🌎 Large Banks Look for an Alternative | Gold's Above $2,000 | Oil Price Surge
Updated: Aug 12
August 7th, 2020
As the weekend approaches, the Deaglo team will take a moment to reflect on the horrific explosion that happened in Beirut earlier this week. It reminds us of all the pain and suffering that innocent people are faced with on a day to day basis. Our thoughts go out to all of those affected.
Did You Know...
The tree in the middle of the Lebanese flag is a Cedar tree, symbolizing eternity, steadiness, happiness and prosperity.
According to Lebanese folklore, how many times has Beirut been destroyed and rebuilt?
Japan's Large Banks Look for an Alternative
Japan's three biggest banks and two smaller banks (as well as the two main lending units of Resona Holdings Inc) are starting talks on building a common settlement infrastructure for small payments, with the aim of cutting interbank fees, they announced on Thursday.
Currently, banks use a payment network called the Zengin system, which will continue to handle large transactions like those between businesses, or between businesses and banks.
Last month the government called for a reduction of high bank transfer fees: Major banks charge 220 Y to wire less than 30,000 Y online (0.7%) to other lenders accounts. A reduction in these fees - unchanged for more than four decades - will improve digital payment systems, raise productivity and curb transmission of the coronavirus through touchless payments.
The USDJPY has been trading in a loose band between 106 and 114 for the last three years, with relatively low volatility. Hedging costs are around 0.5%, favoring selling USD. JPY often acts as a safehaven to the USD and often sees a spike in times of uncertainty.
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Gold Above $2,000 for the First Time
The 18 month rally in gold has strengthened as governments have flooded their economies with approximately $20tn worth of stimulus to combat the COVID-19 pandemic, as well as concerns over tensions between Washington and Beijing. Investors are betting that the uptrend continues as the dollar weakens and interest rates remain around 0% in many parts of the world.
Market strategist Margaret Yang says she sees potential for bullion to continue rising in the coming weeks and months: "The mid-to-long-term prospect of gold and other precious metals remains bullish against the backdrop of low interest rate environment and fiscal and monetary stimulus."
According to Citibank, gold short-term targets to ~$2,100/oz. 6-12m targets breaching $2,300/oz seems plausible. The record pace of ETF investor inflows, a weakening US$ and negative real yields are the primary drivers for the push higher.
Riding the wave of higher prices and positive expectations, an ETF (Exchange Traded Fund) became one of the world’s largest gold owners, outperforming even the central banks of Japan and India as investors rushed to buy the precious metal. This investment fund is called SPDR Gold Shares, whose main characteristic is that it is traded in the secondary stock market and that it has physical bullion instead of just financial derivatives.
The stock market ETF, which is comfortably the largest in the world with US$289 billion of assets, charges end investors a fee of just 0,095% a year. The State Street’s gold ETF, on the other hand, charges investors 0.40% a year, which means that it is currently generating about US$320 million of revenue annually.
In spite of the big names in finance have over the past decade warned of the dangers posed by the ETF industry - especially in times of turbulence like 2020 - the ETF markets have been functioning as intended and holding up well in such stressful environments.
Is gold up, or really is the USD down? Gold often gets a bump up in times of market stress, with global politics in disarray and interest rates at 0% people turn to gold or mattress stuffing. The dollar index (DX:Y) is at a two year low, having fallen 10% just since March.
Oils Up After a Rise in Gasoline Inventories
Oil futures posted the highest close in five months, but ended off session highs after data confirmed a large drop in crude inventories and an unexpected rise in gasoline stocks. WTI closed at $42.19/bbl, while Brent closed at $45.17, the highest since March 6 for both benchmarks. However, prices are still down about 31% this year.
It seems these gains are going to be short-lived. Saudi Arabia just cut pricing for its flagship light grade, and also cut prices to buyers in NW Europe and the Mediterranean.
On the supply side, OPEC+ (led by Saudi Arabia and Russia) pledged to cut output by 9.7 million barrels a day beginning in May, easing to 7.7 million barrels a day this month and running through the end of the year. Iraq pledged cutting 400,000 bbl/day in August. Countries that exceeded the earlier curbs are supposed to further curtail output, which means output is targeted to rise by around 1.5 million barrels a day beginning this month. We’re skeptical though; it seems in OPEC+ it's every country for itself; we’ll see if these gains hold.
However, earlier in the week, the EIA (Energy Information Administration) updated its oil demand forecast and now expects demand to suffer a 7.9 million barrels per day decline this year. Also, J.P. Morgan cut the forecast for the second half of the year by 1.5 million barrels per day, which added pessimism to the market.
Not enough for this week, the International Monetary Fund (IMF) said in a new report that the coronavirus crisis will lead to global oil demand dropping by around 8% this year compared to last year.
However, the market must weigh which perspective will have the most influence on oil prices, the reduction in crude stocks and the cut in production, or an increasingly weak demand.
The USDRUB has been extremely volatile, nearly 14%/annum. Unfortunately, hedging costs are extreme, at around 4%, favoring selling USD. In spite of emerging market currencies rebounded in July, logging their best month against the U.S. dollar this year, the Russian ruble was the worst-performing currency in the basket. This behaviour was due to interest rate cuts and further decline in U.S.- Russia relations, which has reignited concerns over fresh sanctions.
In Other News
Currency Heat Map
This chart shows the relative volatility between currencies. The redder the color, the higher the volatility.
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Quiz of the week
According to Lebanese folklore, Beirut was destroyed and rebuilt seven times during its 5,000-year history. Our fingers crossed that it only needs one more rebuild.