Financial markets this week continued to be directed macroeconomic uncertainty, especially deficit issues in both sides of the Atlantic. Risk appetite was hurt as the US Congress failed to agree on the 12 trillion saving plan over 10 years. While rating agencies affirmed that the US credit ratings would be maintained, downgrades of the outlook remained possible. In the Eurozone, signs of contagion have become more apparent. Germany's bond auction disappointed the market. It only received 3.89B euro of bids for 10-year bond sales worth of 6.00B euro. The market described the outcome as 'truly miserable' and a 'disaster' as it showed that the Eurozone's biggest economy has experienced difficulty in securing public funding. The situation in France, the second largest economy in the 17-nation region, was not better off. Following Moody's and S&P's, Fitch's warned that the credit rating of France is at risk. In a report to investors, 'the increase in government debt has largely exhausted the fiscal space to absorb further adverse shocks' without undermining the triple A status.
During the week, ratings of Portugal and Hungary were downgraded. Fitch's downgraded the credit rating of Portugal to BB+ from BBB-, citing the government would find it more challenging to lower its budget deficit in the midst of deepening recession. Yet, the agency still expected the country to meet its fiscal target both this year and in 2012. At the current rating, Fitch's view on Portugal is the worst among the 3 major rating agencies. Moody's rating is Ba2 while S&P continued to hold Portugal's debts in investment grade. Meanwhile, Moody's cut Hungary's credit rating by one notch to Ba1 from Baa3, signaling worries about the country's ability to lower its deficits as economy deteriorates further.
Both the FOMC and the BOE released minutes for the November meetings. The Fed discussed a wide range of tools to improve communication with the market. While some members favored language that specified a period when the funds rate was expected to be low, as opposed to a calendar date, other measures including nominal GDP targeting and inflation target were also suggested. The BOE policymakers voted unanimously to leave the Bank rate unchanged at 0.5% and the asset-buying program at 275B pound. The members acknowledged that 'the existing program of asset purchases would take a further 3 months to complete and market capacity made it difficult to increase the monthly rate of purchases substantially above what was already under way'.
France said earlier in the week it would impose unilateral ban on Iranian oil, a move in response to a UN report that the Arab country's development of atomic weapon. Yet, the French government later issued a statement clarifying that it would act together with the EU. In our opinion, sanction on Iranian oil shipment would not be meaningful unless it's joined Asian countries. It is because Asian countries such as China, India and Japan are key customers of Iranian oil.
According to the DOE/EIA, Iran is OPEC's second largest oil producer and the world's third largest exporter of crude oil. Last year, the country exported 2.2M bpd out of total crude oil production of 3.7M bpd. Geographically, Asian countries made up 60% of total exports with China alone contributing 20%. The largest oil importer in Europe was Italy which purchased 10% of Iran's exports last year. France indeed only bought 2% of the country's shipment last year. This is why the EU stated that an oil ban would not affect the region's energy security.
Meanwhile, the Arab League threatened to sanction Syria financially should the country not end bloodshed in 3 days. France proposed establishing 'humanitarian corridors' for transportation of humanitarian supplies. While the French has not proposed military intervention, escort of humanitarian supplies would inevitably require armed protection. While most of Syria's crude oil goes to Europe, the amount is insignificant and that's why European countries were not worried about worsening relationship with Syria. On the other hand, supporting sanction of Syria is probably in favor of Saudi Arabia, the West's major oil exporter, and its Sunni ally Bahrain. Putting the focus on Syria would help water down suppression in Bahrain.
Natural gas recovered after falling to the lowest level in more than 1 year last week. Yet, the outlook remained fragile despite the winter heating season. The DOE/EIA reported that gas inventory climbed +9 bcf to 3852 bcf in the week ended November 18. The reading in the prior week was revised down to 3843 bcf. Stocks were +23 bcf higher than the same period last year but +233 bcf, or +6.4%, above the 5-year average of 3 619 bcf.
Separately, Baker Hughes reported that the number of gas rigs fell -6 units to 865 in the week ended November 25. Oil rigs added +5 units to 1130 and miscellaneous rigs remained unchanged at 5 units, sending the total number of rigs to 2000 units. Directionally oriented combined oil, gas, and miscellaneous rigs stayed flat at 213 units while horizontal rigs increased +8 units to 1155 and vertical slipped -9 units to 632 during the week.