Outlook 2018, Part II: Oil, Agriculture, USD/ZAR and Central Banks

  • Market Overview
  • Editor's Pick

As mentioned in part one published earlier this week we covered Stocks, Market Overview and Cryptocurrencies. In part two, we will cover oil, agriculture, the rand and dollar as well as major central bank policy direction in 2018.

Ellen Wald: Oil Production Cuts To Continue; More US Shale Divergence

OPEC will continue its production cut agreement with its non-OPEC partners at least through June and likely through the year. However, we should expect that some countries will continue to cheat and overproduce, as usual. Other countries, however, will struggle to produce at their quota levels. Because some countries will under-produce, Saudi Arabia may produce more than it has recently, but it will still stay within its quota. Russian oil companies will overproduce as well, but the country will likely try to present an image of compliance with the agreement.

Global demand is expected to grow–a sound assumption barring a serious drop in the global economy. The industry obviously wants oil prices to rise, but Saudi Arabia and some of the other Gulf countries do not want the prices to rise much above $60 (and not above $70) because that could hurt the global economy and global demand.

In the U.S. shale industry, we may see more market divergence. Some companies will struggle to raise needed capital and may be forced to sell assets or merge. The better capitalized shale enterprises with better shale assets will benefit as long as oil prices do not drop markedly. The big question for the U.S. shale industry in 2018 will be whether higher oil prices increase investors’ appetites for shale opportunities or whether investors will demand returns, not just growth.

In the electric vehicle (EV) sector, expect more skepticism of the viability of current EV business plans. Expect rumors of much lower adoption projections than those we have seen over the last few years. Unless we see a breakthrough in technology, more analysts may lose patience and begin to doubt the ability for engineers to develop truly revolutionary batteries. It is likely that more environmentalists will express concern about the environmental impact of producing and charging powerful lithium-ion batteries. Look to Tesla , Volvo , and other companies with significant EV plans to see where this phenomenon is going. If one of these companies tempers its projections for EVs, it could mean the idea is not ready for the mainstream consumer.

Jesse Cohen, Investing.com: Shale Derails OPEC, Powell Tested, Bitcoin Pops Then Drops

Rising U.S. shale oil output will derail OPEC’s ongoing efforts to rid the market of excess supplies and prevent prices from rising much further next year, with crude futures forecast to trade in the $55-to-$65 range.

Domestic U.S. oil production has rebounded by almost 15% since the most recent low in mid-2016 to around 9.7 million barrels per day at current levels, the highest since the early 1970s and close to the output of top producers Russia and Saudi Arabia. Increasing U.S. drilling activity for new production means output is expected to grow further, as technological innovations at U.S. shale oil companies make it cheaper for them to produce.

On the Fed front, Jerome Powell, who will take over as chair of the U.S. central bank when Janet Yellen's term ends in February, will be tested early as economic data stateside starts surprising to the downside and growth prospects begin to dim. That could lead Powell to reverse the current plan to wind down the Fed's $4.5 trillion balance sheet in order to support the economy.

Finally, Bitcoin will continue its jaw-dropping rally into the early part of 2018, with prices peaking at around the $60,000-level, before Russia and China partner up to sideline the cryptocurrency. That move sparks an epic crash, taking Bitcoin prices back down to the $1,000-$2,000 range.

Stanton Roux: 2018 Outlook At Bitcon and The Rand

Bitcoin

2017 was undoubtedly the year of Bitcoin. With growth of over 900% this year, the cryptocurrency seems to be unstoppable. The question is, will this run continue into 2018? With the launch of Bitcoin futures by Cboe Global Markets inc, scheduled for December 11th, and the CME group, scheduled for the 18th, I foresee a dramatic change in the Bitcoin landscape. Firstly, it will allow traders to invest in the cryptocurrency without actually owning Bitcoin, which could lead to huge growth. Alternatively, it allows investors to short Bitcoin, which would either assist in stabilising the market or could lead to its collapse. In 2018, I would be cautious before rushing out and buying Bitcoin. When investors like Jack Bogle and Warren Buffet warn of an asset bubble, you sit up and take notice.

ZAR

In 2017, South Africa saw two downgrades from ratings agencies S&P and Fitch, while Moody’s has given South Africa a lifeline by holding off its local currency debt rating until after South Africa’s 2018 Budget Review. South Africa requires a complete political and financial overhaul in 2018, therefore all eyes will be on the ANC Elective Leadership Conference in December 2017 and the Budget Review in 2018. A Ramaphosa victory should be positive for the South African economy. Should the Budget Review not reveal how it intends to cut expenses or increase taxes to the tune of R40bn, a full junk status rating will be inevitable, causing South Africa to fall off the World Government Bond Index and up to R150bn may be wiped from the South African economy. The ensuing volatility over the next three months could provide some trading opportunities, especially in the Rand-Dollar Exchange and in commodities, such as gold and platinum .

Paul Makube: A positive outlook for South Africa’s agriculture in 2018

December 2017 – Following a robust agriculture output during the 2016/17 production season, South Africa is poised for another good season with recent forecasts favouring a La Nina weather pattern which implies decent rainfall for the 2017/18 season. Expectations are that rainfall conditions over the summer rainfall area will improve towards the end of December 2017 and early January 2018, which is critical for the grain crops that have already been planted and for the late plantings.

Grain prices remain range bound with current maize spot prices still trending at low levels below R2,000/t and R2,100/t for white and yellow maize respectively. Although the July futures for both the white and yellow maize have just edged above R2,000 per ton, there is limited further upside due to the bullish supply outlook given that local stocks are expected to be comfortably above 4 million tons by April 2018 and the 2017/18 production of just over 13 million tons.

In the oilseed complex, the bullish production outlook with planted area for sunflower and soybeans up 5% and 25% respectively relative to the previous season remains a bearish feature for prices. Sunflower and soybean futures prices for July 2018 delivery are currently trading about 19% and 21% below the 2016 levels at R4,695/t and R5,150/t respectively. This trend is likely to be maintained for the remainder of the growing season.

On the back of favourable rainfall season with La Nina conditions taking hold, it is expected that the horticulture sector will do particularly well across the growing areas with the exception of the Western Cape where drought conditions still persists. The increased fruit production will boost exports and ensure the much needed forex revenue for the sector, accounting for over 33% of total agricultural exports. The expected increase in fruit production from the rest of the country will somewhat help offset the reduced output from the Western Cape due to drought.

The livestock sector continues to benefit from the lower feed grain prices (maize, soybeans) and this coupled with strong meat prices has improved the profitability and ensured better margins in feedlots, poultry and pork. The higher meat prices means producers are expected to continue to make good margins. Meat prices are expected to remain expensive but the magnitude of the increases will be marginal due to base effects. Favourable production conditions due to rains will enhance the herd rebuilding process for both cattle and sheep.

From the food inflation perspective, the increased agricultural output will help tame food inflation in 2018 which will impact positively on the interest rate outcomes. With a seasonally adjusted and annualised in increase of 44.2% quarter-on-quarter (q/q) in the 3rd quarter of 207, the agriculture, forestry and fishing industry was the largest contributor with 0.9 of a percentage point to GDP growth. Robust agriculture output is therefore expected to continue to contribute positively to the overall economy in 2018.

Jason Martin, Investing.com: I see central banks continuing to stick to the path they’re currently on in 2018

Federal Reserve:

With the process for the removal of accommodation well underway, the changing of the guard at the helm of the Federal Reserve--with Janet Yellen passing the baton to Jerome Powell--may mean little for U.S. monetary policy in 2018.

In the latest economic projections released in December, the Fed itself predicted that there would be three rate hikes next year and although President Donald Trump still has spaces to fill at the U.S. central bank, it’s looking less and less likely that there will be undo pressure from the White House.

The changes to the Fed’s dovish outlook are still far from leaning into an even remotely “hawkish” camp. 2018 looks to be shaping up a lot like the year gone by: the Fed trying to “over-communicate” to the markets what it will do far in advance.

European Central Bank:

The ECB appears to be letting the Fed take the lead and then cautiously following. In its December meeting, the euro zone monetary authority confirmed its previously announced plans to cut monthly asset purchases in half to €30 billion ($35.5 billion) beginning in January and extend those purchases to “the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim”.

The ECB’s stance follows in the Fed’s footsteps in terms of being gradually “less dovish”. ECB chief Mario Draghi has insisted that interest rates will not move “for an extended period of time, and well past the horizon of our net asset purchases”. Markets, in fact, are not pricing in a move until at least 2019.

Not unlike its U.S. counterpart, the ECB has been fighting remarkably muted signs of inflation despite bustling strong growth led by Germany.

That very growth is adding to speculation that hawkish members of the Governing Council will begin to push harder for policy tightening in 2018.

Bank of England:

The Bank of England is a bit of an outlier in this trio of central banks. While the BoE faces a similar problem of low wage inflation, it is the only one of the three who has seen headline inflation soar past and remain far beyond its target, placing a serious squeeze on households’ cost of living.

Although the BoE eventually undid the rate cut implemented after the UK voted to leave the European Union, its policymakers remain reluctant to make further moves in tightening monetary policy due precisely to the uncertainty surrounding the Brexit negotiations.

The bank’s Monetary Policy Committee insisted in its December meeting that inflation had peaked at its most recent reading of 3.1%.

At the moment, markets do not expect the BoE to raise rates again until towards the end of 2018, when it will add another 25 basis points.

Glenn Howell: Take responsibility for Pete’s sake

Traders, here is my Outlook for 2018, all wrapped up just for you. It’s the same outlook I had in 2017…and 2016… and 2015…and you get the idea. Here it is: Keep your head down, stop looking for the holy grail of trading, stop falling for ridiculous scams that you know are impossible but instead, take responsibility for your trades. No, you can’t make 20% a month, every month. That’s called a Ponzi scheme.

Focus on the stuff that matters. In 2018, some markets are going to move, some aren’t. No one knows what will happen in 2018. Your job is to have your plan all ironed out and ready to go to take advantage of the opportunities when they come. Stop blaming the central bankers, brokers, markets, etc.. The truth is, no one cares and excuses aren’t going to help you.

“The markets are the same now as they were five or ten years ago because they keep changing-just like they did then” – Ed Seykota, legendary trend-trader, responsible for his success.

If you haven't already, now read Part I.

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