U.S. investors return to work after a long holiday weekend to find oil dominating global risk narratives. A decision by the world’s two largest oil producers to freeze production levels reverberated through futures markets overnight. After a meeting in Doha, Qatar on Tuesday between Saudi Arabian oil minister Ali Al-Naimi and Russian energy minister Alexander Novak, the two oil powers announced, along with Qatar and Venezuela, that they had reached an accord to cap production levels. While the agreement is the first between the Organization of Petroleum Exporting Countries’ de facto leader and a non-OPEC state in more than a decade, analysts note that the freeze will do little to boost prices since it allows production to remain at record levels. Gross-domestic-product data for the final quarter of 2015 released by Statistics Norway registered a contraction of 1.2 percent versus the prior three-month period, a reminder that the impact of low oil prices is being felt around the globe. Despite the impact of sluggish demand for gas and oil, Norwegian Prime Minister Erna Solberg insists that the country’s $800 billion war chest and relatively high interest-rate environment provides its policymakers with significant room to maneuver and will allow it to weather the storm.
Apollo to buy ADT. New York alternative-asset giant Apollo Global Management returned to action with another major acquisition Tuesday by announcing the buyout of Boca Rotan-based home security firm ADT Corp. for $42 per share or $6.9 billion in total. The deal represents a greater than 55 percent premium to ADT’s closing share price on Friday, although the terms of the transaction allow for counteroffers.
Anglo American posts loss. Financial results released today by London-based mining giant Anglo American revealed a loss of more than $5 billion in 2015 as the company struggled with declining demand for basic materials. In statements accompanying the release, the firm’s management indicated that it intends to consolidate balance-sheet liabilities through a sale of assets that may bring as much as $4 billion.
Japan’s GDP shrinks. On Monday the Japanese cabinet office released preliminary estimates for gross domestic product during the final three months of 2015, with figures that indicated a steeper decline than consensus economists’ forecasts. Headline growth slowed by 1.4 during the period versus the same period in 2014, underscoring the challenges facing Prime Minister Shinzo Abe’s administration as massive quantitative easing measures by the Bank of Japan have failed to curb deflationary pressures.
Chinese data reveals new concerns. On Monday, the China Banking Regulatory Commission released data on non-performing loans that indicated a 51 percent increase for full year 2015 versus 2014. As concerns over the lending sector in China increase, industry analysts caution that the official bad-loan rate of 1.67 percent still remains artificially low. Separately, January trade data released by China’s National Bureau of Statistics revealed a 6.6 year-over-year decline in exports while inbound shipments fell by 14.4 percent versus the same month in the prior year.
Portfolio Perspective: Saudi Arabia, Russia Blink
Oil has been about who will blink first in shutting down production. The game is well-worn with children who stare blankly at each other until someone’s dry eye forces shut, but for adults this becomes less fun and more serious. Overnight, oil prices rushed higher 5 percent plus with Brent breaking $35.50 with Saudi and Russia meetings in Qatar central to driving hopes for a deal. When one came, the market reversed and it begs the question why. Saudi, Russia, Qatar and Venezuela surprised with this meeting and agreed to freeze output at January levels with Qatar monitoring the accord. They also will start to push this to other OPEC and non-OPEC producers with the key focus on Iran. The problem rests with the level of production — January was near record capacity and so freezing output there suggests that demand will be the solution to stabilizing oil. Given the ongoing doubts that easy money drives growth, further oil selling will likely follow, particularly given that this OPEC-Russia deal was priced from Friday last week when oil rallied 12 percent. The data overnight doesn’t help the cause — China M2 and CNY loans were even higher than whispers and suggest the PBOC [the People’s Bank of China] won’t ease further in 1Q at least, Japan shares sold into the close as negative rates kick in and the German ZEW, while better than feared, still fell for the second month and suggest the financial instability from banks is beginning to bite, something that [European Central Bank chief Mario] Draghi may act on in March but given his speech yesterday, it’s not likely to be a bazooka event like August 2012. Blink isn’t a fun game — and it’s not ending well today — with risk-on for two days likely reversing into the U.S. Data will remain the central driver for U.S. outlooks on how the Federal Open Market Committee policy can shift, but many are beginning to price in a mistake. The JPY remains the chart to watch for risk-off vs. risk-on and the failure at 115 overnight suggest larger trouble should 113.25 break.
Robert Savage is the chief executive officer of CCTrack Solutions in New York.