The Daily Prophet: Wall Street Has a New Parlor Game

Connecting the dots in global markets.

How low can it go? The price of oil, that is. Crude is in free fall, approaching $42 a barrel today, from $52 as recently as late last month, and it seems like almost everybody has an opinion on where the bottom is. There's no shortage of pundits saying prices could easily fall below the $30s a barrel.

Not even a drop in U.S. stockpiles was enough to dispel the pessimism that has struck the market this month as American supplies remain stubbornly above their seasonal average and production keeps rising. "This is like a falling knife -- wouldn't catch it right now," Amrita Sen, the chief oil analyst at consulting firm Energy Aspects in London, told Bloomberg Television. "We've had people call us and say this is the worst they've seen sentiment in 20 or 30 years. Right now, fundamentals don't really matter."

The ripple effects run wide. Currencies of oil-producing nations such as Russia are tanking, sovereign-debt markets are jumping higher as traders downgrade their inflation forecasts, and the energy-heavy junk bond market is wobbling. A wave of equity analysts cut dozens of oil-industry stocks on Wednesday, as views of the world’s ability to soak up a global oversupply turn increasingly pessimistic, according to Bloomberg News' Alex Nussbaum. Seaport Global Securities downgraded 51 explorers and oilfield service providers, including Apache, Continental Resources and Devon Energy, warning that crude could plunge below $30 a barrel next year. Barclays and Morgan Stanley slashed estimates for Schlumberger and the rest of the services industry, citing the potential for as much as a 50 percent drop in stock values. Big Oil wasn’t spared. Analysts at Macquarie Capital cut Royal Dutch Shell, Chevron, Eni and BP, warning the companies may require “further, painful cost reductions" if prices keep slipping. Capital One Securities cut Hess and three other exploration and production companies.

The number of junk-rated companies having their credit ratings cut is on the rise. S&P Global Ratings said Wednesday that downgrades doubled in May, to 42. That's the most since November. About 20 issuers were upgraded. The energy-heavy high-yield corporate bond market appears to have hit a wall. The Bloomberg Barclays US Corporate High Yield Bond Index is essentially flat in June after rising 4.49 percent in the first five months of the year. Whether the recent action just represents a pause that refreshes or reflects broader concerns about creditworthiness remains to be seen, but it's notable that the Markit CDX North America High Yield Index is spiking higher, suggesting investors are paying more to protect against the possibility of default. Oil has been one catalyst for the softness, as more energy-related companies were downgraded into junk territory in recent years. Open put interest in the iBoxx High Yield ETF has spiked to a record amid this retreat in oil, according to Bloomberg News' Luke Kawa. In their latest weekly report released Friday, the strategists at JPMorgan said they speculative-grade yields rising to 6.50 percent by year-end from 5.86 percent.

Forget tech. It seems traders can’t get enough of biotech shares, whose advance this week has made them the top performers among U.S. equities in June, according to Bloomberg News' Elena Popina, Lu Wang and Tatiana Darie Clinical breakthroughs and easing political pressure fuel investor appetite for biotech stocks that plunged the most in the S&P 500 Index last year amid concern over industry regulation and drug pricing. After threatening to give government more negotiating power over drug costs and accusing manufacturers of “getting away with murder,” President Donald Trump is expected to settle for an executive order that will be “constructive” and supported by the industry, according to Goldman Sachs analysts. Up almost 7 percent in three days, the iShares Nasdaq Biotechnology exchange-traded fund has seen some frenzied options trading, with more than 41,000 contracts changing hands on Tuesday. Almost three calls have traded for every put that bets on a decline. A ratio that lopsided hasn't been seen since July 2005, data compiled by Bloomberg show.

Much of the talk in emerging markets Wednesday was about MSCI Inc.'s decision to include Chinese stocks in its benchmark indexes, but the real action was in a market that didn't get in: Saudi Arabia. The country’s Tadawul All Share Index leaped 5.5 percent on Wednesday, the most since August 2015, as traders embraced a trio of key announcements. Hours after MSCI suggested it's moving closer to including Saudi Arabia, King Salman bin Abdulaziz Al Saud enacted a palace shakeup and restored a raft of benefits for state employees. The developments may continue to drive up Saudi equities for investors who anticipate inflows from passive funds, an emboldened economic-reform platform and consumers with more cash to spend, according to Bloomberg News' Samuel Potter and Filipe Pacheco. It’s a pivotal time for the kingdom. Stung by the slump in oil prices, Saudi Arabia has moved to overhaul its economy, and the ability to lure investment from overseas will be key to its plans. Inclusion in MSCI’s indexes could result in inflows to the stock market on the order of $9 billion, according to a calculation by HSBC Holdings.

Have pity on your local pound traders. The U.K currency has been whipsawed the last couple of weeks, first by a botched election campaign that raised new questions over Britain’s membership in the European Union, then by conflicting remarks from central bank officials. At one point, sterling gained more than a cent against the dollar Wednesday after the usually dovish Bank of England Chief Economist Andy Haldane told an audience that he came close to voting for an interest-rate hike at the bank’s meeting on June 15, surprising those who bet against the pound as it plunged Tuesday, according to Bloomberg News' Dennis Pettit. BOE Governor Mark Carney said Tuesday that this is not the time to raise rates, an observation that caused the pound to relinquish all of its gains scored after the bank’s Monetary Policy Committee voted 5-3 in a hawkish shift to maintain current policy. U.K. money-market rates jumped on Haldane's comments, with the perceived odds of a 25-basis point rate increase by the BOE in 2017 jumping to 60 percent from about 20 percent Tuesday.

It's been a busy week so far for Fed officials, and Thursday will be especially active. Governor Jerome Powell, St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester are all due to speak at events. The headliner will be Powell, who speaks at a hearing of the Senate Banking Committee on Fostering Economic Growth: Regulator Perspective. This event should be closely watched as Powell rarely speaks on the economy and monetary policy, but recently delivered a rather dovish speech noting that he did not see any signs of the economy overheating and that the labor market is not super tight, according to the economists at Bloomberg Intelligence. He stressed that the Federal Open Market Committee needs to continue to demonstrate a strong commitment to achieving its symmetric 2 percent inflation objective, they said. Since inflation continues to fall below the Fed's inflation target, Powell's remarks, particularly regarding a rather aggressive pace of balance-sheet unwinding, will provide clues with respect to the FOMC's thinking on the timing of the plan's implementation.

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The Fed Didn't See This Type of Bond Conundrum Coming: Ben Emons

Canada Should Be on Alert for End of Housing Bubble: Ben Carlson

Hedge Funds Prove to Be the Ultimate Survivors: Barry Ritholtz

Saudi Shakeup Is a Win for Economic Reform: Meghan L. O'Sullivan

Central Banks Should Recruit Foreigners: Ferdinando Giugliano

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