Daily Agenda: Oil Continues to Rebound

Trump and Clinton win primaries; China market regulator sacked; HSBC posts fourth-quarter loss.


On Sunday, Nigerian Energy Minister of Petroleum Emmanuel Kachikwu publicly supported the move by Saudi Arabia, Russia and Venezuela to cap production levels while supporting a more liberal stance towards output by Iran and Iraq as they reenter the global market. In a speech today before the Gulf Cooperation Council in Abu Dhabi, International Monetary Fund Director Christine Lagarde urged Gulf nation leaders to adopt similar accommodative policies to those in the U.S. and Europe to weather the storm. In response, futures contracts tied to Brent-indexed crude oil for front-month delivery rebounded by more than 3 percent in overnight trading to more than $34 per barrel.

Trump and Clinton victorious; Bush drops out. On Saturday, Donald Trump won the Republican primary in South Carolina while former Secretary of State Hillary Clinton secured a victory in the Democratic Party’s caucuses in Nevada. Following the South Carolina results, former Florida Governor Jeb Bush announced he was withdrawing from the race after finishing a distant fourth. Bush’s departure leaves a contest now centered between conservative Senators Marco Rubio and Ted Cruz and the frontrunning populist Trump.

EU makes concessions in attempt to avoid Brexit. Prime Minister David Cameron successfully secured concessions during the European Council meeting held late last week. While European Union leadership agreed to allow certain privileges for the U.K., including measures to curb benefits for immigrants beyond a threshold, proponents of a severing of the U.K.’s ties with the EU remain skeptical. In advance of a referendum that will likely be held in June, the deep political divide between elected leaders has become more pronounced with London’s popular Mayor Boris Johnson declaring on Sunday that he will campaign for an exit.

Chinese regulatory official sacked. Over the weekend, media outlets reported that Xiao Gang has been forced to step down from his role as head of the China Securities Regulatory Commission as political repercussions over the sharp selloff in Chinese equity markets continue. Xiao, the former CEO of Bank of China, will be replaced by former Agricultural Bank of China executive Liu Shiyu.

HSBC posts unexpected fourth-quarter loss. London-based HSBC Holdings announced financial results for the final three months of 2015 early Monday that were significantly weaker than consensus analyst estimates. With a pre-tax loss of more than $850 million, when one-time items were included, the results largely reflected setbacks in the bank’s extensive operations in Asia.

Eurozone PMI slips. Preliminary Markit February purchasing-manager-index data for the common currency zone released today registered at levels lower than consensus forecasts. The manufacturing PMI registered only slightly within positive territory at 51, versus a prior 52.3, while composite index levels came in at 52.7 versus an expected 53.3. German specific manufacturing index levels were recorded at 50.2—a steep sequential decline from 52.3 in January.

Portfolio Perspective: Investment Begins at the End of Your Comfort Zone — Sean Darby, Jefferies

We believe the U.S. equity market has become overly pessimistic on the outlook for U.S. inflation, the yield curve and credit conditions. Equally, investors appear not to have noticed that a number of market indicators have turned. With investors having liquidated $196 billion since 2015, there is the potential for a very big gyration in U.S. indices as the herd revisits their earlier assumptions. We believe the U.S. is experiencing a Kitchin cycle not a credit cycle.

It should also be noted that the number of stocks making new lows has decelerated while the proportion of stocks above their 260-day moving average has bottomed out. Market breadth seems to be moving in line with overall indices for the first time since mid-2014.

The sea-change in the real economy has been transposed to financial indicators. Firstly, the Dow Jones Transports has been rallying. Secondly, the CRB industrials spot prices have bottomed out. This has been a good indicator of overall manufacturing deflation. Thirdly, while bond yields have plunged, the Dow Jones Utilities index has not touched a new high. Finally, the NAAIM exposure index indicates that active risk managers have been bearishly positioned through the start of the year.

Sean Darby is chief global equity strategist at Jefferies in Hong Kong.