Weekly Market Update – 07.02.2019

Weekly Market Update – 07.02.2019

 

US ban on Venezuela’s oil export and OPEC production cut let crude oil rise

• The Trump administration puts a ban on oil exports from Venezuela into US and  a ban on oil processing product exports from US companies to Venezuela. This partially explains the rise in WTI and Brent crude oil.
• The US Treasury department has as well restricted trading in Venezuela’s government bonds (Moody’s C- and S&P D-rated). However, since the possibility of the end of Maduro’s regime Venezuela’s 10 year government  bond has risen almost 40% and trades now at around 32.
• We consider these bonds as too risky for discretionary portfolio’s. But we believe that in case of a regime change theses bonds have more upside.
• In the latest update from UBS about Venezuela there are two interesting conclusions, which we have in common. We expect that crude oil will further increase during 2019,  not only because of Venezuela but also because of the measurements the OPEC has taken to support higher oil prices.
• The implications considers Russian assets: Rosneft (BBB-)  used to have a significant exposure to Venezuela’s oil industry. This exposure was significantly reduced over the last 5 years. Their bond prices have been rising since the beginning of December 2019.

 

 

• The latest PMI data shows that apart from the US we see a further slow down of industrial activities. The likelihood for further stimulus in the Eurozone has risen. European banks must refinance a substantial part of their outstanding debt.
• The ECB might therefore impose another target longer-term refinancing operations (TLTRO) program to further stimulate the economy.
• That would mean not only is there no hike in the Eurozone in 2019 due to the weaker growth but also that the quantitative easing would see a revival.
• The FED is as well on hold, although the latest job report and PMI data indicate that the US economy might be stronger than what the FED communicated recently. For consistency reasons the Fed might wait until September to reconsider a next rate hike.
• Overall this supports corporate bonds. Since the beginning of the year US high yield bonds and emerging market corporates rose around 5% which is about half of the return of US and emerging market equities. If this bond rally were to continue at the actual pace, we would  see more than 50% total return for 2019, which is very unlikely

 

 

Bonds Covered
Ford Motor 5.596 2022  (Ford Motor 2022 5.596)
XPO Logistics 6.5 2022 (XPO Logistics 2022 6.5)

 

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