Oil prices consolidated and closed lower this week after the surge at the beginning of August. Sabotage acts, a pipeline fire and power shortages in the south of Iraq have not been able to increase the oil price further this week as such incidents might already have been priced in. The long awaited news was that Iraq started exporting oil to Turkey from its northern fields of Kirkuk. It caused a slight decline in oil prices. But it has to be seen how steady the flow will be. Prices were sent down further by the announcement of increased crude stocks in the US. The lower prices have also been a relief for Opec that has claimed that the market would be well supplied and that there were no fundamental reasons for such high prices.
Also remarkable was the move of five energy mayors which are trying to get a foot in the state-controlled, and for outsiders long closed, Mexican gas market. They are to bid for the development of Mexican gas fields. The companies involved are Exxon Mobil, the Spanish Repsol, Total from France, the Canadian Nexen and Brazilian state-owned Petrobras. Until now, all natural gas exploration activities have been controlled by the state company Pemex, the world's seventh-largest petroleum company. However, in order to meet ambitious production rises, the company needs foreign technical assistance and fresh capital. But there are already opposing voices in Mexico who do not like foreign companies involved in their oil business.
In the US, there has been a dispute over the merit of dividends. With the economic recovery, dividends are raising but not everybody is convinced that it will do any good to the investors. There is the view that companies that pay dividends, and therefore funnel less money into their businesses, will generate less growth and see smaller share price gains. In the recovery, investors will be looking for more speculative small-cap stocks. This would lead to a better performance of stocks without dividends. However, it has to be noted that over years, dividend payers outperform growth stocks. Dividends have a further advantage that the management cannot use the idle cash to undertake projects with a poor performance. The discussion is likely to continue.
The Japanese stock market has had a good week, which could have been due to a shift of the policy of the Japanese Central Bank (BoJ). The Ministry of Finance ordered another intervention on the foreign exchange market and this time it was massive. Only in the three month to June, the BoJ spent about $40 billion in Yen to purchase dollars. This campaign has kept the Japanese currency below Y115 against the dollar. This is the first time the BoJ intervened on such a big scale. However, the bank denied that it has changed its behaviour and started to expand the Japanese monetary base. Supporters of another policy have been angry, that the BoJ always squanders their efforts by denying its actions..
On the other side of the world, it is Mexico that hopes to gain from a weaker local currency. The Mexican peso has fallen from 10.37 in July to 10.77 against the US dollar this week. Last spring the peso was 9 to the dollar and therefore a significant burden for the Mexican export industry. The currency increase was caused by a fall of inflation to less than 1.5 percent in the first seven month of the year. The recent welcomed fall can be explained by extra risk aversion of investors and the increased competitiveness of Asian economies. For the country which has close ties to the US economy, the lower peso is the opportunity to increase exports and create more jobs.
As West European countries are struggling with growth problems and the inertia to reform their social security systems, investor attentions has shifted to East Europe. First, the focus was only on Poland, Hungary and the Czech Republic. This has however been changing now. Investors are seeking opportunities in the Baltic States or even in Bulgaria or Romania. Bets are placed on the East European countries? convergence with Western Europe. Bond yields and consequently interest rates have been tumbling and currencies strengthening. Sometimes, this has happened to such an extent that it has become a problem for the export industry of the countries. At a certain time, investors were buying all convergence candidates but that has changed and markets have become more selective. The large budget deficits and current account imbalances could become a problem, but it is speculated that the expected growth rates would more than outweigh the risks involved.
Author: Andreas Wild
