Doha Mwaha

The oil talks in Doha have resulted in no agreement. The response in markets is expectant of a collapse in oil prices, some mentioning $30 again, and a fall in all things 'risk’ on Monday morning.

First let's look at who seems to be tripping a Doha deal up. Depending upon your allegiances it is either Iran for not turning up, or the Saudis for their intransigence to go with a deal that all other parties were willing to run with. Though Iran is refusing to play until they hit pre-sanction production levels, which is understandable, the Saudis appear to be doing little to endear themselves to anyone in particular at the moment. I can almost hear the 'Mwhahaha' from them as they left the meeting. On top of Doha, at the end of last week we heard that the Saudis are threatening to sell their US assets should the US pass a law making other countries legally culpable for terrorism acts against US persons. This doesn’t imply any linkages between Saudi and 9.11 but does mean that it may be prudent to move assets that may get frozen IF any legal cases were to start. But let’s not get too excited about the possibility because in the big scheme $750bio of assets is really not that much (really) and even if they did sell USTs a resulting fall in USD would be pretty handy in these days of competitive FX devaluation and any resulting steepening of the US yield curve would be seen as a move towards stability from the levels of damaging flatness currently out there.

The terrible earthquake news in Japan is more likely to be responsible for JPY strength this morning. Japan tends to bring money home from overseas investment when it has to rebuild. But add this to AUD falls and there will no doubt be models seeing amplified AUDJPY falls as further indication of a risk off environment. I am out of my long Nikkei and short JPY positions until things settle down again.

There’s one other nagging issue that really doesn’t appear to be fully discounted in the markets yet - The Brexit vote. So far the markets in GBP and UK stocks have been relatively subdued. Despite EUR/GBP rallying 10% the markets are not in a mood of panic or scare. I am looking for this to change in the next few weeks as the tightness in the polls becomes more apparent. I do wonder why the markets haven’t started drastically covering UK risk and am asking myself if this is partially to do with how markets are traded these days. Basically, algorithms are pretty dreadful at trading political risk as it isn’t associated with numbers and momentum. Ok, you an plug in a referendum score but there is no way you can quantify how decision makers will act on the outcome. So with most algorithms looking backwards at price and time they have little way of foreseeing this, especially as they haven’t even got a history of ‘leaving the EU’ to back test against. Only when prices start to move through human action will they pick up the running and accelerate things. I don’t think it will be long and I'm planning to short the FTSE 250 and sell GBP/USD again (EURGBP not being the best place to play it as EUR is also likely to suffer on a Brexit).

And of course the Greece negotiations where the IMF is insisting on evenmore draconian budget adjustments. As said before, the PR on these talks is being kept sweet but I am waiting for the lid to blow off the sewer soon.

Now the market response. It is very early on in Asian trading hours but AUS is getting hit and anything commodity is taking a whack. This is leading to expectations of all global risk getting hit on Monday morning - proper Monday morning, not just the New Zealand stopfest hours, renowned for their surgical ability to remove profit from positions. But

- If no deal in Doha is expected to lead to dramatic global financial market falls then that would imply that the recent rises in all risk assets were on Doha hopes. I don’t think so.

- A continued oversupply of oil does not mean that demand or supply of other commodities ensues, so selling AUS$ on this function alone appears premature.

So a fall in oil could be catalyst enough to trigger a correction lower in markets that many have been looking for based upon a myriad of other reasons. Those harbouring a belief that the recent rallies have been nuts may well sell into price falls triggered by Doha looking for the background bear case to now play out. This I can understand. So the tricky balance is untangling Doha (which I don’t see as that big a deal for global risk on its own) from what may have been due to happen anyway.

Brent is down 6% on the futures in early Asia but is still above $40 so not that bad. Sharp moves downwards will be seen as shock (even if in the along run it isn’t) and so DM equities are down but in no panics so I am looking for risk markets to respond by first using the Doha narrative and then wheeling out the usual reasons to be bearish that haven’t changed over the weekend. I am waiting for the moment to buy again as I still don’t see the next leg down as anything more than corrective for US and EM, though UK and Europe are entering a greater uncertainty.

However, imagine the horror if global markets actually end up closing higher on Monday.