Week in Review: Middle East Tensions Ease

Brent Crude oil prices slipped further towards $65 a barrel on Friday as tensions in the Middle East eased and investors focused on rising U.S. inventories and other signs of ample supply. Brent is now below where it was before the U.S. drone strike that killed Iranian general Qassem Soleimani on January 3rd.

The U.S. has become a net exporter of all oil products, including both refined petroleum products and crude oil for the first time since records began in 1973, selling 89,000 barrels per day more than it imported. The change stems largely from increased production from shale oilfields, an increase in renewable energy which now accounts for approximately 11% of total U.S. energy consumption, greater energy efficiency as well as the continued shift toward a service led economy. Manufacturing which is more electricity-hungry has declined sharply in the U.S. and now accounts for approximately 12% of nominal GDP, down from 28% in the 1960s. The result is that the U.S. is now a lot less susceptible to an oil price spike like the one experienced in the early 1970s (OPEC oil embargo), causing high inflation and a 16-month recession.

Iran admitted Saturday that it mistakenly shot down a Ukrainian passenger jet, blaming human error and "US adventurism" for the crash that left 176 people dead. In a statement, the nation's armed forces said it targeted the passenger plane unintentionally. It attributed the crash to radar activity and fear of US action. Iran had previously denied US claims that the country had struck down the plane accidentally.

On the U.S. economic front, the December jobs report marked a slowdown in job gains. Nonfarm payrolls increased by just 145,000 while the unemployment rate held steady at 3.5%. Economists surveyed by Dow Jones had been looking for job growth of 160,000. The jobless rate met expectations for staying at a 50-year low. Wage growth softened; however, wages are still growing faster than consumer prices, supporting consumer confidence and spending.

On Thursday, China announced that Vice Premier Liu He would lead a delegation to Washington from January 13–15 to sign the “phase one” trade deal interim agreement to defuse a more than yearlong dispute with the Trump administration. The two sides have not released the 86-page phase-one deal, but the White House said it secured commitments from China on some of the ways it manages its economy. The Trump administration has said that after the first stage is signed, trade negotiators would begin working toward a more comprehensive trade agreement.

Business activity in the Eurozone firmed slightly more than expected in December, as gains in the service sector partially offset another decline in manufacturing. The services index rose to 52.8 from 51.9, while manufacturing shrank for an 11th consecutive month. The upturn in services helped to boost companies’ confidence in the economic outlook for the year ahead.

Major U.S. indexes posted solid weekly gains, with the 30-stock Dow Jones Industrial Average breaking above 29,000 for the first time ever. The Dow ended the week up (0.66%), as did S&P 500 (0.94%) and Nasdaq (+1.75%). Similarly, in Europe the Euro Stoxx 50 (+0.43%) was firmer while the FTSE 100 (-0.45%) was marginally lower. Asian markets were stronger with both the Nikkei 225 (+0.82%) and Shanghai Composite Index (0.28%) ending the week in the green.

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Market Moves of the Week

The JSE ended a four-week winning streak on Friday, with the rand weakening under pressure amid continued load-shedding and weak domestic growth prospects. State utility Eskom’s power cuts are putting significant pressure on SA’s mining and manufacturing sectors, which also struggled with unreliable electricity supply in the first quarter of 2019.

On Wednesday, the World Bank cut its economic growth forecast for SA to below 1% for 2020 on concern over the continuing power cuts by Eskom. The World Bank cited unreliable electricity supply and infrastructure constraints as inhibiting domestic growth, and also highlighted persisting policy uncertainty.

President Ramaphosa delivered his third January 8 statement on Saturday in Kimberley saying that the ANC will speed up the process of transforming Eskom into an effective and reliable energy supplier and reaffirming the central banks role, mandate and independence. The President went onto say that the government would step up its investment drive, launch a massive infrastructure build programme, reduce the cost of doing business and see to the creation of jobs, in an attempt to achieve a far greater pace of economic growth.

The JSE All Share Index ended the week softer (-0.56%), with resources (-1.83%) and financials (-1.84%) weaker, while industrials (+0.90%) ended firmer.

Weekly
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Chart of the Week

The market reaction to the latest incidents in the region has been rather muted. While the price of oil briefly rose by around 4% following the US airstrike, it has since fallen again. In the wake of several events, for example the missile attack on Saudi Arabian oil facilities which briefly took up to half of the country’s production offline, the price of oil rapidly fell back to its pre-event level.

oil prices

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