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

In February 2018, the value of assets of the WellMax investment portfolio increased by 1.12% in USD in EUR, which is equivalent to 14.3% per annum with monthly compounded interest. There was a 15.18% yield per annum in rubles and a 14.36% yield per annum in yuans with monthly compounded interest.

The value of assets of the WellMax Premium investment portfolio increased by 8.25% in USD over the period from February 10th, 2018 to March 10th, 2018.

Last month’s increase in the WellMax Premium investment portfolio asset value came, first and foremost, as a result of the renewed growth of the gas company stocks represented in our portfolio. In general, the stock market remained highly volatile. However, over the last month, the stocks of shale companies Southwestern Energy Co. and Gulfport Energy Co. showed substantial growth. The publication of companies’ reports for the fourth quarter and the year 2017 was a contributing factor, as their results turned out to exceed the market expectations.

Thus, in a month from February 10th to March 10th, Southwestern Energy Co. stocks increased by 17.9% and Gulfport Energy Co. grew by 21.15%, whereas the S&P 500 increased by 6.4% and the Dow Jones Industrial Average grew by 4.7% only, which can be seen on the chart below (source: Yahoo Finance).

In our opinion, the stocks of shale companies present in our portfolio will continue growing in the short term, due to a range of internal and external factors, which are as follows.

Firstly, the stocks of the issuers we chose to invest in are undervalued, based on several criteria, such as market capitalization/net profit to assets ratio, the difference between sale price and cost of production, and so on.

Secondly, the sale price of the companies’ products will go up even in the case of a drop in gas prices in the south of the country, thanks to the rapid development of the gas transport infrastructure in the north-east of the USA. This development will result in a decreased price difference between the lower price in the north-east of the U.S., in the Marcellus/Utica fields area (the location of the companies' oil production), and the higher price in the U.S. south, in Louisiana, which is tracked by gas futures.

Besides, it should be mentioned that the U.S. LNG export is growing, with the LNG export terminals being put into operation, as can be seen on the graph below (source: U.S. Energy Information Administration).

Rapid development of the U.S. export capacity will expand the U.S. gas export geography to both Americas and even beyond, reaching markets in the Asia-Pacific region, which are more competitive. This, in turn, will also contribute to the growth of gas issuers’ stocks.

Last month’s volatility in the oil market was caused by a reduced interest of investors in risky assets amidst the stock market correction, along with the continuing record-high oil production in the US.

According to the latest data from the U.S. Department of Energy, the country’s oil production had increased by 12 thousand bpd to 10.381 million bpd over the week ending on March 9th, which can be seen on the graph below.

Overall, since the beginning of 2018, oil production in the U.S. has increased by almost 600 thousand bpd, from 9.782 million bpd to 10.381 million bpd. It should be noted that this figure is the absolute record in the U.S. history of oil production. Besides, the U.S. oil production level is already higher than that of Saudi Arabia, which reached 9.981 million bpd in February, according to the OPEC monthly report, published on March 14th.

At the same time, the country’s growing number of operating oil rigs means that the growth of oil production is going to continue in the medium term, which will negatively affect oil prices.

Besides, it should be mentioned that the U.S. commercial oil stock ceased to go down and started to increase. Despite the fact that this change was expected, it has become another factor curbing price growth.

However, the growth of commercial oil stock in the OECD countries is an even bigger cause for concern, as it is one of the main indicators of the success of the efforts by the OPEC + countries, aimed at decreasing oil surplus on the global market. Thus, according to the primary data from the OPEC monthly report, released on March 14th, the OECD countries’ commercial oil stock grew by 12.8 million barrels in January. Although the figure is quite moderate, this represented the first increase of the rate over the last 5 months.

In the same report, OPEC for the first time forecasted an increase in oil production in countries beyond the OPEC+ agreement (primarily the USA), which would surpass oil demand growth in countries beyond OPEC. This is expected to happen as early as March.   

As the above-mentioned factors continue to negatively affect the market, oil prices are most likely to remain under pressure. Thus, we cannot exclude the possibility of a drop in Brent oil price to the psychologically important level of 60 USD/barrel. At the same time, in this eventuality the OPEC+ countries are likely to use verbal interventions, as they require the price above 60 USD/barrel to balance their budgets. Besides, the record-high level of compliance with the oil production cut agreement by the OPEC countries (which, according to the Reuters research data, amounted to 149% in February), is also bound to keep the price high.

It should also be noted that the total of oil open positions remains at very high levels. Considering the general high volatility of the market, jump-like changes of oil prices are possible. This makes it difficult to forecast the situation, and expands the price band. Next month, the latter is most likely to be 59-68 USD/Brent barrel.

As we are getting closer to the presidential elections, the ruble exchange rate is most likely to remain rather stable. However, oil, the possibility of toughening sanctions, and the stock market all remain risk factors.   

A relatively high oil price of over 60 USD/Brent barrel has remained unchanged in the market since last November. This fact, along with the upcoming presidential elections, led to stabilization of the ruble exchange rate at its current high level of 55-58 rubles/1 USD.

High sustainable demand for Federal Loan Bonds was yet another factor leading to strengthening of the ruble. The demand resulted from exclusion of the possibility of sanctions on Russia’s sovereign debt by the U.S. Department of the Treasury, as well as from Russia’s foreign currency sovereign ratings being upgraded by the Standard & Poor’s rating agency, from the ‘junk’ level of BB+, to the investment grade of BBB- in the late February.

At the same time, it should be mentioned that the scandal following the poisoning of GRU’s ex-officer Sergei Skripal and his daughter increased the risk of new sanctions against Russia and Russian officials. Currently, the ruble exchange rate has only slightly decreased after the expulsion of 23 Russian diplomats due to the poisoning of GRU’s ex-colonel. However, considering public response worldwide, Britain’s call for urgent UN Security Council meeting, and the US support of London in this issue, Russia may suffer rather grave consequences for both the national economy and the ruble exchange rate.  Analysts and observers provide different assessments of possible consequences. Some of them believe that the consequences will be limited to Russia expelling British diplomats in response, and the exchange of protest notes between the countries. Others consider a ban on purchases of Russian securities by the residents of the countries which joined the sanctions to be a possible scenario, among other alternatives. Moscow, in turn, may respond by imposing restrictions on the circulation of cash foreign currency on the territory of the RF. In our opinion, the second scenario is hardly possible at the present moment. However, the situation may escalate in the future.

Gradual narrowing of the gap between the interest rates of Russia’s Central Bank and the US Federal Reserve System, mentioned in our previous economic reviews, remains a long-standing but unavoidable negative factor affecting the Russian ruble exchange rate. The narrowing of the gap will also negatively affect the carry trade strategy and capital inflow to Russia in the future. Thus, at the meeting on February 9, Russia’s Central Bank decided to decrease the base rate from 7.75% to 7.5% per annum. Combined with Russia’s President’s pre-election plan to cut the mortgage interest rates to 7%, as well as the record-low inflation rate in the country (which we mentioned on our Telegram channel t.me/wellmaxinfo), in 2018 the base rate will continue to decrease. In turn, as we mentioned earlier, the US Fed forecasts at least three base rate hikes for 2018.

Thus, in the short term, the ruble exchange rate is likely to remain relatively unchanged. However, in the medium term, the possibility of new sanctions and of an oil price drop, as well as the high volatility of global stock markets, put the Russian currency at risk.

EURUSD: ongoing shuffle in the administration and the risk of a global trade war prevent dollar from strengthening

Last month, US President Donald Trump was still the main newsmaker of the world. Having not yet recovered from the crash of the early February, the US market suffered another correction in late February/early March, as, on March 1st, during his meeting with heads of American metal companies, Donald Trump announced his intention to introduce a 25% tariff on steel imports, and a 10% tariff on aluminum imports. As a result, the possibility of a trade war between the USA, China, and the Eurozone started to alarm market participants. Trump signed the new import tariffs on March 8th, with the only exemptions being Canada and Mexico, America’s NAFTA partners. However, the tariffs may be imposed on their exports, too, in case of a failure to negotiate NAFTA reorganization.

Following his disagreement with the President regarding the new tariffs, the free-trade advocate and ex-president of Goldman Sachs Gary Cohn, who had been serving as an economic advisor to Donald Trump, resigned. Another bombshell from the White House was the firing of Rex Tillerson, the now-former US Secretary of State, and the nomination of the current CIA director Michael Pompeo to this post. These firings and the reshuffling of the key people in the Trump Administration also added to the drop of American stock indices, as a factor of political uncertainty.

The Trump Administration reshuffling, along with the risk of a global trade war, negatively affected the US dollar against the other main currencies, including the Euro. At the same time, the Euro failed to achieve its record-high exchange rate of early February, due to the ongoing influence of fundamental factors over this currency pair. Those include a faster growth of the US economy as compared to the Eurozone; the ongoing toughening of the Fed’s monetary policy against the European Central Bank’s zero rate; Trump’s tax reform; etc.

However, it should be mentioned that the toughening of the monetary policy, along with the withdrawal of dollar liquidity from the market (that we described in our previous reviews), led to more expensive borrowings in USD and, as a result, to the growth of borrowing in euros. This positively affected the demand for euro, and thus, its price.

At the same time, in the event of another sell-off at the stock market, the capital will flow from risky assets to U.S. Treasuries. This may lead to a more expensive dollar. There are the several factors that prevent us from forecasting the future price range for this currency pair. They include volatility, which significantly increased in the market in general, and in the currency market in particular. Also, there is uncertainty with regards to central banks’ policies, caused by the current situation on trade platforms, and the recent replacement of the head of the Fed.
 

A few words about Bitcoin

Last month, the market of cryptocurrencies, which was under much pressure in early 2018, showed considerable price movements, as well. Reaching its peak at 19,345 USD per coin on December 16th, 2017, bitcoin had lost almost two-thirds of its value by February 5th, 2018. Even despite the February price leap, bitcoin failed to settle at 11,500 USD, and underwent dramatic corrections again in early March. It should be noted that in our November economic review we wrote about the possibility of the “bear” scenario, due to no significant correction over 2017, as well as the skeptical attitude of the “big capital” towards cryptocurrencies. Besides, as we forecast it in the previous economic review, bitcoin’s volatility decreased over short time spans (hours, days). We continue tracking this asset, however, we won’t provide any certain forecasts, as the market isn’t dominated by professional investors, but by speculative players.

Considering the increased volatility of global stock markets, lower investor interest in risk, replacement of the head of the Fed, the possibility of a trade war, the growing deficit of the US budget, the US sovereign debt boost, there is a prospect of a quite a turbulent and highly volatile period. A period, which will demand from the market participants to make rapid investment decisions, based on a deep and accurate analysis, i.e. the very competencies that have always been the strong suit of the International Financial Community team.

Yours faithfully,
IFC team