Doha meeting likely to do nothing to oil market situation

Outlook:

We have altogether too many Big Factors today and over the weekend that could prove to be a tipping point for several markets. In the US, we get March industrial production and capacity utilization, preliminary University of Michigan consumer sentiment, and Feb TICS (but late, at 4 pm).

Shockingly, Brazil Pres Rousseff lost a Supreme Court appeal to halt impeachment proceedings and the Brazilian lower house now has to vote, on Sunday. If two-thirds agree, she may be prosecuted for breaking budget laws and forced to resign. The FT writes that those opposing Dilma already believe they have won. “… while economists largely agree that the economy will benefit from the exit of Ms Rousseff and her populist interventionist policies that cost Brazil its investment-grade credit rating, they warn that any reforms will be slow and painful. There is also a significant risk of a full-blown constitutional crisis if the [Rousseff party] PT does not accept congress’s decision.”

And then there’s the Doha conference. It’s not clear why the Iranian oil minister backing out is such a big deal, since Iran was attending only as a courtesy and had already said it wouldn’t join a freeze. The consensus of opinion is summed up by the Commerzbank note: “Our expectations for the meeting are low. Although an agreement on production caps is likely to be reached, it will probably not include any concrete figures or obligations, let alone any sanctions to be imposed in the event of non-compliance. In other words, the meeting will do nothing to change the current situation on the oil market.”

We continue to disagree. The new freeze consortium may not get a credible deal, let alone an enforceable one, at this outing, but both the Saudis and Russians are desperate. We should not doubt their resolve. It may take longer for measures to affect prices, and there is plenty of water to go over the dam, but sneering at anyone for trying to corral the world’s most important market is not useful. The focus has been on output, but what the producers really want is higher prices. One idea that has yet to be floated is simply buying the stuff to reduce the surplus. How about convincing some big countries (like China) that oil inventories are better than gold and should be used as official reserves?

Low expectations are a danger. As Barclays told Market News, one outcome could be to prevent prices from falling back to the low $30’s. That’s if the statement an appearance of commitment are credible. And we are going to get comments from all over the place, since Qatar invited just about everybody—all 13 OPEC members, Russia and Mexico, and five other non-OPEC countries. Maybe next time they will invite the US. Even if the outcome is not impressive this time, we can expect further meetings down the road. The range of possible outcomes spreads out like an options tree. It would be foolish to expect any particular outcome this time or that this time’s outcome will be lasting.

We get the new NY Fed GDP tracker today and this is going to get more attention than the Atlanta GDPNow tracker. As we wrote yesterday, big bank economists are gloomy about Q1 GDP, probably less than 1%, but that’s the rearview mirror. A weekly update from the prestigious NY Fed will be welcome. One little boost comes from left field, the Baltic Dry index. It’s up for the 9th week for the best un-up since 2003, according to Reuters. See the Bloomberg chart.

And while we don’t get the latest TICS report until late this afternoon to tell us how capital flows are going, yesterday’s 30-year auction was a screaming success and even made headlines in London. It’s not the yield (up 1 bp to 2.60%) but rather the participation. The FT notes “Strong investor demand for long-dated debt meant that US banks walked away from Thursday’s 30-year Treasury bond sale with their smallest share of the auction on record. The 22 primary dealers, which are responsible for underwriting the US government’s debt, were awarded just 24.1 per cent of the $12bn issued on Thursday — the lowest allotment on record, according to data from Bloomberg going back to 2006.

“The vast majority of the demand — over 65 per cent — came from indirect bidding, which tends to represent investors using the primary dealers to get access to the auctions. The remaining 10.8 per cent came from non-primary dealer direct bidding.” In sum, foreigners seek yield, especially when the Danish homeowner getting a check from his bank on his mortgage is making headlines everywhere.

Finally, the mythical currency war. Late yesterday, Reuters reported Japanese FinMin Aso said he told TreasSec Lew that Tokyo was deeply concerned about recent one-sided currency moves. "I told (Lew) that excessive volatility and disorderly currency moves would have a negative impact on the economy. I also expressed deep concern over recent one-sided moves in the currency market." Aso and Lew were meeting at a G20 meeting. “Aso also said he agreed with Lew that a G20 agreement to avoid competitive currency devaluation did not constrain monetary policy steps aimed at domestic purposes, such as the adoption of negative interest rates.”

That sounds like a threat to intervene—but it’s not, no matter how hard you try to make it so. The FT headline is a bit of shocker—“Japan warned not to devalue the yen”—but for once, the headline writer at the FT has it wrong. “But the US Treasury said both men had agreed to honour their G20 exchange rate commitments, showing Japan’s lack of options as a stronger yen drags on its economy. Overall, the tone of Japan’s rhetoric suggests it is unlikely to intervene unless the yen moves sharply higher.”

Then we got a retreat from BoJ Gov Kuroda, also in Washington (for IMF/World Bank meetings). He said “In the last few days, the excessive movement of the yen has corrected a little.” The negative rates in Japan have been a disaster. But the BoJ is expected to take some action at the late April meeting, probably an increase in QE or an increase in BoJ equity buying. Or Japan can pave over another river.

Bottom line, Japan didn’t really threaten invention and the US didn’t really tell Japan not to. Expressing concern is not the same thing as a threat. What effect any of this has had on the dollar/yen is not known. The yen should not have gotten stronger on the introduction of negative yields—it’s economically and financial irrational. That the move seems to be ending is probably more a function of market speculative exhaustion than anything officials are saying. But it’s worrisome that speculators can cause so much trouble. In years past, the MoF and BoJ have railed against speculators. They are keeping quiet and not using that word this time, but the sentiment must still be strong. This is not over.

Where does the dollar go from here? We can make a plausible case for either direction. We always hesitate to call for a stronger dollar because that flies in the face of history, and besides, we still have such a big disconnect on the Fed outlook. At a guess, the euro channel will hold and the benchmark euro/dollar will return to higher levels, at least for a while, around 1.1350 or more. But don’t bet on it.