All Dance to the Oil Drums
The positive market sentiment overshadowed stronger than expected data from the US. . Positive sentiment is due to oil dynamics, and investors bet the worst is over. We don’t expect this positive sentiment will persist for a long time. Oil price which is the key market driver rebounded more than 30% from its lows. At the same time, the global overproduction continues to persist and, according to the market mood, oil has a limited room to grow further. Investors should closely monitor the US oil production data, as it is the key parameter determining market fundamentals and future trends.
Iron ore rebounded 23% in two days on the Chinese government announcement about increasing infrastructure spending to support growth. Currently, there are no details on this announcement. According to the market, the latest price jump is fundamentally ungrounded, and iron ore will decline in the nearest future.
HY market rebound continues despite the strong US data. We expect further positive dynamics to be limited, as oil has a limited room to grow further. Investors should closely monitor the US oil production data.
German Berlin Hyp issued a €500m 3 year covered bond with no coupon to yield minus 0.162%, making it the first non-sovereign borrower to issue euro denominated debt at a negative yield.
Fitch: Widespread Cuts in Growth Forecasts, But No Global Recession
Fitch Ratings-London-07 March 2016: Fitch Ratings has made widespread downward revisions to growth forecasts in its latest Global Economic Outlook (GEO). While the biggest revisions have been to emerging market commodity producers – namely Brazil, Russia and South Africa – there have also been sizeable revisions in advanced economies. The breadth of the revisions is notable; however, it still leaves the growth outlook considerably above global recession territory.
“The investment slowdown in China and sharp expenditure compression in major commodity producing countries continue to reverberate around the world economy,” said Brian Coulton, Chief Economist at Fitch.
Fitch forecast growth in advanced countries as a whole at 1.7% in 2016 down from 2.1% in December.
For Emerging Markets Fitch goes down to 4.0%, from 4.4% in December
“With emerging markets at the epicentre of these shocks and now accounting for 40% of world GDP it is legitimate to ask whether the world will see, for more or less the first time in recent history, an emerging market led global recession. However, we believe several factors mitigate this risk,” Coulton added.
Commodities: Fitch is now assuming the Brent oil price averages USD35 per barrel in 2016 and USD45 in 2017 respectively, down from USD55 and USD65 in December. These revisions reflect a strong inventory build, higher than expected OPEC production in January and deteriorating prospects for world GDP growth.
South Africa, China:
Tighter fiscal and monetary policy settings in the face of weak growth and rising inflation were also a factor in the revision of South Africa’s forecast since December (down to 1% from 1.7% in December).
Growth in China is expected to be slightly weaker at 6.2% (down from 6.3%) reflecting revisions to external demand, but recent credit data and stepped up policy easing suggest that risks to the 2016 forecast are balanced.
REGION SUMMARY As oil prices are still very close to the local highs, the demand on the emerging market bonds should remain quite strong.
Russia: lower oil prices are reducing corporate incomes and have prompted pro-cyclical fiscal policy tightening, while high interest rates and falling real wages are squeezing consumption. Fitch has revised its 2016 forecast down to -1.5% from +0.5% in December.
CORPORATE The sharp oil rebound during the last few days will mitigate the negative impact from Moody’s decision to place the ratings of the oil-exporting countries under review with negative implication.
The credit ratings of more than 10 oil-producing nations were placed on review for a downgrade by Moody’s. The list includes Russia, Kazakhstan, Nigeria, Angola, Gabon and Trinidad and Tobago, Kuwait, Saudi Arabia, the United Arab Emirates, Bahrain, and Qatar. During the review, Moody’s will assess the impact on Russia’s economic performance and government balance sheet from further sharp fall in oil prices, which Moody’s expects to remain low for several years.
REGION SUMMARY Emerging Asia is trading in the negative territory today except China. Indonesia 10y sovereign Eurobond is lower by 36bps, Malaysia is marginally lower and China’27 is higher by 40bps.
MACRO : China’s February trade data was weak, but it probably had been affected by the Lunar New Year, as proxies indicate the exports didn’t collapse last month. At the same time, weaker exports is generally consistent with sluggish demand across Asia observed since the start of this year. On the positive side, deceleration of decline in FX reserves may indicate the capital outflows have slowed down last month.
China exports decreased by 25.4% y/y in February, while imports fell by 13.8%y/y. Trade surplus was USD32.6bn
China FX reserves declined by USD 28bn last month to USD 3,202bn slowing down from a USD 100bn decrease a month earlier.
Protective measures introduced last year still support the Indian steel industry recovery.
India steel imports have declined 7.3% in Feb’16 compared to the same period last year, which was a fourth consecutive monthly decline. India remained the net importer of steel.
Fortescue and Vale have entered an agreement to form a JV for blending of selected volumes of iron ore from both companies for supplies to China customers.
REGION SUMMARY The regional bond market jumped on a positive sentiment. Strong upside pressure came from China where the government pledged to increase infrastructure spending to support growth and commodities.
MACRO Political situation in Brazil is nearly critical. The nationwide protests on March 13 and 19 will make the government’s current position among electorate more clear.
Pressure on the Brazilian president Dilma Rousseff continues to grow further.
The former president Lula da Silva was detained by the prosecutors for 3 hours on Friday. Currently, he is not a part of the investigation.
The nationwide protests are expected in Brazil on March, 13. According to the opposition, it would be the largest antigovernment action. Rousseff supporters are planning to arrange demonstrations on March, 19.
JBS production plants stoppage will have a limited effect on the company’s operations.: JBS halts beef production at 5 Brazilian plants due to a cattle shortage. The activities will by fully resumed in 20 days. We don’t expect any substantial effect on the company’s operations as a result of this stoppage.
Odebrecht’s former CEO Marcelo Odebrecht was sentenced to 19 years in jail for criminals including corruption and money laundering.
Odebrecht and OAS management that are under investigation are seeking a plea bargain and ready to announce new important details of corruption in Petrobras. We don’t expect any negative impact on Odebrecht’s construction business, as such a dynamics was expected by the market. The company’s ability to maintain backlog stable is the key factor for prices and its prospects.