Headlines:

The Oil Market … 

If you look at the medium term growth expectations (2023-2024), they have risen but the oil prices have traded in a fairly tight range. If you are wondering why, then Goldman perhaps has an answer. Their data shows that oil is in ‘sport surplus’,' meaning essentially that oil producers are thinking that ‘a barrel in hand is worth two in the bush’ as per a research note. They find that oil traders (and hence prices) put more weight on fundamentals today and in the near-term than on distant horizons. They arrived at this conclusion based on three methods below:

     1.) Daily news shocks such as weather disruptions and economic activity news which tend to affect oil balances that could last for a few weeks. The future shocks such as OPEC announcements and fiscal stimulus, affect consumption in months ahead and could last for years. The model finds that supply shock of a 1% 1-year hit to global GDP could boost Brent 10% in spot while 5% in future stock.

    2.) Revisions to global GDP over the next year 'significantly’ affects oil prices while distant reassessments do not move oil much

    3.) Finally, Brent time spreads are strongly negatively correlated with OECD commercial inventory-to-demand ratio 1-4 months ahead. “A 10% decline in inventory ratio raises the 2m/3y Brent time spread by 25 bps (time spread is the difference in prices between the two points on commodity curve. Here they are taking 3-month and 3-year points), and the spot prices by $18/barrel (assuming 3y Brent is stable). While the 1-4 months ahead horizon usually captures pricing well, oil markets periodically become more forward-looking when large shocks to future balances are priced in, as happened when the war escalated mid last year.”

Getting capital out of China … 

It is not clear how pervasive this is and if this is a long-term issue, but one emerging market investor, Mark Mobius says that he can’t get funds out of China.  They're putting all kinds of barriers," Mobius continued. "They don't say, 'No, you can't get your money out,' but they say, 'Give us all the records from 20 years of how you've made this money,' and so forth. It's crazy."

According to him, President Xi is operating ‘in a completely different direction’ than the former leader, Deng Xiaoping. "I'm personally affected because I have an account with HSBC in Shanghai. I can't get my money out. The government is restricting the flow of money out of the country," Mobius told Fox Business on Thursday. "So I would be very, very careful investing in China." He recommends India and Brazil for large population in case of India and large amount of natural resources (in case of Brazil).

Decisions Have Consequences …

This gets tricker when decisions are made on ideology rather than facts. So, you may ask, how much do anti-climate (or anti-ESG) drives in red states of the US cost them? Daniel Garrett of the Wharton School and Ivan Invanov of the Fed looked at the data from Texas after the state senate signed bills 13 and 19 on Sept 1, 2021. The law is to protect the state's oil and gas and firearms industries by prohibiting local jurisdictions from contracting with banks that have adopted E, S, and G policies against those industries. After the law was passed, JPM, Goldman, Citi, BoA, and Fidelity - five of the largest underwriters of the muni bonds left the state. The impact was immediate. The authors of the paper estimate that in the first eight months after the law was passed, Texas towns (and cities) will pay an additional $303-532 million more in interest on $32 bn debt - a sizable increase. This was in 2021 and early 2022 before rates started going up. There are other states who are following Texas’s lead without thinking too much. If you read between the lines about which institutions chose to leave, it tells you of what’s to come. “I think what’s really interesting about this story is who leaves,” Garrett said. “It’s not a random selection of banks. It’s a selection of banks that are making profit-maximizing decisions, and they’re choosing to leave, and they happen to be the largest.” The short version of the discussion is here.  

Corporate Corner:

Ferrari (+1%) was named as top-pick by Morgan Stanley replacing Tesla citing backlog and pricing power of the Italian luxury car group.

Apple (+2%) rose after Goldman (hear this) initiated coverage with a buy rating. So, Goldman was not covering Apple all these years.

KB Home (-1.4%) was double downgraded by JP Morgan citing over valuation.

D.R. Horton (-1%) was downgraded to neutral by JPMorgan citing fair valuation and future performance in-line with peers.

Vir Biotech (+5%) was upgraded to overweight by JPMOrgan.

Silvergate Capital (-8%), a crypto bank, continues its downward trend as worries swirl about it remaining continuing concern.

Data Check:

Factory orders at 11 AM

China will release imports, exports and trade balance data this evening

Trading Desk:

• Equities:About an hour before open the futures are up but not by much. Dow +9, S&P +6, Nas +41, and VIX +0.46 (18.95). European shares are mixed. FTSE -54 bps, DAX +43 bps, CAC +32 bps, AEX -16 bps, and STOXX -14 bps. Asian shares were mixed at the end. HK +17 bps, Nikkei +1.11%, ASX +56 bps, Mumbai +69 bps, and Shanghai -19 bps.

• Commodities: The WTI and Brent are down 1.3%. Gold +18 bps and copper -32 bps.

• Currencies: The DXY index -7 bps, euro +18 bps, yen up 6 bps, pound -14 bps, and ASX -43 bps. Bitcoin +9 bps ($22.4k).

• Bonds: The US10y yield -5.6 bps (3.909%), gilts -7.3 bps (3.782%), and bunds -6.2 bps (2.656%)

Charts: