This week has been another volatile one for the stock market. While the oil market is still struggling with an on-again, off-again relationship with barrel prices, Britain is awaiting its vote for leaving the EU, and new documents could connect Saudi Arabia with a role in 9/11. On a more positive note, corporate defaults may be less of a problem than previously thought. Now, on to this week’s digest…
A Tug-of-War Week for Oil – crude oil prices endured a volatile week. It started with the collapse of the Doha talks – not surprisingly, Iran made a last minute decision to skip the meeting, which almost certainly irked Saudi Arabia. For market participants, this also created fears that no production freeze would be possible (it’s still uncertain for OPEC nations). But then later in the week, oil got a boost when Kuwaiti oil workers went on strike for three days, cutting production nearly in half for the nation. Fast forward to the end of the week when supply concerns resurfaced rapidly after data from the American Petroleum Institute showed that the U.S. oil inventory had grown by 3.1 million barrels over the last week. Oil bounced around quite a bit, but seems to want to call the $30-$40 barrel price range home. Still, the market is waiting for the ‘fear’ to fade which will most likely result after a consistent price of an oil barrel is reached.
Are Corporate Defaults a Growing Problem? – U.S. corporations have defaulted on approximately $50B in debt so far this year, and the number of insolvent companies is rising fast – the fastest pace since 2009 in fact. There have been a total of 46 defaults (including the latest 5 in just one week). The largest share of these defaults are attributed to the Energy and Mining Sectors which have taken a hit from persistently low oil prices and the softening of global demand for commodities. The Mining Sector contributes to less than 2% of the U.S. value added as of Q3 2015. If you excluded metals and energy from the default picture, you would find that U.S. High Yield default rate by the end of 2016 is expected to be in the 1.5%-2% band – lower than the non-recessionary average of 2.2%, as suggested by a March report from Fitch. On the other hand, sectors occupying a larger slice of the economy, such as real estate, are experiencing gradual but steady recovery – largely due to firming domestic fundamentals.
Interesting Study on the Brexit Impact – a recent study from the U.K. government unveiled a worse-than-expected economic impact of Britain leaving the EU. The biggest statistic that caught our eye was the expectation that the British economy would be 6% smaller by the year 2030 if it left the EU. George Osborne, Treasury Chief in Britain, also said that households could expect to take a ~$6,000 hit each year on average. The vote will not take place until June 23rd, but Britons will have a lot to consider between now and then. The more capitalism-friendly move would be to stay, and it might be the safer move too.
The Saudis Get Tough – 60 Minutes ran a story recently about a classified set of documents that, if released, could give fairly astonishing insight into a potential role played by the Saudis in the 9/11 attacks. Congress is mulling over a bill that would hold Saudi Arabia responsible in U.S. courts for any role they may have played. The Saudis responded with a pretty direct line, stating that they would sell up to $750B in U.S. Treasuries and other American assets if Congress passed the bill. It seems doubtful that Saudi Arabia would follow through on such threats as American assets and U.S. Treasuries are some of the most coveted balance sheet items in the foreign world – but it would not be the first time surprises came in droves from that region. It will be very interesting to see how this shakes out.
Disclosure