The G20 summit hosted in Argentina on November 30 is lining up to be quite a blockbuster event. Given the disastrous performance across all asset classes, with more than 90% of them being in negative total return year to date, it is hardly surprising that traders, investors and all market participants will remain glued to their screens this weekend.
This annual gathering for all the leading industrialized nations and emerging economies to discuss world affairs is turning out to be the hottest event for the year. We wait to hear on the outcome of U.S./China trade wars, OPEC oil production cuts and potential interest rate implications for the U.S. economy and the dollar. These three issues have haunted investors all year.
Going into this weekend's negotiation, Trump renewed his tariff threats by suggesting they could be raised from 10% to 25% on $200 billion worth of goods and hit the rest of China's imports on tariffs ($267 billion) if talks did not "go well." Previously Trump could use the U.S. stock market gains as his key point of leverage, convinced it was immune to the global economic slowdown being seen everywhere. His precious U.S. stock market is now trading down on the year -- welcome to Macroeconomics 101! After promising the American public more jobs and lower taxes and promising to "Make America Great Again," tax cuts of 2018 have faded, more U.S. manufacturing companies are lost and average cost of consumer items are facing increased prices.
One begs to ask what part of the above is great in any way? General Motors (GM) latest casualty shedding 14,000 jobs does not make Trump happy, but then perhaps he should fire his advisors who fail to inform him how tariffs make "his" economy uncompetitive. GM and General Electric (GE) have their idiosyncratic issues, but they represent part of a much wider problem -- how corporations have used the free money pumped by central banks over the past decade to boost buybacks to "show" gains to investors, while not actually investing it in the business. Now when the free punch bowl is being removed, the scam becomes evident as mismanagement.
Two years into his presidential term, Trump is losing on most issues and severely needs some positive news to stand a chance for a second term. He needs a perceived win. The devil will be in the detail, but a positive headline is all the market needs. Some sort of compromise to an outright economic cold war between the two superpowers. It seems he is a bit backed up in a corner, right now.
Brent oil price has dropped from highs of $86/bbl down to $60/bbl today. There were three 7% down days in the last month, which shocked investors. Welcome to world of deleveraging mixed with pricing in an economic slowdown and suppliers who are clueless how to forecast demand, but only focus on supply. Let's not kid ourselves, there are only three nations that drive the price of oil -- the U.S., Saudi Arabia and Russia. The rest of OPEC just follows what Saudi Arabia will decide in coordination with their new non-OPEC bestie, Russia. OPEC meetings held in Vienna used to decide the fate of oil, but it seems the JMMC (Joint OPEC-non-OPEC Ministerial Monitoring Committee) is far more important in terms of market direction and thinking.
Putin and Saudi ministers will be meeting at the G-20 summit to discuss the oil market developments. There is talk of 1-1.5 million barrels per day (bpd) cut in oil production being pushed by Saudi Arabia, which desperately needs it given their budget requirements. Russia doesn't really need a cut until Brent gets to $50/bbl. The U.S. is arguing for lower oil production for political reasons, even though the U.S. is now the largest exporter of oil -- so lower oil means lower revenue for Texas, which impact U.S. economy and jobs, as well.
There will no doubt be a cut in December and January, the only question is how much and will it be enough? Amending oil production is like steering a very large ship, once course is changed, it takes a bit of time for the ship to move in the desired direction, but be careful as there is a lag effect, best not to overreact in either direction. Cutting production going into the key winter heating demand season, which has yet to begin, is quite a risky call. If we get a cold snap, there can be a very sharp increase in demand in a short span of time squeezing prices. No one knows the true demand picture until we get into January. One can only forecast, with weather being the wild card.
A cut of 500,000 bpd is possible in December -- and maybe a further 500,000 bpd in January. Oil prices have now reached U.S. shale breakeven levels, with WTI trading at $50/bbl. Most of the larger E&P companies have been smart and hedged about 60-80% of their production for this year and next. This is something OPEC misses, as U.S. shale can survive in prices much lower and still produce.
The Federal Reserve committee is due to meet on December 6 to announce their well-publicized 25bp rate increase. It is not the increase itself that is key to watch, but more the statement that follows. The Fed is a backward-looking entity, its job is to react not pre-empt. It needs to see hard-coded data before deciding one way or another. Hence, it is always late to the party.
The U.S. economic data is showing signs of weakness and slowdown, if the Fed stays emotionally attached to the neutral rate, they might miss the party altogether. If one takes into account the amount of rate increases and unwind of the central bank balance sheet, there is a risk of them over-tightening.
The smart thing would be to leave themselves open for room to manoeuvre. Any dovish tilt to their statement will cause the dollar to fall and provide much-needed support to broader markets like China and emerging markets -- but also leveraged asset classes.
Bigger picture, any positive communique at the G-20 between Trump and Xi Jinping will lead to a rally across asset classes, even oversupplied oil markets. Whether we like to believe it or not, all asset classes are linked and correlated to one another, right now. We can fool ourselves trying to be "hedged," or long/short, but let's face it, -