Oil, oil, oil and more oil

Outlook:

What should we be worrying about? We see four potential tipping points. First, US company earnings. Alcoa starts the ball rolling but it’s big bank earnings, starting Wednes-day, that have the potential to scare the market. Average S&P earnings are forecast down 8.5% y/y, but what if it’s worse? And if US banks fall, given they are (arguably) better managed and better capitalized than European banks, what does that mean for European banks?

Secondly, nobody is trying to make hay out of last week’s Chinese reserves story. Reserves actu-ally rose a little in March, after falling $28.6 billion in Feb, $99.5 billion in Jan and $107.9 billion in Dec. This was considered a proxy for expectations of depreciation. Then by March, promises of better yuan management led to a tiny rise in reserves (to $3.21 trillion). But nobody knows how much is due to confidence in currency management and how much simply to market revaluation of euros and yen over the month—both rose.

Bloomberg reports “Without currency valuation effects, the reserves would have fallen $20 billion to $30 billion — still less than in previous months without the valuation effect, economists estimated. Many economists and traders say they believe that China will try to prevent a broad fall in the renminbi through early autumn. A weaker renminbi risks making China’s currency an election-year issue in the United States. The renminbi is also set on Oct. 1 to join a basket of currencies determined by the Interna-tional Monetary Fund, a move Beijing is unlikely to imperil. President Obama and other world leaders are scheduled to gather in early September in Hangzhou, China, for the annual Group of 20 summit meeting.”

Nobody thinks we will be getting a major move in the yuan before then. Joining the reserve currency basket and hosting G20 are both high-prestige benchmarks. Analysts say China won’t risk losing face. Well, maybe. But the Chinese are nothing if not pragmatic and September/October is a long way away. If crisis conditions emerge, we have no doubt China can and will devalue/revalue in response.

Third, negative rates are a terrible, terrible thing. The latest big-shot to say so is Larry Fink, CEO of BlackRock, on the front page of the Financial Times. In the annual letter to shareholders, Fink says not enough attention is being given to what happens to savings because of negative rates. Savers have to save far more than earlier generations, and savings eats into consumption. The IMF concurs, saying there are “limits on how far and for how long negative policy rates can go.” The IMF is expected to low-er the world growth outlook again at the spring meeting this week (to 3.4%).

Elsewhere, Bloomberg reports “BlackRock cut its outlook on Japan from overweight to neutral, citing the stronger yen’s risk to exporter earnings and increased volatility as reasons. Dan Chamby, who over-sees the $47 billion BlackRock Global Allocation Fund, said in February that while he’s still bullish on Japan, wild market swings meant he had to reduce his allocation to the Asian nation’s equities as his fund’s goal is to provide competitive returns with less volatility.”

It’s economically and financially perverse for the yen to be stronger in the face of negative rates and a wobbly economy, especially because capital is demonstrable flowing out. Bloomberg reports that “Starting in the first days of 2016, foreign traders have been pulling out of Tokyo’s stock market for 13 straight weeks, the longest stretch since 1998. Overseas investors dumped $46 billion of shares as eco-nomic reports deteriorated, stimulus from the Bank of Japan backfired and the yen’s surge pressured exporters. The benchmark Topix index is down 17 percent in 2016, the world’s steepest declines behind Italy.

“Overseas investors, which account for about 70 percent of the value traded in Tokyo shares, bought a net 18.5 trillion yen between 2012 and 2015. Global fund managers, which were negative on Japanese shares for almost all of the five years before Abe came to power, have been overweight every month since, according to a Bank of America Corp. Merrill Lynch survey. Now that bullishness is dissi-pating. Overweight positions on Japanese stocks fell for a third straight month in March, with in-vestors’ outlook on the economy dimming and concern over earnings growing, the Merrill Lynch survey showed. They’ve sold a net 5 trillion yen since the second week of January, the longest stretch since 16 weeks of selling in 1998 and the most in records going back to 1993.” Banks and exporters are suffering the most (from negative rates and too-strong yen).

And fourth, equity market dependence on oil may be diminishing, but it has hardly gone away entirely. IMF and World Bank meetings pale in comparison to the Doha meeting next week. Commentators are out in force saying Doha won’t work and can’t work because it’s the same cartel mentality that has the same classic, insoluble issues—mostly the inability to get everyone inside the tent and then police them. What, exactly, will the Russia/Saudi coalition do to punish miscreants? With all due respect to the ana-lysts and to the lessons of history, we guess they are going to come up with something surprising, maybe Shocking. It’s a little strange to see Commies and Saudis acting together, but the two mindsets are actu-ally closer to one another, generally medieval or at least pre-modern, than either is to the Western mod-el.

We hate to say it, but it looks like hope will spring eternal and oil will rise. The market then expects the dollar to fall, regardless of anything else going on, including yield differentials. Besides, the Fed is clearly on hold for a very long time and so we cannot expect rising yields to offer dollar support. We are back in bear mode—but have to watch every twitch in the oil market—everything from rig count to ex-ports to oil company earnings, etc. and so forth. Aargh.

		Current	Signal	Signal	Signal
Currency	Spot	Position	Strength	Date	Rate	Gain/Loss
USD/JPY	108.11	SHORT USD	WEAK	02/04/16	117.57	8.05%
GBP/USD	1.4216	SHORT GBPNEW*S	STRONG	04/06/16	1.4059	-1.12%
EUR/USD	1.1383	LONG EURO	WEAK	03/11/16	1.1094	2.61%
EUR/JPY	123.08	LONG EURO	STRONG	03/29/16	127.24	-3.27%
EUR/GBP	0.8006	LONG EURO	WEAK	03/11/16	0.7759	3.18%
USD/CHF	0.9568	SHORT USD	STRONG	03/11/16	0.9877	3.13%
USD/CAD	1.2992	SHORT USD	STRONG	02/01/16	1.4031	7.41%
NZD/USD	0.6831	LONG NZD	STRONG	02/01/16	0.6478	5.45%
AUD/USD	0.7551	LONG AUD	STRONG	01/25/16	0.6980	8.18%
AUD/JPY	81.64	LONG AUD	WEAK	03/03/16	83.57	-2.31%
USD/MXN	17.7264	SHORT USD	STRONG	02/23/16	18.1208	2.18%