The crude oil trade remains heavily speculative as traders crowd the long side in anticipation of an agreement between Moscow in Riyadh. This morning, however, prices have turned lower as Iraq is seeking an exemption from the Opec deal citing military spending needs.
Article / 23 May 2016 at 10:30 GMT

Daily Shot: Japanese labour market going strong Team / Saxo Bank
  • Stabilizing oil prices affect markets
  • In Japan manufacturing contraction has worsened, employment is increasing
  • Betting markets are increasingly discounting the Brexit risk
  • Target prices for Deutsche Bank are getting one-digit
By Walter Kurtz*

We begin with a few developments in the energy markets.

1. The US energy & mining investment growth has declined sharply. While this is bullish for oil in the medium term, there is no shortage of capital waiting on the sidelines that will be quickly redeployed should prices rise further.
US mining
2. US oil rig count didn't decline last week - is it stabilizing? 
US rig count

3. Seeing oil prices stabilize, Iran is in no hurry to "freeze" production - as hard currency begins to flow in.

4. As discussed on Friday, with crude oil contango declining sharply in recent weeks, storage (cash & carry) is no longer profitable. Nevertheless, floating cargo continues to increase. The physical crude supplies remain bloated, and they will hit the spot market at some point.  
1. We now stitch to Japan, where the manufacturing contraction has worsened this month. This factory slowdown has been fairly broad, with production, new business, exports, and orders - all showing signs of weakness. The only stable component of the sector performance has been employment. Take a look at the summary below from Markit.

Markit Japan
2. Japan's imports fell by the largest percentage since the Great Recession as domestic demand remains poor. As a result, Japan's trade surplus rose.
Japan again
3. Japan's full-time employment growth has risen significantly this year as demand for labor remains strong. 
4. Related to the above comment, Japan's labor force has been increasing despite the drop in working-age population, as more women enter the workforce.
labour force
As discussed before, Australia's RBA has sharply revised down its inflation forecast. In fact, Australia's CPI growth projection is now below that of the US. 

In the Eurozone, the focus remains on Greece, with the IMF pointing out what Greek government debt trajectory will look like with and without the proposed debt restructuring. Similarly, the IMF sees debt servicing costs rising sharply without any "help". Is it time to convert Greek debt into a perpetual zero coupon bond?
1. In the UK, the focus remains on the EU referendum. Mentions of "Brexit" in the media have overshadowed the volume running up to the Scotland referendum as well as the UK elections. 
2. Similarly, Goldman Sachs' client survey puts Brexit ahead of other key concerns, including China's outflows/devaluation. Will this change as the dollar rises further? 
3. The betting markets, on the other hand, are increasingly discounting the Brexit risk.
Brexit bets
Next, we review some trends in the equity markets.

1. Which countries have the highest equity risk premium (relative to the government debt markets)? In addition to several other sectors, banks and energy firms keep risk premia elevated. 
equity risk premiums
2. One measure of the lack of conviction in the equity markets is the difference between bullish and neutral equity investor sentiment. 
3. Berenberg's target for Deutsche Bank shares is 9 euros. Several other firms have similar targets, expecting DB to be forced to raise additional capital in the near future. 
Deutsche separator
Finally, let's look at a couple of trends in alternatives.

1. Hedge funds are increasingly becoming concentrated as investors demand alpha
Hedge funds
 2. It's a bit surprising to see an increase in fund-of-funds allocations by institutional investors while other strategies decline.
Turning to Food for Thought, we have 5 items this morning:

1. Public transportation usage in the United States. 
public transport
2. The smaller the population of US counties, the worse the recovery from the Great Recession. 
out of recession
3. Most shootings in the US take place in the poorest communities. 
4. According to Pew Research, "41% of US adults say they get their news from Facebook". The use of Facebook, however, varies by political affiliation. 
News from Facebook
5. The world’s most polluted cities.  

— Edited by Clemens Bomsdorf

* Walter Kurtz is an alias

**This is an abridged version of the Daily Shot. To subscribe to the full version, link to the Daily Shot and select the appropriate command. E-mail addresses are never shared with anyone.



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