The Daily Prophet: OPEC Flexes Its Muscles And No One Cares

Connecting the dots in global markets.

Remember when OPEC meetings meant something? Me neither. The members of the cartel must be wondering what exactly they have to do to regain their former glory and influence after the price of oil tumbled, even though the group reached an agreement in Vienna today to extend production cuts for nine more months.

Six months after forming an unprecedented coalition of 24 nations and delivering output reductions that exceeded expectations, resurgent production from U.S. shale fields has meant oil inventories remain well above the level targeted by OPEC ministers, according to Bloomberg News' Wael Mahdi, Grant Smith and Javier Blas. Oil bulls were also disappointed that no new non-OPEC countries will be joining the pact and there was no option set out to continue curbs further into 2018. The disappointment wasn't confined to the commodities market, as shares of big oil companies such as Chesapeake Energy, Marathon Oil and Transocean all tumbled. Over in the bond market, traders lowered their inflation estimates, given that it doesn't look like the price of crude is going to rebound any time soon.

Saudi Arabian Energy Minister Khalid Al-Falih said maintaining the same level of production through March 2018 “is a very safe and almost certain option to do the trick.” He later added that he hopes U.S. shale oil producers will moderate their growth after adding rigs and increasing America's production. "The Saudis have been trying to put a happy face on this thing," John Kilduff, a partner at Again Capital, a New York-based hedge fund that focuses on energy, told Bloomberg News' Meenal Vamburkar. "But this is all they could get, and that’s disappointing to the market."

It hasn't been a very impressive rally, but the S&P 500 Index has managed to rise for six straight days. That's the longest streak since it gained for seven consecutive days in the period ended Feb. 15. The benchmark has now fully recovered from the selloff a week ago that was sparked by House Speaker Paul Ryan's inability to reassure markets that Congress can simultaneously investigate potential Russian meddling in the U.S. election and possible ties to President Donald Trump’s campaign while advancing the administration’s pro-growth legislative agenda. So, who is buying? Bloomberg News reporter Lu Wang found that data compiled by Bank of America on its client flows show the biggest source of demand has come from companies themselves, which have raised buybacks to the highest level of 2017. Hedge funds also partook in the spree after spending most of the time since mid-March scooping up shares. Institutional clients such as pension funds, for one, have been net sellers for 14 straight weeks, Bank of America data show. Reluctance can also be found among wealthy individuals, who reduced holdings after two weeks of purchases.

One of the big surprises in markets this year has been the performance of the bond market, which many had expected to suffer under Trump's pro-growth policies. Instead, persistent demand for Treasuries is spurring Wall Street strategists to slash their yield forecasts -- again -- and whether the Federal Reserve winds up raising rates again has little to do with it, according to Bloomberg News' Brian Chappatta and Liz Capo McCormick. At about 2.25 percent, 10-year yields are plumbing 2017 lows as the central bank signaled not only an imminent rate hike, but also a gradual approach to shrinking its massive bond portfolio. Big bond dealers such as Goldman Sachs and JPMorgan Chase cut year-end yield forecasts this month, while maintaining calls for more tightening. The underlying message: While the economy may be robust enough to warrant further Fed moves, the bond-market forces that drove yields to record lows last year are still intact: tame inflation data, waning confidence in Trump’s agenda, haven demand amid rising geopolitical risks and a growing conviction that the bond market will smoothly digest the transition to a smaller Fed balance sheet.

It was a big day for metals, as copper rose to a three-week high after Freeport-McMoRan dismissed striking workers at the world’s second-largest mine for the metal, casting a cloud over the supply outlook. The IndustriALL global union said Wednesday that Freeport has issued 2,018 “voluntary resignation” notices to workers who were absent for more than five days at the Grasberg site in Indonesia, according to Bloomberg News' Luzi Ann Javier, Danielle Bochove and Mark Burton. Copper has climbed 24 percent over the past year as mine disruptions in Grasberg and Escondida in Chile raised concerns about global shortages. Inventories tracked by the London Metal Exchange have fallen as orders to withdraw the metal in warehouses in Asia swelled on Wednesday to the highest in more than six months. Copper futures for July delivery gained 0.5 percent to $2.5975 an ounce at 12:18 p.m. on the Comex in New York, after touching $2.6195, the highest for a most-active contract since May 3.

Efforts by China to make the yuan a global currency that may one day challenge the dollar for supremacy are off to a slow start. The yuan's share of global payments fell to 1.6 percent in April, the lowest since October 2014, according to data from the Society for Worldwide Interbank Financial Telecommunications. For China’s leaders, the decline is a reminder that the policy has trade-offs, according to Bloomberg Intelligence economists Michael McDonough and Tom Orlik. Yuan depreciation for much of the period from mid-2015 through 2016 helped restore competitiveness to exports. But a weakening yuan was less attractive as a store of value, limiting its international appeal. Since the end of 2016, capital controls have brought renewed stability, but have placed another barrier in the path of international adoption. McDonough and Orlik say the lesson in the yuan’s shrinking global role is clear: If currencies are not freely usable, they won’t be internationally adopted. If they are freely usable, they won’t be easily controlled. That’s the trade-off that China’s policy makers will continue to wrestle with.

Friday brings the first revision to last quarter's gross domestic product numbers. The median estimate of economists surveyed by Bloomberg is for a bump to 0.9 percent from 0.7 percent. There's a little more than month to go in this quarter, but economists are wondering whether they will have to downgrade their forecasts for 2.4 percent growth after data showed the U.S. recorded its second-widest merchandise trade deficit in two years last month and inventories at wholesalers and retailers fell in April. Economists look to the advance report on trade and inventories -- the two most volatile parts of the calculation for gross domestic product -- to gin up forecasts for quarterly growth, according to Bloomberg News' Shobhana Chandra. In April, the trade gap in goods widened to $67.6 billion from $65.1 billion in March as exports declined and imports rose.

If you'd like to get The Daily Prophet in e-mail form, right in your inbox, please subscribe to this link. Thanks!

Oil Traders Fail to See the Bigger OPEC Picture: Jason Schenker

Fed Is Losing Its Influence Over the Bond Market: Gary Shilling

Beware of the Consequences of Low Growth: Mohamed A. El-Erian

Losing Faith in Free Trade Will Make U.S. Poorer: Ramesh Ponnuru

Offset Corporate Tax Cuts With Hikes for Investors: Noah Smith

    To contact the author of this story:
    Robert Burgess at

    To contact the editor responsible for this story:
    Max Berley at

    Before it's here, it's on the Bloomberg Terminal.