Weekly Market Commentary 28 June 19

World Leaders arrive in Osaka for G20 Summit
All eyes are on both the G20 and OPEC this week. And while 82% of the worlds proven oil reserves are located in OPEC member states, the G20 summit will be more closely watched in a time where political risk has heightened. President Trump has already dialled up the temperature, taking time away from criticising Federal Reserve Chairman Jerome Powell and Iran to have a pop at India and Japan. Trump is unhappy with India’s imposition of tariffs on US goods even though it was an act of retaliation and questions Japan’s loyalty.

G20 meetings have long been criticised as a “talking shop” were little is achieved, and disputes magnified. Nevertheless, investors will be waiting to see if there is progress on trade talks that has slowed global growth this year. The last G20 summit saw China and the US agree to a 90-day truce. A similar outcome looks unlikely this time but expect trade talks and Iran to dominate the agenda.

Oil: Iran /US Conflict Drives Oil Prices Upwards
The four-year standoff between Iran and the US threatened to spill into war recently following the former’s efficient attempt at shooting down a $110m US drone. While a similar event occurred in 2011, President Trump’s combative nature almost resulted in a retaliation that could have impacted civilian lives. Instead, sanctions against Iran have been tightened. Unsurprisingly, curbing Iran’s oil exports have sparked shortage fears leading to prices gaining 10 per cent since last week.

Threats by Trump of “obliterating” Iran will be keenly watched by the oil cartel OPEC who convene next week to discuss supply levels. They will be wary of getting wrongfooted again by the White House as last time, sanctions against Iranian oil were waived for key importers at the last minute. This led to a glut in supply and a slide in oil prices. Ironically, for all of Donald’s protestation at OPEC to boost production and thus reduce high prices, sanctions against OPEC members Venezuela and to some extent Iran have inadvertently cut supplies by an extra 1.3m barrels per day.

M&A: Abbvie hopes allergan will smooth out wrinkles
Abbvie the seller of popular arthritis medication “Humira” this week offered to buy into Botox maker Allergan for $63bn in stock and cash. In general, pharmaceutical companies heavily invest in research and development to create drugs that they can patent and subsequently sell at a high price. But these patents don’t run indefinitely and once their shelf life expires, generic versions flood the market. Abbvie’s Humira drug which generated 60 per cent of its $20bn revenue last year only has four years left before the patent expires, so it would make sense for the company to expand its portfolio. Allergan’s dominance the Botox market will help provide immediate and consistent cash flows.

Another potential benefit of the mooted acquisition is the instant cost cutting benefits. Combining the companies will see an estimated savings of $2bn a year. However, it is far from a done deal as approval checks have yet to take place. But given the limited overlap between the products, there won’t be anti-competition concerns.

Eurozone: Economic Data ends on a weak note for this quarter
At the risk of sounding like a broken record, Eurozone data once again remained weak this month. Economic sentiment fell from 105.3 to 103.3 rounding of a weak quarter for the block. What this will most likely mean is that the European Central Bank will roll out fresh stimulus in a months’ time, but which tool President Draghi uses may that be restarting bond buying, delaying rate hike further or reducing an already negative deposit rate remains yet to be seen. Meanwhile the dichotomy between services and manufacturing grows as domestic demand picks up while exports face downward pressure due to the trade war.

Elsewhere, Spain has come a long way since the Great Recession. The economy has been expanding at a quicker pace than the Eurozone average, in turn attracting immigrants to the region. Population grew by 276,000 people last year. Spain is less reliant on international trade than its European peers and subsequently was less affected by US-Sino dispute’s. However, it still has a long road of recovery ahead. Unemployment rate is the second highest in the Eurozone, and tourism growth is expected to cool as rivals like Turkey recover.