Daily Agenda: Oil Prices Continue to Weigh on Weak Economies

Saudi Arabia remains non-committal on production caps; EU inflation levels are subdued; Brazil’s Rousseff faces impeachment vote.


In a television interview on Tuesday, Energy Minister Khalid Al-Falih stated that the Kingdom of Saudi Arabia will refrain from increasing output in advance of September’s informal meeting of the Organization of Petroleum Exporting Countries leaders in Algeria. The comments, coming from the world’s largest oil exporter that’s keeping production at near-record levels to punish North American rivals, provides relief for weaker economies that have been devastated by the sharp fall in energy prices. Venezuelan President Nicolas Maduro, desperate holding onto power after low oil prices cut support for social programs instituted by his predecessor, Hugo Chavez, began arresting opposition leaders on Tuesday ahead of a large protest planned for Thursday, according to local media reports. Meanwhile, the decision by the Kremlin to delay public floatation of Bashneft because of a stalling oil rally underscores Russia’s economic dependence on crude prices. Among the hardest hit of the oil-centric economies, Nigeria today reflected the pain when its National Bureau of Statistic revealed that gross domestic product fell by 2 percent in the second quarter. West Texas Intermediate-grade crude futures contracts for near-month delivery in New York traded as low as $46 ahead of the weekly inventory report by the Energy Information Administration, following last week’s surprising increase. For now, investors are left to ponder not only whether OPEC policymakers will find the political will to cap production, but also whether such a move will work in the face of a supply glut and weak demand.

Inflation remains muted in EU. On Wednesday, consumer-price-inflation data released by Eurostat confirmed that the growth of the cost of goods in the common-currency zone was subdued in August. The headline index registered at 0.2 percent year-over-year, underperforming consensus forecasts as did core prices at 0.8 percent versus the same month in 2015. Single-economy figures released on Tuesday also disappointed, with German prices at the cash register expanding by only 0.3 percent annualized for the month. Separately, headline unemployment remained unchanged for August.

Rousseff faces final vote. The final congressional vote in impeachment proceedings against Brazilian President Dilma Rousseff will be held today. To succeed, the motion will require a two-thirds majority in Brazil’s Senate and is widely expected to pass. If the impeachment is finalized, acting President Michel Temer will hold office until December 2018. Popular support for Rousseff fell sharply during the recent economic pullback, sparked by declining oil prices and the ongoing Petrobras scandal.

Trump to visit Mexico. GOP presidential candidate Donald Trump surprised observers today with the announcement that he will fly to Mexico to meet with President Enrique Pena Nieto, prior to a widely anticipated speech outlining his immigration policy. Trump came under fire from Mexican officials for inflammatory statements that included calls for building a wall on the border between the two nations and getting Mexico to pay for it.

Canadian GDP disappoints. Gross-domestic-product data released this morning by Statistics Canada was weaker than consensus forecasts at an annualized contraction of 1.6 percent for the second quarter. Canada experienced a major setback from wildfires and low oil revenues, which most economists view as temporary. June estimates were stronger than forecast at nearly 1 percent, suggesting that a rebound is likely.

Portfolio Perspective: Living in a low volatility world


Our message for longer-term traders and investors in equities is and has been consistent: Every shred of technical evidence suggests that this is a bull market. There is no real reason to fear the end of the bull market. Technical (price-action) considerations lead both fundamentals and economic data, so attempts to predict market direction based on, for instance, economic data or, even worse, political concerns, are doomed to failure. The best we can do is to monitor the health of the bull market, and there is nothing, at this point, that suggests the market is weakening or is sick in any way.

We think it is important that longer-term investors are heavily positioned in equities, but doing so requires that we are aware of the challenges of this environment, and of some behavioral factors that can shape investors’ perspectives and errors.

Everyone knows about fat tails and black swans—the last financial crisis sensationalized these terms enough that even the casual commentator knows crazy things happen. Only the most daft analysts will say something like “this recent move in the S&P 500 should only happen once in every 150,000 years” because everyone knows that the assumptions of naïve risk management math are woefully inadequate. However, there’s another lesson of fat tails that most people miss.

If we imagine a normal curve, to get fat tails we push more of the “weight” of the curve out to the tails. In a leptokurtic distribution (the technical name for fat-tailed distributions) there is another consequence—more of the weight also clusters around the mean. If we are considering distributions of market returns this means that returns are both more extreme and more boring than we would expect—or than intuition might suggest—while we do have some of these “one-in-100,000 events,” far more events cluster somewhere in the middle and there are far more events that have very small changes. So, we might argue that low volatility is simply a natural consequence of the well-known black swans and fat tails that rule market action.

It is vitally important for investors to have a plan, and to stick to that plan when it is challenging. We do need to realize that our subjective evaluations of volatility are unreliable. For instance, many people might have felt that Friday’s decline from the day’s highs, nearly 30 handles, was an extreme move. In the big picture, this was nearly an average move for the S&P, but it felt very large relative to the tiny ranges we’ve seen in recent months.

Should the market decline further, investors are likely to have a very negative reaction. We will see people panic, hit stops, and dump investments with no real justification. Behaviorally, this is the type of action that will lay the seeds for a further rally. Understanding this can help us sidestep this risk and to avoid being one of the casualties of this challenging environment.

Adam Grimes is chief investment officer for Waverly Advisors in Pittsford, New York.