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 November 2018, the value of assets of the WellMax investment portfolio increased by 1.05% in USD and EUR, which is equivalent to 13.35% per annum with monthly compounded interest. There was a 15.22% yield per annum in rubles and a 13.61% yield per annum in yuans with monthly compounded interest. 

Despite the increased volatility in the world’s stock and commodity markets, the WellMax Premium portfolio also showed a significant growth over the last month. Over the period from October 10^th, 2018, to November 10^th, 2018, the value of assets of this investment portfolio increased by 4.62% in USD.

Last month’s growth in the value of assets of the WellMax Premium investment portfolio came, in many ways, as a result of the positive dynamics in the US natural gas market, which we had forecast in our previous economic review.

Indeed, since the previous economic review was written (on 17/10/2018), the December price of natural gas futures has grown by more than 27% in the US, breaking through the psychologically important level of $4/million BTU, which can be seen on the chart below (source: CME Group).

The rapid price growth, reaching the three-year high, was caused by a whole range of factors mentioned in the previous economic review. The early start of the heating season in the US, combined with the poorest gas stocks in underground storages since 2005, serves as a foundation for the price rally. It can be seen on the chart below (source: EIA).

Combined with the mid-November early frosts, the poor stocks signify the risk of gas shortage, especially in the north-eastern part of the US, which contributes to the growing price of this particular fossil fuel. As we mentioned in the October economic review, the producers of shale gas (whose quotations we have been closely tracking throughout the recent weeks) would be the main beneficiaries of the gas price growth.

As we had forecast in our previous economic review:

following a short correction, the euro exchange rate resumed its decline against the US dollar, breaking through the psychologically important level of 1.13.

Currently, the EURUSD currency pair is being traded at the lowest rate since the June, 2017. The factors pushing the euro down against the US dollar since the early 2018 remain the same as those mentioned by us in the beginning of this year. The main one is the divergence between the world’s two leading central banks, the ECB and the Fed.

• Dollar liquidity withdrawal vs the issue of the euro:

The US Fed’s balance sheet shrinkage continues increasing, along with the subsequent withdrawal of dollar liquidity from the market (to which we made numerous references in our previous economic reviews). According to the Fed’s plan, the balance is to be reduced by $420 billion in 2018, and by $600 billion in 2019, with overall shrinkage exceeding $1 trillion. The situation, in which the supply of a commodity (in this case, the commodity being the dollar) decreases, while the demand remains unchanged or goes up, results in the shortage of the said commodity, and thus, the price growth. In its turn, the ECB will proceed with monthly bond purchases of EUR15 billion till at least December 2018. 

• Record-breaking interest rate differential between USD and EUR:

The key interbank interest rate in USD (1-year LIBOR) has already exceeded 3.1%, whereas the euro LIBOR is at the level of lower than -0.2% (see the chart below). There has never been such a huge difference between the rates, not since the original issuance of the Common European Currency, as can be seen on the graph below (source: FRED Economic Data). Such differential is currently putting, and will further continue to put severe pressure on the euro exchange rate against the US dollar.

• The US economic outperformance, as compared with the Eurozone:

Indeed, the US GDP grew by 3.5% in the 3^rd quarter of 2018, compared with the 2^nd quarter of 2018, whereas the Eurozone’s GDP grew by a mere 0.2% over the same period.

At the same time, it should be mentioned that many countries (including Russia, China, countries of the Eurozone, etc.) have observed the intensified “de-dollarization of economies”, i.e. the reduction of the share of the US dollar interstate settlements, and an accelerated shift to settlements in national currencies. De-dollarization comes as one of the outcomes of the Trump Administration’s foreign policy. Weaning off the dollar is a long process. Thus, it is likely to take years before it significantly affects the USD exchange rate. However, there is no doubt that this factor will contribute to the dollar’s weakening against the major currencies in the long term. 

Currently, the euro continues experiencing even more pressure from the Italian budget issue, in which Rome and Brussels have not as of yet reached an agreement. The Italian government continues insisting on the populist budget items, such as increasing social spending, tax cuts, and lowering of the retirement age. According to the calculations by the Italian Parliament, this is likely to result in the 2019 budget deficit growing to 2.6% of the GDP (whereas budgetary regulations limit this figure to 2.4%).

It would be an unaffordable luxury for the Italian economy, which is overburdened with debt. As we wrote in the October economic review, Italian government bonds had showed a significant price drop, with their yield reaching that of the period of the country’s debt crisis, following the disagreement between Rome and Brussels regarding Italy’s budgeting. More public spending, along with the growing government debt and the falling bond prices, may result in the country’s incapacity to repay its obligations. At this point in time, the scenario of Italy’s national bankruptcy appears highly unlikely. However, the current trends are causing widespread anxiety among investors. It is to be recalled that the ECB is planning to end the monthly incentive program of EUR15 billion in December, which, in fact, means that the only large buyer is about to exit the Italian government bond market. Thus, there is no doubt that Italy’s current situation is a risk factor bearing unpredictable consequences for the euro.

Last month, the oil market also showed dramatic price fluctuations. Despite the rather severe sanctions imposed on Iran, the oil price reverted to the level of early 2018, after it had started to plummet in the early October.

The oil price decline has, in a way, set a record. In the past, the WTI crude oil price has only seen five 9-day slumps, whereas its current downward trend lasted twelve trade sessions in a row.

The main reason of the oil quotation crash was the high volume of oil production in the US. According to the weekly data from the US Department of Energy, the country had increased the production by 400 thousand bpd over just one week, to 11.6 million bpd, which can be seen on the chart below (source: EIA). Released on November 7^th, this information came as a great surprise for the investors.

Thus, the USA, which produced about 5 million bpd as far back as 2010, has officially became the world’s largest oil producer. Such an astonishing growth, along with the rapid increase in US oil stocks (which surpassed the market’s expectations) came as one of the key factors contributing to the further decline of oil price. Besides, the oil price experienced even more pressure from the information published by The Wall Street Journal on November 8^th. According to the newspaper, Saudi Arabia is researching the potential impact that the possible dissolution of the OPEC may have on the oil price. According to some experts, the research is backed by Saudi Arabia’s concerns that oil demand will plummet to the level, at which the cartel would no longer be integral to the market, rendering it virtually useless. In this regard, the investors are also worried by the US plans to authorize American courts to take action for antitrust violations against the states that participate in cartel agreements in the international oil market (the related bill called No Oil Producing and Exporting Cartels Act has already been drafted by the US Senate Judiciary Committee).

Last month’s ruble dynamics followed the forecast from our previous economic review. 

The main factors supporting the Russian ruble over the last month were the Central Bank’s decision to suspend the purchase of foreign currency for the Ministry of Finance till the end of 2018, as well as Russia’s overall macroeconomic stability, as we had written it in our previous review. Despite the downward trend of the oil price, those factors allowed the ruble to consolidate at 64-70 rubles/1 USD, as we had forecast in our previous review. 

We also continue to follow the situation in the silver market, with silver trading at the lowest price since 2015. With silver being both an investment and a hedging asset, the silver price is experiencing pressure from the US Fed’s current monetary policy (the growth of the rates and balance sheet shrinkage), while a possible global economic slowdown, expected by the economists within the next two years, is affecting the assessment of silver as an industrial metal. At the same time, we cannot exclude the possibility of volatility surges in the silver market in case of growing geopolitical tension, and should they occur, we will be sure to take advantage of the opportunity.

Considering the high volatility of the world’s financial markets, the record-breaking oil price slump, lasting trade disagreements between the US and China, as well as the upcoming trade negotiations between the leaders of the two largest economies, we are about to enter an informationally rich and volatile period. The growing uncertainty and volatility of the world’s financial markets provide more opportunities for our clients and for us, since the skill to analyze news cycle and the ability to make swift investment decisions have always been the strong suit of the International Financial Community team.

Faithfully yours,

IFC team