OPEC; Khelil Calls for 9-Month Extension

Joseph McMonigle senior energy policy analyst at Hedgeye hosted an OPEC meeting preview conference call last week with the former Algerian Energy Minister and former OPEC President Chakib Khelil. Focusing on OPEC decision-making process the call addresses the geopolitical risk from Saudi leadership transition, supply cuts and market balance, and demand forecasts for the upcoming year. Expecting a production oversupply in H1 2018, Khelil argues that a 9-month extension is required to balance the market in the second half of the year. The full recording of this interview is available for interested parties. Click below to contact Hedgeye directly.

PLN: Politics > Economics

The Polish economy is in great shape, and interest rate normalisation is approaching very gradually. For the markets, however, politics is bigger than economics, and EUR/PLN risks are skewed to the upside in the near term due to three political risks, writes Anders Svendsen from Nordea. He sees three political risks that could push EUR/PLN higher in the near term: 1. Cabinet reshuffle bringing PiS-leader Kaczynski to the fore or sending Finance Minister Morawiecki to the back 2. Judicial reforms pushing the EU closer to outright sanctions against Poland 3. The return of CHF loans to the political negotiations. Nordea have kindly provided access to the full note.

Normalization of Credit Costs in Japan, a Wake-up Call

As we’ve highlighted in recent weeks, there’s a growing sense that Japan’s economy is running hot and that inflation is starting to emerge from 2-decade stupor. As a reflation trade, the question becomes whether banks represent a suitable trade, based on a view that the yield curve steepens. Daniel Tabbush is an Asian banks specialist, and in this report he paints a fairly pessimistic view on Japan’s banks. Despite all the hype of share buy-backs, raised profit guidance, boosted dividends and job cuts at Japan’s banks, Tabbush is far from convinced. He says credit costs are the major profit driver, and they are now rising, not falling. Furthermore, Tabbush highlights the wider malaise in Japanese banking, where despite improving economic conditions, banks are not leveraging. For instance loans/assets is stuck at 60%; loan-to-deposit ratios (LDR) are static at 70%. These should be rising if credit conditions were truly improving, says Tabbush. Bottom line, in an era of low credit costs, Japan banks missed an opportunity to bolster operations. Things get harder from here, not easier. Click below to contact Tabbush for samples of his work on Asian banks.

OPEC: Get Big or Go Home

The biggest question mark hanging over this week’s OPEC meeting is Russia, writes Helima Croft, global head of RBC commodity strategy team. After all, Vladimir Putin was the one that first floated the idea of being all-in for 2018 in October, but since then a chorus of Russian corporates have publicly poured cold water on the idea and called for the agreement to sunset at current expiry, the report says. Anxiety is rising that OPEC is set to lose its unofficial co-pilot next week, thereby dimming the outlook of a deal extension, RBC observe. However, they think it is likely that Putin’s voice will ring loudest. In their view, President Putin will likely again override his corporate chiefs because his key political and strategic objectives will fare better with a firmer oil price floor and another post-meeting sell-off would be sub-optimal heading into next year’s elections. Relinquishing Russia’s co-pilot role in OPEC would also undercut Putin’s newfound position as the global energy Czar. RBC clients can access the piece via RBC Insight, click below.

South Africa: Mpumalanga’s Mabuza as the ANC King Maker

Southern Africa is very much in focus at the moment as changes of leadership provide opportunities, but also increased market risk. South Africa is where the market implications are highest, and we highlight the work of CEE MarketWatch. They are European/EM/Frontier specialists with 30 analysts covering 60 economies across 4 continents. Whenever you’ve read sell side EM research in the past it’s highly likely that the main source of this was CEEMarketWatch, as almost all of the banks subscribe to their service. Their key edge is their on the ground presence, and the fact that they do not miss any of the major news flow that impacts each economy. In this note, they assess the upcoming ANC conference and the role that Mpumalanga, the second-largest ANC province, and its leader David Mabuzais, will play in determining who will be South Africa’s next leader. At the moment it’s too close to call. The note can be purchased on ResearchPool, alternatively contact provider directly to request a trial to the service.

Greek Banks, Looking for Positive Changes

Investors have been paying more attention to Greek banks lately, asking whether the now may be the time to buy this ”bombed out” sector. It’s reporting season, and two of Greece’s big 4 banks have already reported Q3 earnings, so we wanted to highlight the work of Paul Hollingworth of Creative Portfolios. He bases his framework on the PH Score™ ,  a unique tool for measuring value-quality, and change in the global banking market. Fundamental Momentum and Value are at its core. The Score is designed to support stock selection, but also has use in bond and sovereign selection as well as macro/jurisdictional decision-making and strategy. CP covers more than 700 banks globally. Last week he was in Greece, and he’s just published this report on Greek banks. Within this he updates the PH Score for Eurobank and National Bank of Greece, the two banks to report so far. Eurobank’s score has improved, NBG’s has deteriorated marginally. To put the Greek scores in perspective, the average score for EM banks based on franchise value is 17, the highest scoring Greek bank is AlphaBank at 8.2. Piraeus is the cheapest bank globally at 2.7. The interesting aspect about this model as a measure of ourperformance is that it rewards improvements through efficiency and improving capital provision, as opposed to loan growth, so it can be very useful in analysing bombed out sectors like Greek banks, says Hollingworth. Overall, Hollingworth writes that trends seem to be quite positive though serious challenges and risks remain. Recent poor share price performance is perhaps linked to a fear that banks will require yet another recapitalisation. That looks unlikely given capitalisation levels, says Hollingworth. NPE issue is a thorny matter though successful auctions next year can alleviate this. Share price liquidity has been very low too suggesting that the recent sell-off is not entirely about fundamentals (which are improving). Click below to contact Hollingworth, he is very happy to discuss his scoring methodology and share samples with investors.

Rise in 2-year Reminds us of 2015 Tantrum

Forget about the 2s/10s spread, the compression in the 2s/5s spread is more intuitive, and more concerning, writes Tom Tzitzouris from Strategas. It more or less tells us how much runway the Fed has to tighten, at least in the esteemed view of the bond market. What the bond market is saying is that the Fed funds rate won’t breach 2.00%, and it’s highly confident in this view. It seems odd, says Tzitzouris, that the market would ratchet up its timing for the next two hikes but then suggest is was unwarranted to hike much more after that. It reminds Tzitzouris of the tightening tantrum in 2015, therefore the changing shape of the curve needs to be watched very closely. Click below to contact provider for access to the full piece.

The Ingredients of a Great Frontier Market

Many of the ingredients of a great frontier market are in place in Zimbabwe: human capital, infrastructure, natural resources and diaspora, says Hasnain Malik, Head of Equity Research at the specialist frontier and emerging markets investment bank, Exotix Capital. The transition from Mugabe to Mnangagwa could mark a major and positive shift and put Zimbabwe back on the foreign investor radar, he adds. But challenges abound. Click below to request access to the latest research on Southern Africa.

Caution on European Asset Markets

The breakdown in German coalition government talks has important consequences for the Euro and therefore equities, writes Keith Grindley from Macro Thoughts. He believes the chance of a second election at the end of Q1 2018 has
increased to 35% – 40%, and this could increase the pressure on the
Euro. This has consequences for equities because after the French election, equity
fund managers moved out of US stocks into European stocks, and
performance has been supported by a move in the Euro from 1.11 to 1.20.
The increased risks and pressure on the Euro could see a reverse in the
equity trend, back to the US or even EM stocks, he concludes. If you’d like to access content on this, or other themes covered by Macro Thoughts click below.

Retail Therapy Feels Good this Season

The economics team at Wells Fargo each year produce a very comprehensive outlook for US holiday sales that has a fairly good track record. This year they forecast an increase of 4.0 percent on a seasonally adjusted basis compared to only 3.0 percent for last year. They say that more than eight years into the current economic expansion, consumers appear confident enough in the present and future state of the economy that they may be willing to continue to drive economic growth forward. Wells Fargo have kindly given us free access to the piece. Click below to read the note in full.