.
The latest US economic report, the so-called “Beige Book”, published by the Federal Reserve was rather restrained and saw robust but less dynamic growth for the US economy. At 3.5 per cent, annualized growth in Q3 was significantly weaker than in the previous quarter (Q2 2018: 4.3 per cent), but managed to just exceed expectations.
According to the Fed, the US economy chiefly suffers from uncertainty about further trade policy developments. The US is currently in dispute with China about its trade policy. However, the conflict is also taking its toll on the People's Republic, with 6.5 per cent in Q3 of 2018 year over year marking the weakest growth since 2009.
The situation on the stock markets is exacerbated further by rising key interest rates in the US. The central bank raised its key interest rate corridor to 2.00–2.25 per cent, indicating four further hikes until the end of 2019. Some central bankers have even spoken out in favor of one more hike in 2018. As a result of higher interest rates, US bond yields have also risen significantly again. The higher interest rate on the bond market tends to make investments in equities less attractive and recently put a strain on the stock markets.
The uncertainty that had already caused prices to fall on some bond and currency markets reached the equity markets around the middle of October. In recent months, a number of emerging markets have generated a negative news flow. The mix of economic imbalances – so-called twin deficits, i.e. a current account and a budget deficit, in addition to political uncertainties and rising US interest rates have caused significant declines, e.g. in Turkey.
Technology shares shedding previous gains
Adding to the renewed rise in yields on the US capital market, the correction affected mainly the technology sector. Whereas other international equity markets, especially Europe, have been grappling with declines throughout this year, the US market, driven by the so-called FANG shares (Facebook, Apple, Netflix, Google) had still been recording positive returns.
Positive reporting season in the USA
In this, now more volatile environment we have decided to keep the equity ratio in the YOU INVEST funds at 80% of the investable maximum. Despite the headwind of rising yields, the economy is still dynamic in most economies and should remain positive, albeit at a slower pace. Companies, especially in the USA, should also profit growth in the coming reporting season. And although the interest level in the USA has increased drastically, the absolute level does not represent any serious competition for equities at this point, judging by real yields. Key-lending rates are currently still at a level that is broadly in line with inflation. Strong, sustainable declines on the equity markets tend to go hand in hand with a decline in general economic activity – which we do not see at the moment. We have used the opportunity to continue divesting US bonds and in turn to increase money market instruments and European corporate bonds. In the equity sector itself, defensive sectors such as energy or telecoms and quality-oriented stocks are now more favored, especially in the US.
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