Market commentary: Demand, demand, demand

Global stock markets continued their somewhat tempered advance, and faltered slightly in some cases, after mixed earnings failed to give any clear direction. A day after JP Morgan beat expectations Bank of America and Wells Fargo posted lower profits on the quarter and increased provisions for bad loans, souring the mood in financials.

But perhaps the things on most investor’s minds over the weekend will be the meeting in Doha, where oil-producing countries – from both OPEC and non-OPEC blocs – will be meeting to discuss an output freeze, an attempt at curbing the current oversupply in crude oil. Qatar is hosting the talks between 15 countries, and there is slight optimism that an agreement would help feed the existing recovery in oil prices.

Oil, while still very low by recent standards, has risen almost 40% since talk of a freeze began in mid-February. In a letter to Norway’s Ministry of Petroleum and Energy, Qatar that talk of the freezing plan has already “changed the sentiment” in the oil market, and suggested that should a country like Norway also join in the freeze, the price would benefit even more. Norway has said it will not attend the meeting.

And despite the optimistic jargon which is being thrown around, political differences remain a key hurdle ahead of the Doha meeting. Saudi Arabia – a key player – has insisted that any deal would have to involve Iran. That would not be meaningful news were it not for the fact that the two countries are not particularly on good terms, with the roots of their rivalry stretching back as far as 1979 during the Islamic Revolution in Iran.

Indeed, despite a possible freeze on the cards – the agreement suggests capping output levels at January levels – there is little conviction amongst analysts and traders that the move would have an immediate impact on production and prices in general. This belief is also echoed strongly by the International Energy Agency, who said in its monthly report that any deal to freeze production would only materially address the over-supply issue in 2017, barring other developments.

The IEA, which is thoroughly involved in developed countries’ energy policies, said that supply will still be greater than demand in 2016, despite an acceleration in the decline of US production and little upside coming from countries such as Russia, Saudi Arabia and Iran. More significantly, demand was waning in China, the US and much of Europe. Global demand growth is now estimated to be 1.16 million barrels per day in 2016, well below the 1.8 million barrels per day in 2015.

Lack of demand is also plaguing another sector of the economy – that of credit and borrowing, and with it, consumption, investment and growth (or at least that’s the theory). Most central banks – read the European Central Bank, the Swedish Riksbank, the Swiss National Bank, and the Bank of Japan – have pushed the price of money to historic lows going into negative territory in some cases. Simply put, getting a loan (provided you’re an eligible institution) has never been so cheap, ever. Heck, the ECB is practically paying you to take out a loan with its latest round of Targeted Long Term Refinancing Operations.

But, as the old saying goes, you can lead a horse to water but you can’t make it drink. Making the world economy ‘drink’ is proving to be harder than previously thought. Some will argue that’s it’s not working at all, and that monetary policy alone can no longer solve the world’s problems. This resonates with what ECB chief Draghi has mentioned in virtually all his post-meeting conferences, where he has repeatedly called on national governments to make the necessary reforms to facilitate investment and growth. These calls, echoed by the IMF, focus particularly on government spending on infrastructure and labour market reforms.

This article was issued by Andrew Martinelli, Trader at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd. has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.