January outside the box and statistics. Without having any sign of recession in the USA, the Stock Exchanges decided to open 2016 with a decline that at times reached panic selling. At this juncture, European markets proved to be weaker, while the US proved to hold up better.
For many weeks there was no real flight to quality, all asset classes depreciated with the only exception of gold which we had already indicated in the newsletter at the beginning of the year in a situation of potential decorrelation with respect to other assets class for an interesting positioning of professional traders on the yellow metal (Commercials).
The impression is that the Stock Exchanges are left without a clear vision for the future on the support of the Central Banks to the economy. In fact, after a period of silence in the second part of the month, the Central Banks have all expressed themselves, either with words or with actions. The FED, while not reneging on future rate hikes, has announced that they will once again be conditioned by macro data, thus correcting the almost deterministic hike program announced in December for now. Through the mouth of Governor Draghi, the ECB has made openings for an expansion of European QE in March.
Those who did not express themselves with announcements but with facts is the Bank of Japan which, with a move that was not entirely unexpected in terms of content but surprising for the times, on the evening of Thursday 28/1 introduced interest rates in Japan for the first time negative for excess deposits of financial institutions with the central bank (-0,1%, from the previous +0.1%). A move accompanied by the affirmation that, if necessary, rates will become even more negative. The reaction of the dollar/yen exchange rate was immediate, considered by many analysts as a marker of crisis if the exchange rate were to fall below the level of 116.
In short, a breath of fresh air for the markets in the last days of January, certainly not yet decisive. The other two themes that dominated the month were oil and European banks (especially the Italian ones).
Petroleum
A real roller coaster the one taken by oil in the month of January. Below are the continuous quotes of WTI oil for the last month:
The low of 20/1 just above $26/barrel brought prices back to levels not seen since 2004. By now the market has identified the price of oil as the leading indicator to follow and the low price as the source of all evils. Undoubtedly, a continuation of prices below $30 a barrel would have severe consequences on the entire extractive and refining industry chain, not to mention the deflationary effect which is exactly what half the world is trying to counteract today.
In recent days, the recovery in prices has been partly driven by rumors and news on a greater willingness of the OPEC countries to reduce production and also by Russia's participation in negotiations to this effect, rumors which have since been partially denied. More concrete are the news from overseas where the collapse in the price seems to have convinced the producers of shale oil to come to terms with reality. Three of the major American producers (Continental Resources, Hess Corp and Noble Energy) have announced new heavy cuts in investments which will lead to a significant drop in production. Added to this is the fact that in 2015 as many as 42 companies that had launched into the shale oil business declared bankruptcy. The impression is that the drastic drop in investments worldwide and a change in the market flooding policy by Middle Eastern producers could lead to some normalization of prices upwards during the year. According to data from Baker Hughes, there were 498 active wells in the USA at the end of January. There were 1480 at the beginning of 2015, just over a year ago.
It is no coincidence that the oil futures contract for December 2016 delivery closed Friday night at $41,75, a full 24% higher than the current contract for March delivery. A normalization towards $40 by the end of the year is probable and desirable, but we fear that there may still be many shocks in the coming months.
European banking sector
If January was very negative for almost all markets, it was catastrophic for the banking sector. Much has been said and discussed about the situation of Italian banks, but on a less superficial reading the problem has affected European banks as a whole. The Italian FTSE-MIB stock index suffered more than others due to the high weight of banks in the index, but it was the whole European sector that fared badly. The market made some distinctions. The European index as a whole lost 17,3% in one month and almost 25% from the relative highs of October, a symptom of a malaise not only in Italy.
There are many causes behind this decline, some general, others specific. There is no doubt that the market did not like the new rules for bank bail-in, either in terms of substance or in terms of implementation times. In some cases, fear and rumors of new recapitalization requests from the market weighed. This is the case of Unicredit: again on Saturday 30/1 on the occasion of the Assiom forex conference in Turin, the managing director Ghizzoni answered in a sibylline way to a specific question on the need for a capital increase: "On 9 February we will present the accounts of the bank , it's better to see them and then we'll talk about it again". In any case there is a problem of confidence in the banking sector which appears deteriorated in the best of cases, crumbling in others (Monte dei Paschi). There is no doubt that, if the accounts are true, there are purchase opportunities at these prices. However, it will be necessary to see first if the haemorrhaging of prices on the Stock Exchange will stop. A bounce is possible.
