16:21 GMT +313 December 2019
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    US Markets Hit Record High, but Global Pessimism Deepens on Oil Uncertainty

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    Following Tuesday's rally in US stock markets, several key investors moved out of the energy and real estate sectors, citing poor fundamentals; meanwhile a Grexit scenario remains a possibility due to the failure of the EU's financial representatives to come to terms with Athens at the negotiating table.

    Kristian Rouz — After a robust rally in the US stock markets Tuesday, with the S&P 500 index having posted record gains, many key investors, including Warren Buffett and Soros Fund Management, were surprisingly reported to have actually pulled their money out of the US stocks due to a fundamental weakness in certain sectors, namely energy and real estate. Other investors soon followed, triggering a moderate resurgence in Europe and a truly boisterous rally in early Wednesday trades in the Asia-Pacific region. Among the factors that concern the global markets are the uneven and as-of-yet unsuccessful negotiations over the Greek debt in the Eurozone, the ongoing conflict in Ukraine and oil prices, which are slumping again after having advanced in the previous days.

    On Wall Street, stocks chiefly advanced Tuesday; all the three major indices having posted some gains at the close. The S&P 500 touched its new record high, having added 0.13% at the day’s end. News from Greece arrived at that point, which may have hinted at a possible resolution to the stalemate between the recently elected left-wing PM Alexis Tsipras and an international pool of the nation’s creditors. However, the latest round of talks eventually crashed, with Greece explicitly seeking a simple solution – a prolongation of its borrowing agreement with its ‘troika' of creditors: the IMF, the EU and the European Central Bank (ECB), without undertaking any serious reform. A structural reform, most of Greece’s creditors believe, would help the nation overcome its long-term weakness and eliminate the necessity for extensive external borrowing, while the left-wing Tsipras government is reluctant to adopt painful austerity measures that will most likely have a devastating effect on popular support for his party, Syriza, the Coalition of the Radical Left.

    Early on Tuesday in his address to the nation’s parliament, Tsipras said Greece would not tolerate "being threatened" and that he will not "take a step back from his promises to the people" of Greece. Apparently, it will take some time for the newly-elected left-wing populist to realize the urgent need to take action, as Greece is facing the real possibility of being expelled from the Eurozone, which would take a heavy toll on its already-ragged economy.

    "The costs of a Greek exit are so great for Greece, they will eventually strike a deal. Yesterday's meeting should not be seen as a failure, but more part of a necessary process," James Butterfill, an equity strategist for Coutts, told Reuters.

    "While… the impact on euro zone economic growth of Greece leaving would be minimal, the concern is that a Greek exit could undermine confidence in the whole euro project."

    In the US, thus, money people are generally optimistic regarding the Greece situation. The Dow Jones Index also gained, adding 0.16%. Demand for risky assets and operations has been higher than just the day before, hitting the US Treasuries with yields which reached 7-week highs and pushing the US dollar FX rate further up. The dollar advanced to over 119.0 yen from some 118.235 yen. The euro gained to $1.1406, thus creating a precondition for Asia’s rally Wednesday.

    In Europe, nevertheless, trades were erratic Tuesday, with the UK retreating and Greek stocks falling as the result of the failed talks between Athens and the international creditors. The main Greek index fell by 4.7% during the day, retreating only 2.45% at the close.

    The FTSEurofirst Index of top European shares added 0.2%. However, the banking sector retreated 0.3%, dragged down by Greek banks, which lost 9.4% of their valuation during the day. Better performers have been telecoms and mining shares, with Danish jewelry maker Pandora skyrocketing 16.9% after posting good Q4 profits. However, French cell phone operator Orange retreated 1.7% after strong gains just the other day, due to its less-than-optimistic profits stats.

    Asian trades opened with robust growth Wednesday as the news of the previous day from the US  fueled bullish sentiment in Japan and beyond. Warren Buffet’s corporation Berkshire Hathaway pulled its $3.7 bln worth of investment money out of the oil giant Exxon Mobil due to lower oil prices. Underinvestment in the oil industry has already been acknowledged as one of the key factors affecting crude’s slight rebound in recent days, and Buffet’s move just might support the trend. However, there’s no sign of a major exodus of capital from the energy sector.

    “There was clearly no edict that says, ‘Oil is terrible, let’s get out,’” Jeff Matthews, a prominent shareholder of Hathaway’s told Bloomberg. “Someone has a different opinion about it.”

    Buffet still has a large stake in PetroChina, the listed arm of state-owned China National Petroleum Corporation, the country's largest oil producer.

    Another major investment management firm, Soros Fund Management, was reported to have sold a lot of its US assets in Q4, moving the money to other parts of the world. With a total capital of $30 bln, Soros moved some $2bln from North America to Asia and Europe. A decline in oil prices is named among the key reasons for the move. Big hedge funds like Appaloosa Management and Moore Capital Management pulled $2.74 bln and $700 mln out of US stocks, respectively, in Q4. Additionally, Jana Partners pulled $2.7 bln out of US stocks in Q4.

    "We expect the European and Japanese equity markets to outperform the US in the coming year," Leon Cooperman of Omega Advisors told Bloomberg, having added that US stocks are set to grow as well, but at a more moderate pace.

    As a consequence of the activity of such bigshots, the Stoxx Europe 600 Index fared better this January than at any point since 1989, when Germany reunited, adding 7.3%; it is up 10.3% YtD.

    Another troubled sector in the US is real estate, which has seen a decline in managers’ confidence in February due to seasonally low consumer demand. According to a National Association of Home Builders/Wells Fargo estimate, confidence in real estate decreased to 55 in February from 57 the previous month. However, this has been attributed to higher-than-average snowfalls in many regions, which is preventing effective home sales.

    “Solid job growth, affordable home prices and historically low mortgage rates should help unleash growing pent-up demand and keep the housing market moving forward in the year ahead,” the NAHB statement reads.

    In Asia, stocks rallied Wednesday; MSCI Asia-Pacific added 0.3% and Japan’s Nikkei rose 0.9% due to the weaker yen, bolstering the nation’s exporters. Australian shares rallied as well, with the Aussie dollar rising after the Japan Post Holdings acquired the Australian freight enterprise Toll Holdings for some $5.1 bln. "We had soaring US bond yields and a sharp fall in iron ore prices overnight, but the Aussie still went up," Sean Callow of Westpac told Reuters.

    In China, however, the issue of regional debt was further exacerbated, with some townships seeking foreign funding to restructure their debts. China has overall debt of roughly $28 trln (280% of GDP) outstanding; $10 trln more than the US, and Beijing might not be able to ensure the repayment of some of the provincial debt.

    About 50,000 auditors have been hired by China’s authorities to probe into the provincial debt, as the true scope of the issue is yet largely unknown due to a lack of transparency.

    "We’re seeing funding vehicles from China that actually aren’t able to borrow onshore any longer and are now coming to the offshore market," Endre Pedersen of Canada’s Manulife Asset Management Ltd., told Bloomberg.

    It became known that the city if Qingdao is seeking a $800 mln offshore loan.

    “Investors are worried about the uncertainty that will come out of the debt reclassification exercise,” James Su of the Hong Kong-based Haitong Intl Securities told Bloomberg. “They are waiting for more clarity to assess the risk of those bonds.”

    Japan’s broader Topix Index rose 0.4%, the yen retreated further by 0.7% due to the Bank of Japan’s decision to keep monetary stimulus in place. Australia’s S&P/ASX 200 added 0.4%, New Zealand’s NZX lost 0.4%. Markets in China and Korea are shut down on holiday.

    The US Federal Reserve has just released its’ January meeting’s papers, which reflect the regulator’s confidence in the US growth. Investors, anticipating the gloom of the Fed interest hike, started selling on the news.

    The views and opinions expressed in the article do not necessarily reflect those of Sputnik.


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