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Message from Riyadh: we’re winning

May 14: But the International Energy Agency says the battle for global oil is just getting started. Plus, wonky job numbers, and the economics of art.


 

MORNING-PLAYBOOK-STORY

Today, a Saudi official says the country’s strategies are working: cutting out their rivals and giving them a bigger share of an increasing global barrel. But the IEA isn’t convinced they’re seeing the whole picture.

It’s another day of declining bond and share prices, and European indices are falling so far this morning. The Greek situation isn’t helping: the government may have managed its debt payment to the IMF earlier this week (via more emergency debt), but there is still no concrete sign of progress in negotiations. The latest development is support from the German finance minister for a Greek referendum on membership in the euro.

In the U.S., retail sales numbers released yesterday for last month were flat – coming under expectations and underlining predictions that a U.S. rate hike could be pushed back still further. The greenback fell one per cent on a basket of currencies on the news, with Asian currencies gaining in response this morning.

The TSX/S&P Composite Index was down yesterday by another 60 points, falling to a six-week low, while the loonie edged down to 82.89 against the dollar.

Today will bring the new housing price index and new vehicle sales for March in Canada, so tomorrow we can talk about both consumption and debt! Today will also bring the Bank of Canada review, and Mario Draghi of the European Central Bank will be in Washington to give a lecture at the IMF headquarters. Otherwise, it’s officially a quiet day on the calendar.

Message from Riyadh: we’re winning. Saudi Arabia believes its plan to cut out high-cost rivals and shore up their market share is working, according to comments from a Saudi official in the Financial Times. The monthly report from the International Energy Agency for April showed that the kingdom’s output had hit another record high, pumping out 10.3 billion barrels a day, while U.S. production has been feeling the impact of oil’s drop since last summer: the same report said the number of American operating rigs was down by 60 per cent. But the IEA also cautioned that the Saudi claim to increasing its market share, which underlined the country’s claims it will not reverse course and cut production any time soon, may be overconfident. While production may have slowed down in the U.S., high-cost production in Brazil continues, and other Middle Eastern countries have increased their gains: Kuwait and the UAE continue to expand drilling, Iranian production is up, as are supplies from Iraq and Libya, despite war. Instead, the global energy agency says the battle has “just started.” Either way, in a world fuelled by massive oil consumption, we increasingly have too much of it.

The Canadian jobs data mystery. In his latest column for Maclean’s, Mike Moffatt takes a look at the latest metropolitan jobs numbers, which record major declines in employment and size of the labour force in some of Canada’s largest cities. The problem, Moffatt notes, is that there’s no clear explanation for the losses: with any notable layoffs not corresponding to the job losses, and no obvious inconsistencies in how the data has been collected this time. This puts the spotlight on a running question – it seems to come up virtually every month – about the reliability of one of Canada’s most important economic indicators. While the head of Statistics Canada has defended the robustness of the survey, multiple economists take issue with its accuracy. Further, the survey is missing important regional numbers: Stats Canada told the Globe earlier this year that around half of First Nations aren’t counted in the survey, which they said was due to the difficulty collecting data on reserves.

Banks to plead guilty to criminal charges – but will it make a difference? In yet another episode of banks behaving badly, the New York Times is reporting that five major financial institutions will face felony charges from the U.S. Justice Department, over allegations of fixing foreign-exchange rates. The banks are expected to plead guilty and face, collectively, around $6 billion in fines, according to the FT. The fines may not be what the banks truly fear, however. The article notes that banks have repeatedly assured investors that profits will remain healthy despite fines, which we also saw in the latest run of bank earnings – but the Times says they are lobbying hard not to lose their rights to sell certain financial products or other privileges. The charges against UBS, in particular, are notable, as the Justice Department has thrown away an earlier pledge not to prosecute in order to lay charges of both currency and interest-rate rigging.
It’s a busy time for the Department of Justice. The Bank of England conducted an internal investigation into how much officials knew about foreign-exchange rigging in London – which cleared all officials – but the Financial Times is reporting the DOJ has doubts, and has requested an interview with a high-ranking forex trader the Bank previously questioned.
The charges will be just the latest in a string of major fines over allegations that London foreign-exchange traders at several banks colluded to fix the London interbank rate, known as the Libor. Just last month, Deutsche Bank settled for $1.5 billion in fines for their participation in the fix.
As you mull the latest charges, it’s worth having another listen of this piece by NPR’s Planet Money podcast on why banks are so hard to punish.

Is art a good investment? This week brought some record-breaking sales of art, including the sale of a Picasso painting for $179.4 million via the auction house Christie’s. It was a heady moment to consider the phenomenal prices in the art world, but also the fact that art, both long coveted and contemporary, though often seen as an investment, does not follow many traditional rules of economics. Writing in the FT, John Gapper notes that fine art sales were at 51 billion euros last year, and from 2003 to 2013, one measure of art prices showed growth that was only slightly less than the S&P 500. But you’re better off spending millions on a painting because you, well, really love it (or at least want people to think you’re classy). Art is illiquid, difficult and expensive to ship, with massive transaction costs from auctions and dealers, and secretive and opaque rules and networks. The biggest risk, of course, comes from associating value with the changing whims of tastes: even a Picasso could one day go out of style. 

Need to know:
TSX: 14,980.72 (-62.43), Wednesday
Loonie: 82.89 (-0.28), Wednesday
Oil (WTI): $60.20, Thursday (5 a.m.)


 

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