Daily Agenda: After Failed Talks in Doha, Oil Prices Resume Slide

Russia signals production increases; Google faces EU antitrust challenge; Saudi takes out a loan.

After a brief rebound yesterday, oil futures markets resumed their sell-off, with contracts for front-month delivery of West Texas Intermediate crude falling within cents of $40 in early trading today. The end of a worker’s strike in Kuwait combined with the failure at the Doha OPEC conference over the weekend has called into question the ability of major producers to prop up prices. Adding insult to injury, a Russian Energy ministry deputy stated during a public forum yesterday that the country would likely increase production in 2016 as a result of the failure to come to a consensus. For investors, the question of how sustained moderation in energy prices will weigh on inflation remains critical.

Google faces antitrust challenge. Today officials at the European Commission informed Alphabet, the parent of Google, that it was subject to an investigation regarding the bundling of proprietary products with Android smartphones. The statement of objection, delivered by European Union Competition Commissioner Margrethe Vestager, centers on a 2014 resolution by EU lawmakers that focuses on limiting the search-engine giant’s hegemony.

Trump, Clinton score victories in New York. Former Secretary of State Hillary Clinton and real estate developer Donald Trump won the Democratic and Republican primaries in New York, respectively. Trump secured 89 of the 95 delegates available in the state, giving him a lead of more than 250 versus Senator Ted Cruz.

Saudi Arabia borrows abroad. Struggling with low oil prices, the Kingdom of Saudi Arabia will borrow for the first time in years, according to unnamed sources in multiple media outlets. At a reported premium of more than 100 basis points to LIBOR, the loan will mark the first time that the Saudi government has sought short-term financing from foreign lenders in nearly two decades; the loan will then be replaced by a bond offering. The move comes as the nation faces a double-digit deficit after declining prices for oil in the past two years have taken a toll on public finance.

Russia wins Yukos decision. A ruling today by a court in The Hague overturned an arbitration victory for former shareholder of Yukos Oil, the energy giant formerly controlled by oligarch Mikhail Khodorkovsky. The court ruling overturns a $50 million levy against the Russian government and may open the door for the state-controlled company to access capital that has been frozen in litigation for a decade.

Japanese exports slump. March trade data released today by the Japanese Ministry of Finance revealed that exports contracted for the sixth consecutive month during March. Shipments abroad fell by 6.8 percent versus the same month in 2015 but Japan still reported a record surplus after imports fell by double digits. The largest setback for outbound orders was Asia, which declined nearly 10 percent.

Portfolio Perspective: Emerging-Markets Currencies to Bounce Higher — Alex Wolf, Standard Life Investment s

Emerging-markets currencies have rallied since the start of the year, driven by a combination of country-specific changes — the Brazilian impeachment, for example; shifts in risk sentiment led by a more-dovish Fedand resulting weaker dollarimproved data in China; and stronger commodity prices. Fears over a hard landing or disorderly devaluation in China have largely subsided from their January peaks; and, following strong activity data, risk sentiment has improved across EM. According to the IIF, nonresident portfolio flows turned positive in Q1 2016 reaching $37 billion, staging a sharp rebound from the approximately $70 billion outflows in the second half of 2015.

Additionally, many currencies have adjusted significantly on a real, effective basis since September 2015 and presented bargains to those looking for yield. However, because the primary drivers of the improvement in EM foreign exchange are largely external, the recent rally faces risks, especially because signs of country-specific fundamental improvement are scarce across most emerging markets. Emerging-markets foreign-exchange resiliency might come under increased pressure over coming weeks/months following the failure to agree on a production freeze in Doha and once questions about the sustainability of China’s growth inevitably become more prevalent.

One of the primary reasons behind the recent improvement in EM currencies has been renminbi stability. According to Goldman Sachs, emerging-markets currencies have begun to move more closely with indicators, notably renminbi volatility and the Hang Seng China Enterprises Index, related to China’s currency management and broader growth expectations. Since the G-20 finance ministers summit in late February, Chinese leaders have made efforts to stabilize expectations and restore confidence in the yuan in the form of strong fiscal stimulus and vocal support. These moves boosted sentiment in the short term and eliminated fears of a sharp devaluation. In our view at Standard Life Investments, these efforts are short-lived and eventually the yuan will come under renewed pressure. To start with, policymakers’ frequent statements about “exchange-rate stability” and “an exchange rate set by market forces” are inherently inconsistent. Although they reference stability against a basket, the dollar is still clearly in the driver’s seat. The yuan has strengthened against the dollar, taking advantage of broad dollar weakness, but depreciated in trade-weighted terms.

Capital controls have also played a role. Since December, Beijing implemented trade invoicing audits, administrative interference in individual convertibility, and suspension of so-called back-door transfer channels. While capital controls can’t effectively stop outflows for such a large economy, they can be effective at the margins. We argue that these controls are also a contributing factor to China’s recent property rebound; since these changes went into effect, property prices in tier-1 cities have increased, likely as a result of residents having nowhere else to park idle cash.

Policymakers will once again have to choose; Will they continue with capital-account liberalization and accept greater volatility, or stall reform efforts to ensure stability? Investors might be buoyed by a strong response from the central government but over the longer-term it is inevitable that investors realize this exchange-rate policy is not credibly anchored, especially if the Fed tightens faster than markets are currently pricing. Once fiscal stimulus starts to fade and activity data softens, downward pressure on the yuan and other emerging-markets currencies could reemerge.

Alex Wolf is the emerging markets economist at Standard Life Investments in Edinburgh.