Wrap – Week Ended 6/18/20

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 Wrap Comments:

  • 1) Energy bounced with the market, OIH more than the rest. The out-performance of the Oil Service group makes a lot of sense when you look at the year to date bludgeoning and the trail of evidence coming out of the BP investigations that points towards BP being at blame and away from RIG, HAL, SLB, and, I think, CAM as well. I'm not ready to jump on the RIG bounce bandwagon just yet but I've been in and continue to run with HAL which has been beaten back unfairly in light of the lack of a cement bond log being run which would have pointed out problems with the cement and in light of BP's decision to go against HAL's design for the number of centralizers in the well.  Adding to that, unlike the BP CEO, HAL's CEO didn't show up at a high fallootin yacht race over the weekend.  I'm not faulting him for spending to with his family but dude, wear a disguise at least.
  • 2) Short interest in both commodities appears to be shifting. Shorts may be starting to get nervous in front of what promises to be a sweltering summer which may possibly result in withdrawals from storage during July. Add in the high potential for a hit to Gulf production from a hurricane and definitely from D.C. lawmakers and I can't say I blame the shorts for seeking browner pastures to frown about elsewhere. I'm still not looking for a massive short cover here as production is still too high but just a supportive mood for natural gas. As to oil, shorts had been rising but the rally proved short lived .... this may be more a function of the dollar than anything else.
  • 3) Gas in storage back to last year's level; still bloated to the five year average. Weather is helping but we still have too much production to contend with at the moment. While gas directed rigs appear to be about to roll back over (and will definitely roll over next year), the number of rigs working in the horizontal plane continues to spiral to new highs which is troubling for gas prices much more (if at all) than it is for oil.
  • 4) Coal remains one of the best performing commodities year to data, yet the stocks have been lagging due to concerns over China. More comments here later this week.
  • 5) Alternative energy hype has not been good for those stocks this year. TAN and GEX alternative energy indexes have been amongst the worst performers in the market this year. You can see the President's Oval Office green energy push in the indexes this year but so far, investors have been quick to pull the trigger on any gains in this group and unless we see real traction on a new "energy bill" that would falsely create good economics for this group, I think their time is later, not sooner.
  • 6) Have a Great Father's Day! I'm told I'm not supposed to be typing so I'll quit now and get back to the ribs. Chat with you tomorrow.



6 Responses to “Wrap – Week Ended 6/18/20”

  1. 1
    BirdsofpreyRcool Says:

    sometimes it’s so bad, you just gotta laugh…

  2. 2
    BirdsofpreyRcool Says:

    yuuuuuuuuuuuummmm…. RIBS!

    Happy Father’s Day, y’all!

  3. 3
    zman Says:

    Futures up large this evening.

  4. 4
    zman Says:

    Tracking two potential systems in the Caribbean:



    Bastardi saying the European model is showing potential for development once these get closer to the Gulf late week.

  5. 5
    VTZ Says:

    End to the USD yuan peg is the rally.

  6. 6
    BirdsofpreyRcool Says:

    BedTime Market Strategist

    RMB Reform.

    We have to give the policymakers at the People’s Bank of China and the Treasury Department here in the United States credit for navigating the political minefield of China’s currency revaluation. The latest round of Renminbi rage commenced back in March as the U.S. Congress commenced its annual rhetoric about China’s currency policy in anticipation of Treasury’s “Report to Congress on International Economic and Exchange Rate Policies.” Treasury’s balancing act has been to acknowledge the reality that China manipulates its currency while simultaneously not offending the largest purchaser of U.S. Treasuries. The previous Administration was afforded political cover by gradualist moves towards revaluation that China has made over time. The difference today is that China has kept the RMB pegged at 6.83 to the dollar since June of 2008, when the economic crisis began to gain momentum. In addition, prior to his election, the President himself went on record numerous times accusing China of being a currency manipulator. With 20 months of an unambiguous peg and the President’s comments on the record, Treasury had few options but to officially designate China as a manipulator. The Main Street version of this is telling your banker how much you disapprove of him but then asking for an indefinite revolving line of credit. Rather than risk alienating our banker or losing credibility, in an air of creativity, Treasury opted not to weigh in and instead delayed judgment until a later date. Just over two months later, China announced a new policy titled, “Further Reform the RMB Exchange Rate Regime and Enhance the RMB Exchange Rate Flexibility.”

    The end result is that China is resuming the program that was in place prior to June 2008, permitting the gradual strengthening of the RMB over time. The PBOC describe the new reform by explaining, “In further proceeding with reform of the RMB exchange rate regime, continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies. The exchange rate floating bands will remain the same as previously announced in the inter-bank foreign exchange market.” In addition, the PBOC was also sure to note that “With the BOP account moving closer to equilibrium, the basis for large-scale appreciation of the RMB exchange rate does not exist.” So this is not a one-off big revaluation, but simply a return to the old gradualist approach. (We cannot argue against this approach, however, because over the past two years currency markets have hardly been a beacon of stability.) The PBOC’s action is something that was very likely to occur, it was just a matter of timing. Since this process was going to head back in this direction anyway, the largest risk in the equation was the political one. In the U.S., it was the concern about politicians rushing a policy change for populist reasons after years of standing by idly, and in doing so, risking compounding one error with more errors. For China, as the emerging global economic superpower, the risk was that they would not want to be told what to do by the international community. China’s addiction to the currency peg is equally as detrimental as the U.S.’ addiction to low interest rates. Although RMB is simply returning to its previous course, it is a victory that the politics of the situation did not implode the process.

    This announcement is well timed in advance of next week’s G20 meeting. There is (as there should be) notable external and internal pressure for China to revalue (allow revaluation) and take the next steps towards developing that middle class and internal consumer market. As the Great Recession has exhibited, too much dependence upon the U.S. consumer is a great risk. It is not very different from a company being reliant upon a single customer, and as that customer goes, so does the company. China has made incredible strides since its entry into the WTO in 2001 and has probably sped its urbanization up by a factor of years through this exchange rate policy. The fact is, however, that it is artificial and cannot be sustained indefinitely without creating greater imbalances and thus leading to a more painful unwind. We should not forget that the Dollar has been strengthening versus most major currencies for the past 7 months. As such, so has the pegged RMB. Accordingly, this may be an optimal time to enact their shift since the RMB will again be managed versus an undisclosed “reference to a basket of currencies.” In addition, with the domestic issues of wage inflation of recent concern in China, now RMBs will be going a longer way.

    The membership of the G20 expects China to continue its process of evolving into the global economy’s developing superpower. With great power comes great responsibility, and this is China accepting its responsibility (on its own terms). It is good to see China has returned to its pre-crisis path. In the long term, investors should be salivating at the prospect of China advancing its consumption. In the near term, the nation is simply returning to its previous path and this move was widely expected. We believe the timing is primarily political but appropriate, and that it is a victory that the politics did not undermine the process. As a result of the gradualist approach and the fact that this has been expected, most of the early reaction in the markets will likely be more excitement than substance.

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