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Wall Street… Breakfast

Russia, Saudi Arabia Agree To Freeze Oil Output,

Crude Disappointed By Lack Of Production Cut

Top oil officials from Russia, Saudi Arabia and several key OPEC members have agreed to freeze crude output at January levels at a meeting in the Qatari capital of Doha, targeting a supply glut that’s sent prices to 13-year-lows. According to the International Energy Agency, Saudi Arabia produced 10.2M bpd last month, below its most recent peak of 10.5M bpd set in June 2015. Russia produced nearly 10.9M bpd in January, a post-Soviet record. Oil soared almost 6% ahead of the meeting – on expectations of a more weighty announcement – but pared gains following the news. Crude futures +1.4% to $29.86/bbl.

“Markets need more than just a freeze in oil production, they need a cut,” said Ralf Zimmermann, a strategist at Bankhaus Lampe in Dusseldorf. “People are looking at policy makers, be it central banks or OPEC, for more reassurance because everything boils down to what will happen to global growth.”

And that is indeed the bottom line, because even with China pumping out record amounts of debt to restart both domestic and local growth in what is increasingly a sign of desperation, growth just refuses to emerge.

Today’s Markets

In Asia, Japan +0.2% to 16054. Hong Kong +1.1% to 19122. China +3.3%to 2837. India -1.5% to 23192.
In Europe, at midday, London +0.2%. Paris flat. Frankfurt -0.6%.
Futures at 6:20, Dow +1.1%. S&P +1.2%. Nasdaq +1.6%. Crude +1.4% to $29.86. Gold -2.1% to $1213.60.
Ten-year Treasury Yield +2 bps to 1.76%

Economy & World

Iran was the notable absentee from the Doha meeting, and no surprise why: the Islamic Republic is planning to ramp up shipments as it looks to regain market share lost after years of international sanctions. Over the weekend, Tehran sent its first cargo of oil to Europe since the end of sanctions last month, and announced plans to boost production and exports by 1M bpd in 2016. Three initial shipments to the continent are carrying 2M barrels for Total (NYSE:TOT) and another 2M barrels for companies in Spain and Russia.

Gold prices have come down again this morning, recording the third day of declines for the precious metal, as money flows back into equities following last week’s massive selloff. But that’s still after bullion prices hit a one-year high of $1,260.60 last Thursday. We’ll have to see whether this week will see further losses for the safe haven commodity. Gold -2.1% to $1213.60 an ounce.

Having flooded China’s financial system with cash before last week’s Lunar New Year holiday, the PBOC has begun mopping up excess funds now that the risk of a cash crunch has passed. The withdrawal of funds comes after a retreat in the dollar led to the yuan gaining 1.3% on Monday, the biggest increase since a currency peg was scrapped in 2005. China also reported overnight that new loans hit a monthly record in January (2.5T yuan in fresh debt), giving a big boost to financial and bank shares. Shanghai +3.3%.

The Bank of Japan’s negative interest rates came into effect today in a radical plan already deemed a failure by financial markets, highlighting Tokyo’s lack of options to spur growth. “It’s getting clearer that Abenomics is a paper tiger,” said Seiya Nakajima, chief economist at Office Niwa. The central bank, which announced the shock decision on Jan. 29, will now charge lenders 0.1% to park additional reserves, prompting banks to lend and businesses to spend and invest.

European shares are debating which way to turn following Mario Draghi’s speech before the European Parliament on Monday. Highlights: “Since early December, a generation deterioration in market sentiment has taken root and has accelerated…Some parts of the banking sector in the euro area still face a number of challenges…The ECB is ready to do its part…the Governing Council will review and possibly reconsider the monetary policy stance in early March…we will not hesitate to act.”

Bosnia has formally applied to join the 28-nation European Union, although the prospect of membership for the once war-torn Balkan country still lies years away. Last March, EU foreign ministers and Bosnia signed the Stabilization and Association Agreement (a pledge of economic and political reforms) that had been on hold since 2008, paving the way for the application. Who was the last member to join the EU? Croatia in 2013.

The world has entered a “new Cold War,” Russia’s prime minister said over the weekend, as he held out an olive branch to Western powers, urging conciliation. “Sometimes I think, are we in 2016 or 1962?” Dmitry Medvedev asked, in a speech that reeled off the long list of grievances – from NATO expansion to Western regime change projects. Russia’s ongoing military activities in Syria also remains a particular bone of contention despite a recent ceasefire agreement brokered by Moscow and Washington.

Puerto Rico’s House of Representatives has approved a bill aimed at overhauling the island’s troubled power utility PREPA, pushing the agency a step closer to finalizing a deal with creditors to rearrange more than $8B of debt before a key deadline. Under terms of the restructuring, bondholders would accept a 15% cut to repayments, but could walk away from the deal if it isn’t enacted by midnight on Tuesday.

Stocks News:

Royal Dutch Shell has surpassed Chevron (NYSE:CVX) as the world’s second-largest non-state oil company after completing its acquisition of the BG Group (OTCQX:BRGYY). “We will now be able to shape a simpler, leaner, more competitive company, focusing on our core expertise in deep water and LNG,” CEO Ben Van Beurden declared. Exxon Mobil (NYSE:XOM) remains the globe’s most valuable oil company with a market value of $337B, almost twice as big as Shell (RDS.A, RDS.B).

General Electric is exploring potential business opportunities in Iran and the chief executive of its oil and gas division took a trip to the country recently, a company spokeswoman said. The visit by GE‘s Lorenzo Simonelli comes at a time when Iran is aiming to boost its crude exports and recover the oil market share it lost as a result of international sanctions imposed over its nuclear program.

Marking its biggest buyback to date, SoftBank (OTCPK:SFTBY) is purchasing up to ¥500B ($4.4B) worth, or as much as 14.2%, of its own shares over the next year. The move follows its repurchase of around $1B worth of shares in August, which CEO Masayoshi Son had said was a response to its lackluster stock price. SoftBank shares have fallen around 24% since the start of the year, but surged 15% in Tokyo today on news of the buyback.

HSBC has decided to keep its headquarters in Britain, rejecting the option of shifting its center of gravity back to its main profit-generating hub in Hong Kong following a 10-month review. The unanimous decision by the bank’s board gives a boost to London’s status as a global financial center, which has faced challenges from tougher regulation since the financial crisis. Analysts estimated the cost of moving out of London at $1.5B-$2.5B, a hefty bill to swallow unless HSBC was going to get clear tax and regulatory advantages.

Moody’s Investors Service says Deutsche Bank (NYSE:DB) will be able to make interest payments on its riskiest debt this year and in 2017, stating that the bank can make payments due in April and only “a major, unforeseen event” would prevent those due a year later. The agency has a Ba3 rating on Deutsche’s so-called additional Tier 1 notes, which is three levels below investment grade.

How much did VW managers know about the company’s emissions scandal? Reuters reports that a high-ranking employee warned senior Volkswagen (OTCPK:VLKAY) managers in May 2014 that U.S. regulators might examine car engine software as part of an investigation into pollution levels. The notice came in the form of a letter, which was sent more than a year before the German automaker’s public admission that its cars had been equipped with software to manipulate emission test results.

Hot on the heels of Star Wars: The Force Awakens, the next installment of the franchise has begun filming in London, but many investors are still questioning when the Force will return to Disney’s (NYSE:DIS) stock. Despite record-breaking quarterly earnings, DIS shares have fallen 15% since Episode VII first debuted in December. The new movie, which is written and directed by Rian Johnson, is scheduled for release on Dec. 15, 2017.

Freeport-McMoRan has agreed to sell an additional 13% stake in its Morenci mine to Sumitomo Metal Mining (OTCPK:SMMYY) Japan’s second-biggest copper producer, for $1B in cash. The deal will take Sumitomo’s share in the Arizona based open-pit copper mining complex to 28% from 15%. Freeport (NYSE:FCX) expects to record a gain of about $550M on the transaction and expects it to close in mid-2016.

Anglo American is targeting a more aggressive turnaround strategy after getting its debt rating cut to junk at Moody’s and reporting a mega full-year loss that doubled to $5.62B in 2015. The company now plans to raise $3-$4B this year from disposals (including a 69.7% shareholding in Kumba Iron Ore), suspended its dividend, and sees a 25% Y/Y reduction in total capital expenditures. Anglo American (OTCPK:AAUKY) shares -7% in London.

False alarm! It will be “at least several weeks before a decision is taken” over the purchase of Bouygues’s (OTCPK:BOUYY) telecom unit, Orange (NYSE:ORAN) disclosed in a statement, shooting down a rumor from Le Journal du Dimanche that reported a deal was imminent. The news comes as the French telecom monopoly unveiled a sharp rise in full-year earnings, with net income advancing to €2.9B from €1.2B in 2014.

Private-equity firm Apollo Global Management is nearing a deal to acquire ADT Corp. (NYSE:ADT), WSJ reports. The price could not be immediately learned, though given the company’s current market value, the transaction will likely value ADT at more than $10B, including debt. Last spring, Apollo (NYSE:APO) moved to buy ASG Security and combine it with Protection One, another security company it owns. ADT +37.7% premarket.

In a bid to gain a stronger presence in the local market, Vodafone (NASDAQ:VOD) and John Malone’s Liberty Global Plc (NASDAQ:LBTYA) have agreed to combine their operations in the Netherlands. The venture will sell mobile and cable under both companies’ brands, and Vodafone will pay €1B as part of the deal to equalize their ownership. It will also create stronger competition among rivals KPN (OTCPK:KKPNY), Tele2 (OTCPK:TLTZY) and Deutsche Telekom (OTCQX:DTEGY) unit T-Mobile.

Coca-Cola is considering its first-ever bond offering in Australia, potentially following in the footsteps of Apple (NASDAQ:AAPL) and Intel (NASDAQ:INTC), which last year made their inaugural debt forays Down Under. The world’s biggest soft-drink company has hired Deutsche Bank to arrange meetings with fixed-income investors and may proceed with a deal amid an issuance slump as global turmoil weighs on investors’ risk appetite. KO +1% premarket.

According to a new 13F filing, Alibaba (NYSE:BABA) owned 33M shares of U.S. local online deals leader Groupon (NASDAQ:GRPN) at the end of Q4, a stake valued at $95M. While the disclosure fuels speculation that Alibaba could try to acquire Groupon, it should be noted the company has taken stakes in many American firms without fully acquiring them. Examples include online retailer (Private:JET) and flash deals site Zulily (NASDAQ:ZU). GRPN+10.4% premarket.

Aetna has received authorization from Florida’s Office of Insurance Regulation for its $37B acquisition of Humana (NYSE:HUM), securing 10 of the 20 state approvals required for the largest deal ever in the U.S. insurance industry. The announced mergers of Aetna (NYSE:AET) and Humana, as well as Anthem’s (NYSE:ANTM) bid for Cigna (NYSE:CI), have come under increased scrutiny as the transactions would reduce the number of nationwide health insurers from five to three.

With worries about the Zika virus spreading across the globe, more than 15 companies have been in touch with the World Health Organization about developing vaccines, and about 20 are working on diagnostic tools. Alongside Sanofi (NYSE:SNY) are smaller players like Inovio Pharmaceuticals (NASDAQ:INO) and GeoVax Labs (OTCQB:GOVX), and developers of testing kits such as Genekam Biotechnology and Aethlon Medical (NASDAQ:AEMD). The Obama administration also recently outlined plans to ask Congress for $1.8B in emergency funding to combat the spread of the virus.

Where global markets stand now

  • S&P 500 futures up 1.1% to 1880
  • Stoxx 600 down 0.7% to 320
  • FTSE 100 down 0.2% to 5815
  • DAX down 0.8% to 9134
  • German 10Yr yield up 1bp to 0.25%
  • Italian 10Yr yield up 1bp to 1.61%
  • Spanish 10Yr yield up 4bps to 1.74%
  • MSCI Asia Pacific up 1% to 119
  • Nikkei 225 up 0.2% to 16054
  • Hang Seng up 1.1% to 19122
  • Shanghai Composite up 3.3% to 2837
  • US 10-yr yield up less than 1bp to 1.76%
  • Dollar Index up 0.55% to 96.47
  • WTI Crude futures up 1% to $29.73
  • Brent Futures up 1.6% to $33.91
  • Gold spot up 0.2% to $1,211
  • Silver spot down less than 0.1% to $15.32


In Europe, despite a positive start sold off heading into mid-morning amid risk off sentiment (Euro Stoxx: -0.32%). This has stemmed from the weakness in financials with concerns surrounding the health of banking sector still not abated entirely. Additionally, the energy complex has somewhat pulled off best levels following comments by the Qatari energy minister stating that an agreement has been made by Saudi, Qatar, Russia and Venezuela to hold output at January levels, however this is contingent on other major producers also agreeing. Downside was seen in the energy complex in the wake of this news given that January levels of OPEC oil production was 33m1n bpd, a record high, while some participants had been hoping for a cut from oil producing nations. The news was also interpreted negatively due to the deal being contingent on other major producers also agreeing, given that the likes of Iran were not present at the meeting. In turn, the risk-off sentiment also saw Bunds come off their worst levels while notable curve steepening has been observed.

In commodities, Brent for April settlement advanced as much as $2.16 to $35.55 a barrel before paring the gains. West Texas Intermediate rose 1 percent to $29.74 a barrel on the New York Mercantile Exchange. More than a year since the Organization of Petroleum Exporting Countries decided not to cut production to boost prices, oil remains about 70 percent below its 2014 peak. Supply still exceeds demand and record global oil stockpiles continue to swell, potentially pushing prices below $20 a barrel before the rout is over, Goldman Sachs Group Inc. said last week.

Qatar energy minister states an agreement has been made between Saudi Arabia, Russia, Venezuela and Qatar to hold output at January levels, however this is contingent on other major producers also agreeing. Of note, OPEC January production levels, were at a record high, while some participants had been hoping for a cut from oil production nations.

According to a senior source familiar with Iranian thinking, Iran would be willing to discuss over an oil output freeze once its production has reached pre-sanction levels. Of note, this is very similar to the recent rhetoric from Iran, consequently hinting that a cut in oil production is becoming increasingly unlikely.

Gold rose 0.4 percent in the spot market as demand for haven assets rebounded.

In FX, the yen advanced against all 16 of its major peers, climbing most versus the South Korean won and New Zealand dollar. It gained 0.5 percent to 127.19 per euro. The 19-member common currency strengthened 0.2 percent to $1.1177.

South Korea’s won dropped 0.7 percent to a two-week low as the central bank’s decision to keep the benchmark interest rate at a record-low 1.5 percent failed to quell speculation about a rate cut. Malaysia’s ringgit slid 0.6 percent, while Russia’s ruble slipped 0.5 percent. A gauge of emerging-market currencies lost 0.2 percent, halting two days of gains.

The yuan traded in the mainland weakened 0.3 percent a day after climbing the most in more than a decade, according to China Foreign Exchange Trade System prices. The currency surged on Monday as it caught up with declines in the greenback last week, when Chinese markets were shut for the Lunar New Year holidays. The People’s Bank of China set its daily reference rate little changed at 6.5130.

Headline Summary

  • European equities shrug off the positive lead from Asian bourses as concerns continue surround the health of financial names.
  • Risk sentiment also dampened as Saudi Arabia, Qatar, Russia and Venezuela agree to freeze oil output at January levels, subsequently disappointing calls for an output cut.
  • Going forward participants will be looking out for US Empire Manufacturing and comments from Fed’s Harker (Non-voter, Soft Dove) Kashkari (Non-voter-N/A) and Fed’s Rosengren (Voter, Dove)
  • Treasury yield curve steeper as European equity markets mostly lower, oil rallies in overnight trading.
  • Saudi Arabia and Russia, the world’s two largest crude producers, agreed to freeze output after talks in Qatar. The freeze is conditional on other nation’s agreeing to participate, Russia’s Energy Ministry said in a statement
  • China’s broadest measure of new credit surged to a record as a seasonal lending binge coincided with a recovery in property prices. Aggregate financing rose to 3.42 trillion yuan ($525 billion) in January, according to a report from the PBOC
  • China’s cabinet has discussed lowering the ratio of provisions banks must set aside for bad loans, potentially easing a drag on earnings after soured debts at lenders climbed to the highest in a decade
  • The BOJ on Tuesday started charging 0.1% on a portion of the excess funds that financial institutions have in accounts at the central bank. The negative interest rate would have applied to ¥23.2 trillion ($203 billion) if the policy had been in place last month, the bank estimated
  • With the ECB president set to give his next policy announcement on March 10, traders are positioned for a monetary-easing bonanza judging from the pace at which euro- region bond yields are dropping to new lows
  • German investor confidence fell to its lowest level since October 2014 as equities plummeted amid slowing Chinese growth and concern over the profitability of euro-area lenders
  • Prime Minister David Cameron takes his case for an overhaul of the terms of Britain’s membership of the European Union to Brussels Tuesday as the French government digs in its heels over aspects of his reform agenda
  • U.K. inflation climbed to its highest in a year in January, driven by motor fuels, food and clothing. Consumer prices rose an annual 0.3% and core inflation slowed to 1.2%
  • No IG corporates priced Friday, $1b priced on the week (YTD volume $182.575b) and no HY priced Friday, nothing priced on the week (YTD volume $9.275b)
    Sovereign 10Y bond yields mixed; European stocks mostly lower, Asian markets rise; U.S. equity-index futures higher. Crude oil, copper and gold rally

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