Tokyo’s exchange rate intervention.

Japanese yen has risen against the dollar to Y75.69. The strong yen has prompted the finance ministry of “decisive action” in the currency market. Yet Japanese policy makers are unlikely to follow suit the Swiss example of explicit exchange rate target i.e. committing itself to sell unlimited amount of domestic currency to prevent the euro from falling below Sfr1.20.

The global financial crisis of 2008, QE rounds announced by U.S Federal reserve, and euro zone debt crisis has led both the currencies, yen and Swiss franc, to appreciate substantially.  In order to counter the surging rates, the Swiss National Bank and Bank of Japan both cut interest rates to zero and engaged in unilateral intervention. Lower interest rates might cause a depreciation of the exchange rate and boost demand for domestic producers who sell goods and services in internationally traded markets. Officials in Japan are concerned that the strength of the yen will result in local companies relocating factories and jobs to competitive destinations like U.S.

Despite policy makers desire to prevent Yen strength, policymakers will not pursure the explicit exchange rate target for the following reasons:

•             The yen is not trading at extreme levels as the record levels reached by the franc against both the euro and the dollar.

• Since Japan is a G7 member and has a 3^rd largest economy, any move for target its exchange rate explicitly will be met by criticism from N America and Europe, particularly as it would make it harder to press China to appreciate the renminbi at a faster pace.

• Japan has more policy options; When Swiss pursures QE, it has little choice but to print money and buy foreign bonds, making franc weaken. In contrast,  when Japan pursures QE, it can print money and buy local government bonds as the Japanese government bond market totals a huge $7000bn. 

Due to above reasons, Japanese policy makers are likely to intervene periodically in the currency markets while undertaking further QE at home to curb strength of Yen.

N.B Assuming all other factors constant, the disadvantages of a strong currency would be:

1. The lower price of imports leads to consumers increasing their demand and this can cause a large trade deficit. Exporters lose price competitiveness because they will find it more expensive to sell in foreign markets and face losing market share - this can damage profits and employment in some sectors and industries.
2. If exports fall, this causes a reduction in aggregate demand and reduces the short-term rate economic growth as measured by the % change in real GDP. Some regions of the economy are affected by this more than others. In the North east for example, manufacturing industry accounts for over 28% of regional GDP whereas the percentage for the UK as a whole is just 19%.
3. Because investment is partly dependent on the strength of demand,If exports fall, then so will business confidence and capital investment.

BP – Anadarko deal

BP has something to cheer about. After the spate of litigation issues and counter claims issued against the company, BP was able to reach a $4bn out of court settlement with Anadarko Petroleum, one of the minority partners in the ill faced Mancondo well. This would add pressure on the other partners, Halliburton and Transocean, to follow suit and drop litigation concerns for BP.

The Q3 earnings and the production will take an impact due to absence of high margin barrels from the gulf. A mean of $4.9bn is the expected earnings for this quarter, which is a decline of 11% on the same period last year. 

However, BP has good news to look forward to. The balance sheet of the company looks healthy, with a heady cash of $18.7bn in hand. Also the $4 bn from Anadarko will allow BP to end it payment into the $20bn compensation trust that was set up after the oil spill, one year ahead of schedule. Also BP has secured approval from UK government to develop Claire ridge project in North Sea and is now waiting for approval to return to drilling in Gulf of Mexico. 

The shares of the company is currently nudging near the 420p level

Shell- Shocked Results!

Shell has unveiled its Q3 results, showing profits that have more than doubled to £7.2bn from the year before. Also, driven by the build up of its oil sands project in Canada and gas in Qatar, Shell’s production was 2% higher than last year at 3.01m boe/d (Barrels of Oil Equivalent per Day). Analysts are gushing about shell’s results and expect it to continue stronger with over 20 projects coming over the next 3 years. In wake of weak financial markets, Shell has resumed its buy-back programme with $800m buy-back in this quarter. Shell shares rose by 1.84% to £22.95 in London.

Shell has also raised concerns about Europe’s competitiveness than its sovereign debt crisis. Shell has curbed its investment in Europe, with only 15% investment in the region, owing to the unfavourable policy support from the European Commission. Comparisons are rife between the strong support to energy industry for the development of unconventional gas, namely shale, from North America and opposing position held by European government.    

Energy Market updates

Oil from Tar sands -

The European Commission is set to classify oil derived from tar sands as more polluting than conventional crude. However, UK is seeking to delay attempts of implementing this plan by persuading other EU countries to follow a “compromised” approach. These restrictions will affect future exports from Canada, whose oil reserves total 175bn barrels behind only Saudi Arabia, and Venezuela. 

Shale gas market -

US Gas markets have been transformed into a self sufficient, exporter of gas to other countries. This has been due to one reason – Shale gas. Using advances in technology such as hydraulic fracturing (fracking) and horizontal drilling, this energy source has become viable. The dramatic gas price reduction from $10-13mcf to $4-5mcf has excited the rest of the world to improving its prospects in reducing energy dependence and building an export industry of its own.

In Europe, Poland, Ukraine, France and some reserves in UK are significant sources of shale gas. However a number of challenges remain:

        

• ·         The economics in shale gas extraction process, supported by existing 2000 land rigs involved in drilling of declining oil fields, along with skilled workforce was favourable in US. This case might not be applicable in Europe, Asia and Australia.
• ·         In US, land owners benefited from royalty payments for continuous drilling. These privileges are not existent for landowners in Europe.
• ·         The geology for most reserves outside N America is not conducive for drilling of shale gas. Most shale gas basins are found in water constrained parts of the region.
• ·         Environment safety concerns as fracking fluid can enter the water table.

There is a general feeling that shale gas will not have a negative impact on renewable energy as drivers for renewable investment is government commitment of achieving carbon reduction. However if gas prices comes down, shale gas will compete directly with nuclear as a supplier of base load power.

Major Oil production companies release earning reports for Q3.

BP, UK oil group, with its clean replacement cost profit, a measure to strip out oil and gas inventories, is expected to earn $4.9bn, a decline by 11% on same period on year before.

BG group, production affected by North Sea maintenance, is expected for operating profit of $1.89bn compared to $1,67bn year on year for its third quarter.

Royal Dutch Shell, Europe’s largest international oil company, will be expected to report net income of Euro 6.1bn, up from Euro 4.93 bn. Exxon Mobile, world’s largest oil group by market capitalization, is expected to report earnings about 5 cents below second quarter of $2.18 per share but up 48% on last years third quarter.

Eurozone crisis.

In a positive signal to end the Euro Zone crisis, the Bundestag today voted in a overwhelming majority to source the £383bn Euro Zone bail out fund. This move will give new powers to buy bonds and recapitalize banks, lifting the financial markets and boosting the euro. 

This measure bolsters the capacity of European Financial Stability Facility (EFSF) to finance liquidity loans to countries in difficulty, if a possible Greek default comes true. German parliamentarians are keen to have greater operational control over the EFSF, with key programmes needing the budget committee approval before they are launched by EFSF.

 

                However the assurance from German parliamentarians comes after a clear message that if Greek’s financial woes have increased then it cannot be funded with more public money. Instead, private creditors (private sector bondholders) will need to take a greater write-down on the value of the bonds.

                The encouraging initiative from the German authorities have prompted the troika – The European Central Board, European Commission, International Monetary Fund – to resume talks with Greece on meeting its budgetary targets as it funds the €8bn tranche of the proposed €110bn of the rescue program.

                Athens is quickly trying to catch with the policy reforms that will reduce public spending. But the government deficit has increased to 22% in the period from Jan to Aug, indicating new measured to reduce its deficit from €24.1bn to €17.1bn. The finance ministry officials are however concerned that there is a revenue shortfall that can be expected because of deeper recession rather than its failure of restructuring policies of its tax administration, estimating that the government can look to lose about €4bn annually in lost income. 

The growth outlook certainly looks grim for Greece, increasingly its chances of default by not clawing back the gaping deficit hole.