A Crude Awakening...

Encouraging to see oil price rise for the third consecutive week in April.   WTI now up $10/bbl to over $45 today from around $35 early April.   Also some $20 above the decade lows of $26.2 observed on 11 Feb 2016.   Its a politicized commodity so i have no idea what is driving price movement, in particular after the OPEC Doha talks failed on April 18.

In any event, I welcome the rise to more normal levels around  $50-60 which should reduce stresses in the global economy and hopefully (if not too late) reduce default rates in the credit HY market, which in the US and Norway is especially exposed to the energy sector.  Last but not least,  higher oil prices will again accelerate change towards renewable and more sustainable energy sources and relative dependence on unstable regions.

Good news for Fortum and other electricity producers...
And on a personal level,  it certainly helps the share price of one of my  div-yielding paying stocks - Finnish utility Fortum, which is majority owned my the Finnish State and has taken a real beating over last 12 months due to 1) declining wholesale electricity prices and 2) sale of Swedish and Finnish grids.

Will be interesting to see if oil can maintain some stability around these levels or in the $40-60 range.. that surely is a good outcome for all sides.

Pound showing signs that Brexit fears may be overdone..

Maybe President Obama did it?   Certainly feels like the Bremain campaign is gaining momentum with commercial, political, even Hollywood (Patrick Stewart sketch by the Guardian), weighing in on the side of reason.

Bloomberg's chart today shows a sharp fall in cable volatility to around -1,  dropping the most since May 2015.  You can see the good 11 day run since the 15th of April in chart below, with the British Bulldog currency gaining almost 3% over this period.

I believe we will see a continues slow upward appreciation, with cable above 1.50 and GBPSEK above 12.0 just before referendum unless a dramatic change in polls.

Oh and here is the sketch with Patrick Stewart (funny if you are a fan like me of Monty Python)  Patrick Stewart - What has the ECHR ever done for us?

"Friends don't let Friends drive drunk"

Obama weighs in on the Brexit debate in a 3 day UK visit clearly voicing an opinion that UK is stronger in the EU that outside.

BBC Video Interview on Brexit

It may yet backfire to have an outgoing US president to influence a UK referendum of this nature, but my hunch is it will help influence the 20% or so that are still undecided over to the Remain side.

Those firmly in favour of Brexit will only have had strengthened their resolve to leave by Obama's explicit comments.  

With around 2 months to go the vote and following Obama's visit, i lower my probability of a Brexit from 40-45% to 30-35%.  This should support the Pound in coming weeks,  and we have already seen some upward creep in Cable, but suspect this main movement has yet to occur following the vote.  

Risks are however asymmetrical, and  skewed to the downside if indeed we wake up to a positive Brexit vote on June 24th.

Central Bank Action Today - ECB and Riksbanken

9.30 CET today Swedish Riksbank will announce monetary policy.  A split committee will may vote in favour of continuing QE via bond purchases beyond the current 30/6 end date in a bid to weaken the SEK vs EUR and boost a moribund inflation rate.   The hawks will argue against further intervention in particular after Riksbankens strong move in February to cut rates further into negative territory by slashing 15 bps.

Later in day ECB is unlikely to move rates at this meeting, opting to save their powder for summer / post summer turbulence.  Instead Draghi will probably engage forward guidance (or as Mohammed el Erian calls it - "linguistic gymnastics") to keep the Euro weak which is not easy.

On a side note, continued dovish rhetoric from the ECB has knock-on effects on other smaller European but non-euro countries, clearly influencing the decision makings by their central banks such as the Riksbank in Sweden which is pressurized to act in kind to maintain relative weakness.

Interesting comment from Bob Janjuah today on currency wars:  Bob Janjuah Blog - Currency Wars

Where did the USD bull go?

On of the safest trades on the street was the long USD short anything else trade which had a decent and asymmetric reward to risk profile over the last two years (2014-2015).  That seems to have come to a crashing halt in 2016 as the dollar bulls have run inside for cover.  Chart below shows USD performance against EUR, GBP, SEK, JPY so far in 2016

While EUR and SEK have appreciated some 4% vs the greenback, the truly dramatic story is the pace of appreciation of the Japanese Yen.  Mr Kuroda and Mr Abe wont be too pleased about this and will only serve to ramp up currency war measures.   Japan desperately needs a weaker JPY to service their export oriented economy and import inflation to show that Abe's third arrow stimulus program is effective.   Japan needs to do something fast and I suspect there will be some major new central bank stimulus packages to weaken the JPY in in the next 6 months.  

  

Positive Q1 from Telia

TeliaSonera, or now better named Telia Company is an olden goldie in terms of dividend payers.  today it released Q1 results which came out better than expected, notably an EBITDA increase of 10.4% before one-off items,  and an increased EBITDA margin by 3.1 percentage points to 30.4%

Still topline continues to shrink,  declining 1.1% in SEK terms and is likely to continue to fall.   Future lies is fiber broadband and build out of services and capacity for coming 5G networks.

The ongoing investigations by the US (DoJ), Dutch and Swedish (FI) authorities regarding transactions in Eurasia (alleged improper payments in Uzbekistan) hang over the company like a cold damp cloth.   I hope they disclose more information around these investigations in the near future so the company can move on.   I suspect the DoJ penalty will be substantial.

Q1 report can be found here:  Q1 2016 Report

Kinnevik return of capital

Picked up a small batch of Kinnevik B shares this morning at the open at 250 kr on the news that they will propose an extraordinary cash distribution of SEK 18 per share in addition to common dividend of 7.75.  

Been discussing the merits of investment holding companies vs a funds with my brother and we both agree some are interesting propositions as often valued below NAV and provide focused yet diversified investment.  This is a minor side step from my usual fundamental dividend investing strategy, but I like Kinnevik as a growth story given their focus on long-term tech and online new ventures so a small position is acceptable. 

Positive market open

Feels like we are finally leaving this sideways trading and into marginally more bullish territory this week, mainly attributed to better than expected earnings so far.  Not that earnings have been great, many top-line earnings have been revised down over the past quarter but expectations have been too pessimistic relative to actual results.    Markets are also shaking off the sad OPEC meeting with both Brent and WTI abobe $40, and downward pressure on the greenback persists.

So far only a few of the US banks and blue chips have reported and we have the bulk ahead of us this week and next,  but already i believe we will get out of this Q1 reporting season better than already expected which will lead to a short lived rally (2-4 weeks).  

Overall this mini rally based on minor adjustments to quarterly results vs expectations doesn't  alter my conviction that we are in a multi year bear market based on anemic global growth and still excessive leverage since the GFC

I suspect we'll see the usual summer time volatility come June / July when Q1 is out of the way, and the markets turn their focus to Greece (which needs another tranche from the IMF's €86bn bailout programme in order to repay the ECB in July). Without the IMF, the EU/ECB will be much less supportive to Greece.   The other higher impact summer risk is the Brexit vote on June 23.  An exit is closer than many people think and even if bad for the UK (in my opinion),  it is equally bad for the EU and the euro-zone.  This uncertainty is difficult to predict how each outcome will play out and could cause a big upset this summer...

Utilities reverse some of gains from anticipated (but ultimately failed) OPEC deal today

Nordic utility Fortum bounces back and beyond Friday's close, despite initial 2.2% slump at the open following OPEC news

French utility EDF shows clearly price action around OPEC news, jump overight Thursday to Friday in anticipation of an OPEC deal and then reaction down this morning.  Side-ways price movement today,  still above thursdays close (before the event)

Whilst i have not tested it statistically for significance, the stock price movement suggests that there is some correlation between producers of wholesale electricity and global crude oil prices.  Whilst lower oil prices are bad for utilities, the overall market benefits (as it benefits industry and on some level consumer) and so we see a firmer tone in broader markets today

Interesting also to note the weaker USD trend so far in 2016 causing problems for the rest of the world, but mostly China (ill get back to this in a later post). If this trend continues, it should help commodity prices edge slightly higher over time

Oil takes a tumble after OPEC fails to reach agreement

Brent oil price falls 10% on OPEC agreement failure last night

Unsurprisingly OPEC failed to reach an agreement on output levels at their meeting of 16 opec members in Doha last night.   What is surprising is that the market had such high expectations of a deal and that over half of surveyed economists believed that an accord would be reached. Seems traders positioned accordingly and so we see a 10% reaction in oil price over night, from $44.75 to $40.15 a barrel before pulling back to $41.2 at the time of writing - still an 8% fall.

Will be interesting to see knock on effects on European utilities (down as correlated with electricity prices), oil and gas producers (down) and airlines (up) in today's equities trading.

Why am i not surprised about this OPEC talk failure?   Well its like asking the UN to agree on a meaningful and effective resolution.  There is no incentive.  Ignoring the fact that some countries hate each others guts and are fighting a proxy war (Iran-Saudi) you more importantly have diametrically opposed incentives  -  the rich Gulf states (Saudi, Kuwait, UAE) wanting to protect market share at all costs for the future,  while the poorer oil dependent states (Venezuela,  Iran) need to generate income at all costs in order to gain market share and increase USD state revenue.  Russia probably falls in between but would likely also want to see an output restriction and higher oil price at around $60 as their cost of production is higher than Gulf states and Iran.

OPEC is not an organisation representing similar interests and such it is set up to fail.  There will be no output reduction let alone freeze in the near term.  The least improbably outcome to hope for is that the Gulf states led by Saudi agree to a unilateral output freeze and cede market share to Iran for the common good.  But don't hold your breath.

Hello World!

And so it begins.  My first blog entry to my new blog "TheThirdWay" sees the light of day, perhaps appropriately expressed with with the classic programming greeting.   I hope to improve and refine the form of the blog over the coming days and weeks.  As for content,  it will be focused on current affairs, financial markets, economics and investment ideas, at least that is the grand master plan.

/ Heurlay