We continue keeping you informed on the results of our activities, and the IFC specialists’ take on the situation and processes in global and regional economies.

In July 2017, the assets value of the WellMax investment portfolio increased by 1.00% in USD and EUR, which equals to 12.68% per annum, with monthly compounded interest. The annual yield amounted to 12.72% in rubles and to 12.96% in yuans.

The assets value of the WellMax Premium investment portfolio increased by 3.96% in USD over the period from July 10 to August 10, 2017.

In the last month, the increase in the assets value of the WellMax Premium investment portfolio was caused by the positive dynamics of a whole range of assets in it. The growing shares of the American photovoltaic modules producing company First Solar Inc. and pharmaceutical giant Gilead Science Inc., mentioned in the previous economic reviews, positively influenced the yield of our portfolio in the last month. The charts below (source: Yahoo Finance) illustrate the dynamics of these instruments over last three months.

Besides, in the last month there was another positive impact on the yield of our portfolio: the growth of shares of the technological giants Alphabet Inc. (which owns Google) and Facebook Inc. Due to some overestimation observed in the high tech sector, we closed the positions in the companies upon their release of the second quarter reports. The charts below (source: Yahoo Finance) prove our decision to be right.  

The Alphabet Inc. shares crash started immediately upon the release of their second quarter report. It says that the holding company's net profit decreased by 28% to $3.5 billion – the biggest fall in the Alphabet net profit since 2008 (whilst, the company's profit grew by 21% in the second quarter of 2017). The profit drop was due to the significant fine of $2.7 billion imposed by the European Commission in June.

The biggest social media's shares, on the contrary, soared upon the announced results of the second quarter, which showed a 71% increase in the company’s profit in comparison with the same period last year. However, on that very day, the issuer's soared shares dropped from the record high level like other high tech securities due to the growing fears of investors related to the general overestimation of the high tech sector. The described environment made us lock in the profits.

Another example of the overbought high tech sector in the stock market is the American company The Priceline Group Inc., which owns the aggregator Booking.com among others. This company was mentioned at last lectures “Economy. Things they don’t talk about on TV”; apart from its commercial success, its current overestimation was pointed out as well. The graph below, which illustrates the changes in the company's shares prices over the period of last three months, proves this statement to be correct (source: Yahoo Finance).

We should also mention the US natural gas market, which was highly volatile in the last month. In the previous economic review, we forecasted a gradual growth of gas quotations on the Chicago Mercantile Exchange (CME). One of the factors able to contribute to the gas price strengthening in the short term was the NOAA temperature increase forecasted for the most part of the US territory in late July/early August. The graphs below provided in the June review, illustrate this forecast (source: NOAA National Weather Service).

However, a cold temperature accompanied by pouring rains and thunderstorms stayed on the US East Coast and in Midlands for a longer time than predicted by the NOAA specialists; the graph below illustrates last two weeks' temperature anomaly when compared to the average temperature of many years (source: NOAA National Weather Service).

The worse weather conditions resulted in the falling prices of natural gas in the US as well as of  derivative financial instruments tracking the changes in the gas prices, such as the UGAZ ETF, which accounts for a great part of the WellMax Premium investment portfolio. The cost of the assets invested in the fund from July 10 to August 4 dropped by 14.5% (source: Yahoo Finance).

However, we were understanding that despite the weak prices in the short term, a slow growth of natural gas supplies in the US would provide significant support for gas quotations in the medium and long term. According to our assessment, if the present pace of gas injections to underground storages is kept, the gas volume in the country will significantly drop not only below the level of the previous early heating season, but also below the average rate of last 5 years. That will result in the growing gas prices.

Considering our forecast we didn't abandon the asset but on the contrary increased the volume of invested funds; in our opinion, the gas price of early August is rather underestimated. Besides, we decided to share the information with our clients, partners and investors and sent the letter on August 4 with the idea to consider this investment. Those who had used the information, already managed to gain a significant income: considering the chart below illustrating the price changes (source: Yahoo Finance), those clients who bought the UGAZ shares on August 4, have earned over 20% over 7 days.

Whereas, despite the continuing high volatility of natural gas prices in the US and of the related derivative instruments (UGAZ), in our opinion, these quotations still have the potential strengthening and we are likely to keep to the forecast of gradual growth of gas quotations by late 2017.

In the letter dated August 4, we also mentioned the Southwestern Energy Company shares, which is a producer of shale gas. The quotations of this issuer have not started to grow yet (source: Yahoo Finance), however according to our assessment, this company's securities account for a significant part of our portfolio and have the potential strengthening by the heating season of 2017/2018.  

The decreased value of the RUSS ETF had a bad effect on the growth of value of the WellMax Premium investment portfolio. The RUSS ETF aims at gaining profit from the weaker Russian stock market; the latter provided almost no reaction to the new American sanctions, which led to a slight decrease in the portfolio profit in the last month.  

Meanwhile, we expect that the new upsurge in sanctions will not only boost capital outflows from the Russian market but will also lead to a weaker ruble; we continue keeping our forecast regarding it (gradual weakening of the Russian currency by the end of this year by 10% and above of the level 56.5 rubles per 1 USD). In our opinion, in the short term, the ruble will be supported in some way by the coming tax period with its peak on August 25, when the Mineral Extraction Tax, Value Added Tax and excise taxes are to be paid. However, in the mid-term and long term, a combination of negative factors (a tougher sanctions regime; geopolitical risks; the negative balance of payments; narrowing of the interest rates; etc.) will continue putting a strong downward pressure on the Russian currency. The ruble's stabilization of late July/early August was first of all due to the positive price changes in the oil market started at the end of last month.    

Oil quotations started to grow on July 24, upon the statement of the Minister of Energy of Saudi Arabia Khalid Al-Falih. The Minister announced the country's intention to limit its oil export to the level of 6.6 million BPD in August 2017, which is 1 million BPD less than in August of 2016.

The US Department of Energy weekly oil report released on July 25 provided another support for the price rally started in the oil market. According to the reported data, the US stocks of crude oil decreased by 7.2 million barrels over the week ended on July 21. This figure is much above the level the market expected (2.6 million barrels). Besides, according to the report, the US decreased oil production by 17 BPD, which has been the first fall since early June of 2017 (excluding a short production drop due to the tropical storm in the Gulf of Mexico in late June). The combination of these factors made oil price soar above the level we mentioned in the previous economic review and stay above 51.5 USD per barrel of Brent.   

It also should be mentioned that the significant decrease in stocks as well as the stagnation of oil production in the US are not a one-time occurrence. Overall, according to the DEO reports, the US commercial oil stocks have decreased by around 15.2 million barrels over last 3 weeks (instead of 8.3 million barrels the market expected); the chart below illustrates the decrease.

At the same time, the stagnation replaced the growth of oil production in the USA, that indicates the current level of output as close to the maximum (we mentioned it in the previous review). Meanwhile, it has to be considered that the pace of growth of drilling activity in the US is slowing down, which reduces the country’s capacity to increase the level of output in the future.

In August, the OPEC countries oil production data impeded further growth of oil prices. According to the Reuters information released on July 31, in July the OPEC oil output increased by 90 thousand BPD and accounted to 33 million BPD, which has been the highest level of output since the beginning of 2017. The main reason for the cartel's growing output is the rapid pace of restoring production in Libya that had been excluded from the agreement and increased oil production by 351 thousand BPD rising above 1 million BPD (1.03 million BPD in July) for the first time over last five years. The OPEC-11 (excluding Libya and Nigeria) compliance with the output cut agreement fell to 84%, in its turn.

According to the International Energy Agency (IEA) monthly report released on August 11, the cartel's countries increased their oil output by 230 thousand BPD up to 32.84 million BPD, while the overall compliance with the OPEC+ agreement dropped to 75%.     

It also should be mentioned that oil prices almost did not react to the continuing growth of output in the cartel's countries while Libya and Nigeria increased oil output by 810 thousand BPD over the 4 months' period, from April to July; we mentioned these countries as a risk factor for oil prices in our previous economic reviews. At the same time, we cannot exclude possible troubles with oil deliveries beyond the schedule from both North African countries due to the political turbulence there.  

Besides, it should be considered that the growing oil consumption in the world also contributes to the withdrawal of oil overstocks from the market, which leads to the reduction of the world’s oil stocks, in its turn. For instance, according to the IEA data (provided below), the commercial oil stocks in the countries-members of the Organization for Economic Co-operation and Development (OECD) fell to 3,021 million barrels in June. Though this figure is still 219 million barrels above the average rate over last 5 years, it’s less than the record rates of last year.  

If the status quo remains through August, oil prices will be most likely to settle at the relatively high level above 50 USD per 1 barrel of Brent. However, due to the end of summer car season and partial halt & maintenance of oil refinery plants in autumn, the demand for crude oil in the US is likely to plummet. This may lead if not to the growth then at least to stabilizing commercial stocks of oil in the US, resulting in a price lower than the psychologically important level of 50 USD per one barrel of Brent, mentioned above. Considering the huge number of uncertain factors influencing the market, the volatility in oil market is likely to increase; in our opinion, this may lead to a broader price band, from 46 to 56 USD per one barrel of Brent.

The escalation of tension related to North Korea puts another pressure on oil prices. Tough talks of Washington and Pyongyang along with mutual menaces of using military force resulted in last weeks’ fall of the global securities markets as well as to a higher demand for protective assets including precious metals, Swiss franc and Japanese yen.

Amid the conflict development, US dollar also got stronger when compared with the main currencies including euro. However, on Friday, August 11, dollar started to fall in comparison with euro amid the release of the US Department of Labor disappointing inflation report. According to it, in July, consumer prices in the country grew only by 1.7% per annum. This rate is below the Fed’s target rate of 2%; this makes another increase in the Fed’s interest rate by the end of this year even less possible and leads to a weaker dollar. In September, there will be other important events, able to affect significantly the dynamics of the EURUSD exchange rate: meetings of the US (Federal Reserve System) and EU (European Central Bank) central banks; the German Bundestag election. 

At the moment, euro is most likely to have almost no potential growing in relation to US dollar. In our opinion, closer to the level of 1.19, “speculating bulls” will start to lock in profits, which may lead to adjustment of the exchange rate, and even to a new trend in this pair of currencies, if there is positive data released regarding the US. Thus, in our opinion, the main possible price band of the EURUSD exchange rate is 1.15-1.20 for the next month.   

Considering the events of last weeks, we can say that the period of tranquility in global markets is over: the volatility index VIX, also known as the “Index of fear” has grown by 56% over last 5 days, while tension between North Korea and the USA is going to increase. It is most likely that there is quite a turbulent and highly informative period in store for us. A period of high volatility, which demands market participants to take rapid investment decisions based on a deep and accurate analysis, i.e. those competences, which have always been strong sides of the International Financial Community team.

Yours respectfully,

The IFC team