The Weekly Truffle Report: Syria, oil and nervous investors

Week in Review – Oil and nervous investors

Another week, another jitter on the Trump Train. This time, it’s James Comey’s explosive memoir about his time working under the Donald, including accusations that the current President is nothing short of a mob boss, demanding complete loyalty from his inner circle while ruthlessly cutting off any dissent. Alas, the Truffle is rather sanguine about the impact of works such as this. Despite a long line of detractors in text, Trump has weathered storm after publicity storm, and this time doesn’t seem to be much different. The only potential genuine upset will be the Mueller Inquiry, which raided Trump’s lawyer’s office last week.

It’s also business as usual in the horrific Syrian Civil War, where the use of gas weapons in Douma has provoked a furious response from Britain, France, and the US. There is undoubtedly a danger here that the situation will spiral out of control – with Iran, Russia, America, France, Israel, and Britain all vying for influence, there is many a powder keg needing only a flame. Yet for now, the powers that be seem to have reached a strange sort of equilibrium. Short of any dramatic developments, do not expect this latest round of Western missile-chucking to elicit much of a change.

Yet, who can blame markets around the world being skittish? We can observe a distinct nervousness we haven’t seen for a long time. As a result, global money flows dominated by giant institutional investors and computer traders, have come to move their money in and out of markets with increasing rapidity causing wild swings. The individual trader and over-eager speculator get crushed.

However, that there is still plenty of liquidity in the markets can be seen in Saudi Arabia – followed closely by regional rival Qatar. Initially, only Qatar tried to tap capital markets, but seeing Qatar as thorn, regional observers commented that Saudis are increasingly trying to get one over on the Gulf nation by raising money before they can – hence delivering a blow to their capital raising efforts.

Thus far this seems to be of no avail, as both countries got investors around the world open their purses eager to provide capital to the tune of  $17 bn (4-5% coupons)  and $12 bn respectively.  For the Saudis, it still is good news as they have completed its capital-raising from international investors this year.

Three countries less highly rated by investors are certainly Russia, Turkey and Iran. In Russia’s case, United States has just imposed its harshest sanctions against Russia, and the Russian stock market collapsed on Monday. Its lead benchmark the RTS index plunged 11.4 percent, its biggest one-day decline since Dec. 16, 2014, when it fell 12.4 percent. These sanctions are aimed at key industries and key Russian oligarchs, such as Oleg Deripaska, a billionaire in control of aluminum company Rusal. The sanctions against Rusal sent aluminum prices surging on Monday as investors feared that large portion of supply was suddenly gone.

While Russia is struggling to deal with a new economic reality imposed by ever harsher sanctions, Turkey and Iran are struggling with their currencies. Iran has already understood how to cope with severe sanctions but it is far from immune to currency declines. Their currency, the rial, plummeted to historic lows amid economic and political uncertainty, losing one-third of its value this year alone, standing at a staggering 60,000 to the US dollar. Strangely enough, though, its domestic stock market is holding up well, with its lead benchmark, the TSE, trading at near all-time highs of over 95,000.

While Turkey hasn’t been targeted by economic sanctions, it’s dealing with its own currency challenges. It seems that on the surface the Turkish economy is booming, but beneath, capital is fleeing the country. Economic advisers are demanding for higher interest to stop the decline of its currency, and to tame the risk of an overheating economy, but Recep Tayyip Erdogan, Turkey’s despotic president, is having none of it. Wait and see where this is leading.

Earnings Season Recap

As we mentioned in our last weekly report, plenty of banks reported earnings last week. Strangely enough, most banks and financials (JP, BlackRock etc.) reported excellent earnings only to be followed by declining share prices. Banks such as J.P. Morgan Chase, Citigroup, Wells Fargo and PNC all saw their stock prices fall.

Market commentators quickly came up with bogus reasons for this bizarre situation. For us it’s simple: Sell on good news, and so the weeks ahead ain’t pretty! Better not speculate on earnings results in coming weeks!

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Week Outlook

The missile strikes on Syria will take center stage at the beginning of the new week. While mainly seen as symbolic, and launched largely so that Trump can save face or divert attention from more pressing issues, the outcome of these ‘surgical’ strikes should be positive for financial markets around the world as a big question mark has been lifted.

Investors should pay attention to oil and other commodities. Oil has already risen to $66 a barrel from about $60 at the beginning of the year (as we forecasted), and gold seems to be on the move up as well currently trading at around $1,349.

As the week progresses, attention will return to earnings seasons in the US, as about 60 large cap companies are scheduled to report results. Last week’s bank reports should guide the way for financial institutions such as Goldman Sachs, Bank of America and Morgan Stanley. But who knows where their share prices will wander off to – keep in mind that the good news is already priced in.

Besides financials, Netflix should be watched closely as a prime member of the FAANG posse. It reports numbers this week. If the general FAANG trend of recent weeks is any guidance, the short-term to mid-term direction should be clear. We can only recommend staying away from taking any short-term bets either way.

IMF-World Bank spring meetings
The usual deep discussions will happen at this year’s spring meetings of the World Bank and the International Monetary Fund’s board of governors in Washington. The discussion will be followed by elaborate warnings by IMF managing director Christine Lagarde and World Bank president Jim Yong Kim when they hold their press conferences. This will be followed by shoulder patting, smiles for the cameras, and fancy cocktail parties. Move along – there’s nothing to see here.

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