The week that was:
At the beginning of the week, Saudi Aramco announced a restructuring. Abdul Aziz Al-Gudaimi will lead a new division which will assess existing assets.
Divesting of assets which are not profitable enough or no longer core is nothing new for international oil companies.
Future divestments are only in part motivated by ensuring the company keeps the promise of its $75 billion (SR281 billion) dividend and also have to be considered in the context of a substantially lower oil-price environment due to the coronavirus disease (COVID-19) pandemic.
It is nothing new for oil companies to tweak their portfolios. Nasir Al-Naimi will now head the downstream division, which involves refining, chemicals, pipelines, and fuel retailing. Looking at this division makes sense particularly since Aramco acquired 70 percent of chemicals giant SABIC earlier this year.
Aramco’s commitment to its dividend paid off from a valuation perspective: its shares are down by less than 2 percent since the beginning of the year while Exxon’s and Shell’s were down by 41 percent and 48 percent, respectively, over the same period.
Hurricane Laura temporarily pushed oil prices up toward the middle of the week, affecting gasoline prices in particular after several of the US’s biggest refineries had to be shut in. While the storm caused devastation, it only tangentially affected the oil-processing infrastructure in the Gulf of Mexico. Traders are now returning their focus to oil demand rather than supply bottlenecks. Midday on Friday, central European time, West Texas Intermediate (WTI) was back down around $43 per barrel while Brent was trading around $45 per barrel.
Chinese business magnate Jack Ma’s electronic payment vehicle Ant group, which wants to raise $30 billion, filed for a dual listing on the Hong Kong and Shanghai stock exchanges in what looks to be a blockbuster initial public offering (IPO). Unlike Alibaba, the company will not list in the US — a sign of the times as American-Chinese tensions continue to rise.
Walmart has joined Microsoft to bid for the US operations of TikTok against Oracle. If successful, the acquired company could become a competitor to Amazon.
TikTok CEO Kevin Mayer has resigned after three months in office on account that his remit was no longer global now that the company’s US operations had to be sold under pressure from American President Donald Trump’s administration.
Focus
At the US Federal Reserve’s (Fed) annual Jackson Hole economic symposium, chairman Jerome Powell announced a fundamental policy change. The 2 percent inflation target was to be achieved over time, allowing inflation to overshoot to compensate for periods where the target had not been met. The key target was “inclusive” full employment.
Core PCE (personal consumption expenditures) inflation, which excludes volatile items such as food and petrol, particularly failed to meet the 2 percent level on a consistent basis.
This means that the Fed will no longer pre-emptively raise rates to avoid inflation to overshoot the target, which puts into question the period between 2015 and 2018 when rates were raised to avoid overheating of the economy.
The focus on employment is understandable, given rising COVID-19-induced unemployment, which moved from the lowest level since the late 1960s to the highest since the beginning of World War II. First-time jobless claims came in at 1.1 million for the week ending Aug. 22 — for the 22nd out of 23 weeks.
The question remains whether this policy shift will lead to higher inflation, such as that seen in the 1970s, or if the new policy objective combined with expansionary monetary and fiscal polices will help bring people back to work as happened in the 1930s.
US central bank policy is moving closer to Japan and Europe in terms of keeping rates lower for longer, still avoiding negative interest territory as seen in the latter geographies.
The yield curve steepened after the announcement because investors were selling off longer maturities out of fear that real interest rates would be impacted by the potential of higher inflation. The Dow Jones reacted positively to Powell’s announcement. Equities generally benefit from lower interest rates.
The Fed’s new policy outlook may prompt President of the European Central Bank Christine Lagarde to keep monetary policy expansionary. It also lowers the risk of a taper tantrum, which emerging markets witnessed in 2013.
The euro and the yen traded higher against the dollar on Powell’s announcement.
Where we go from here:
Japanese Prime Minister Shinzo Abe announced he would step down for medical reasons and that he would fast track the selection of a new leader. Names in the frame include former premier Taro Aso, Minister for Defense Taro Kono, Chief Cabinet Secretary Yoshihide Suga, current and former foreign ministers Toshimitsu Motegi and Fumio Kishida, respectively, and Minister of Health, Labor and Welfare Katsunobu Kato.
Abe has been Japan’s PM since 2012, having previously held the position from 2006 to 2007, and is the country’s longest-serving premier.
His tenure was marked by quantitative easing and negative interest rates to counteract the economic effect of an aging society. His economic policy was based on the three “vectors” of monetary easing, fiscal stimulus and structural reforms aimed at reflating the country’s anemic economy.
While in charge of the country, the NIKKEI 225 index more than doubled, and wages moved from minus 2 percent to grow by plus 2 percent. Inflation only surpassed 2 percent briefly in 2014, but Abe managed to get it out of negative territory.
Given the success of Abenomics, it is likely that the prime minister’s successor will continue his policies. Monetary policy is likely to remain the same under Bank of Japan Gov. Haruhiko Kuroda – for the time being at least.
Abe managed to strike a good relationship with Trump, but it remains to be seen where his successor will take that relationship, especially should the American leader fail to win the upcoming presidential election. Japan’s relationship with China will be another focal point.
— Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources. Twitter: @MeyerResources
