WTI at Two-Year High on Concern Syria Unrest Will Spread

WTI crude surged to the highest price since 2011 on concern that conflict in Syria might spread to other parts of Middle East and threaten oil supplies. Futures gained as much as 2.1% in New York, extending yesterday’s 2.9% advance. Britain, France and United States stepped closer to military strike against Syria, laying the legal groundwork to justify action after the country allegedly used chemical weapons. Brent of London might rise as high as $150 per barrel if conflict causes supply disruptions, as per Societe Generale SA. National Oil Corporation of Libya said output might have dropped below 200,000 barrels per day, the lowest since 2011 uprising against Muammar Qaddafi.
Phil Flynn, Senior Market Analyst, Price Futures Group, Chicago said Syria fears dominated as traders pondered the “what if scenarios”. For October delivery, West Texas Intermediate climbed as much as $2.31 to $111.32 per barrel in electronic trading on NYME (New York Mercantile Exchange), the highest intraday price since 3rd May 2011. For October settlement, Brent advanced as much as 2.2% or $2.54 to $116.90 per barrel on London-based ICE Futures Europe Exchange after settling on Tuesday at the highest since 25th February. European benchmark crude was set at a premium of $5.77 to WTI from $5.35 from yesterday.
Syrian Unrest
Brent might rise briefly to $150 per barrel if the conflict in Syria spills over into other parts of Middle East, causing supply costs. Michael Wittner, Head of Oil Market Research at Bank’s New York-based said the concern is that attack on Syria will reverberate through the region, increasing the spill over into other nations and resulting in a bigger supply disruption elsewhere. Any armed response against Syria would be narrowly focused on the country’s weapons capabilities and wouldn’t be aimed at depositing President Bashar Al-Assad, United Kingdom and United States officials said. As per data from International Energy Agency, Middle East accounted for 35% of international oil output in the initial quarter of 2013.
Military Strike
Jeffrey White, Former Analyst at Defense Intelligence Agency said Tomahawk cruise missiles are likely to be introduced at night against hundreds of Syrian targets if America and allies launch a military strike in retaliation for the use of chemical weapons. Libyan oil production fell to 1/8th of its capacity as protests over pay and allegations corruption spread to fields operated by Repsol SA and Eni SPA. American gasoline supplies shrank by 1.13 million barrels past week. An Energy Information Administration report today might show stockpiles slid by 1.38 million barrels as per median estimate of 12 analysts in a Bloomberg News survey.
Crude inventories increased 2.47 million barrels. The report from EIA, the statistical arm of Energy Department will perhaps show that supplies gained by 750,000 barrels. API in Washington collects stockpiles information on a volatile basis from operators of pipelines, bulk terminals and refineries. Government needs those reports be filed with EIA for its weekly survey.

NASDAQ Shutdown Forces SEC’s White Into Fight With Market Perils

A 3-hour shutdown of NASDAQ Share Market marks the first test of Securities & Exchange Commission Chairman Mary Jo White’s ability to push through stronger technology safeguards for electronic trading. Mary, a former prosecutor who lacks a background in market regulation responded to the failure by vowing to finish a rule proposed in March to need exchanges to test the reliability of their technology. Exchanges want to limit the number of systems covered by the rule and how much info they have to report about glitches. SEC has grappled with how to enhance market stability since 2010 flash crash, when $862 billion in equity was erased in 20 minutes before share prices recovered.

Andrew M. Klein, Partner at Schiff Hardin LLP and Former Director of markets and trading at SEC said Mary needs to be convinced these guys, all of them take this with utmost seriousness. NASDAQ is starting to look like you cannot be stopped from having these issues and it needs to stop. White signaled in her Senate confirmation hearing in March that she would scrutinize the dispersed, high tech and high speed marketplace, so that it can be optimally and wisely regulated.

Connectivity Issue                                    

NASDAQ said its failure this week stemmed from a connectivity issue between the network and exchange, known as securities information processor, which offers data about prices and quotes. SIPs or such systems are owned by 2 most significant operators – NYX (NYSE Euronext) and NDAQ (NASDAQ OMX Group Inc.). The rule proposal of SEC called Regulation SCI would need exchanges, clearing firms and SIPs for adopting policies to prevent failures, stress test their systems to make sure trading continues through a disruption, including a natural disaster or software glitch. The rule would also cover exchange competitors called alternative trading systems such as dark pools.

No Competition

SEC warned in its March proposal that SIPs could be vulnerable to glitches as there is virtually no competition amongst market data feeds offered to the public, which could lead to little incentive in ensuring high quality product with minimal disruptions. David Easthope, Research Director for securities and investment group at Celent, San Francisco said if you are thinking about investing in your budget for technology, you are going to invest in things, which bring in revenue not necessarily things, which are infrastructure or shared services across the industry.

Software failures have mounted as stock trading becomes more dispersed across multiple alternative trading venues and 13 United States equity exchanges. Larry Tabb, Chief Executive Officer at Westborough, Massachusetts based financial market consultant, Tabb Group LLC said the demand for faster dissemination of market data has forced exchanges to accelerate the movement of information through high speed proprietary data feeds and SIPs.

Faster Systems

Tabb said the way you wind up getting software to speed up is you take out all the protection. Exchanges are resisting Regulation SCI as they worry it will be used to fine them for software glitches which are impossible to eliminate. The rule would replace a voluntary program created after 1987’s share market crash and would expand SEC’s oversight to more systems, including those which support surveillance and regulatory compliance. James J. Angel, Finance Professor at Georgetown University’s McDonough School of Business in Washington said Reg SCI fundamentally gives provides SEC the ability to ding any exchange for any problem.

White’s Response

On 22^nd August, Mary White said that she would work to advance the proposal that passed SEC unanimously on 7^th March. She also said she would convene a meeting of exchange executives and other market participants for accelerating ongoing efforts to further reinforce our markets. Michael Piwowar, SEC Commissioner who joined the agency in August yesterday advised caution on advancing the regulation. Regulation SCI may or may not have contemplated what ultimately caused these disruptions. Thus, we should reconsider the assumptions underlying the Regulation SCI proposal before moving forward with further rulemaking.

Limiting Reports

Exchanges also want SEC to limit the rule to systems which support clearance, trading, order routing, market data and settlement in real time. They also say the commission should adopt materiality threshold to limit the number of system intrusions or compliance failures that must be reported to the regulator. The problem is finding a device to prevent this and recognize the truth of what the industry based message is, that you can’t have this kind of technology-based elaborate system and expect no failures.

CNX Nifty Futures Are Little Changed After Yesterday’s Rally

Indian Sensex stock index futures were little changed after equities rebounded on Thursday. For August delivery, SGX CNX Nifty Index Futures fell 0.1% to 5410.5 in Singapore. The underlying Nifty Index on NSE (National Stock Exchange) jumped 2% to 5408.45 on Thursday. Standard & Poor’s 500 BSE Sensex surged 2.3% to 18,312.94, climbing after its steepest 4-day retreat since 2009. Bank of New York Mellon India ADR Index of American traded shares rose 1.5%. RBI (Reserve Bank of India) said the country’s monetary and economic policies must preserve financial stability as the prospect of reduced Fed stimulus contributes to a slide in the rupee. Weakness in rupee could stoke already high consumer price inflation.

Nidhi Saraswat, Senior Research Analyst, Bonanza Portfolio Limited said that economic weakness and issues in rupee against dollar continue to be the main concerns right now. Duvvuri Subbarao, Governor at Reserve Bank and Palaniappan Chidambaram, Finance Minister held coordinated briefings in New Delhi on Thursday to try to soothe investors’ nerves. Excessive pessimism is unwarranted, economic expansion will pick up as year progresses and rupee’s drop has overshot appropriate levels.

Record Low

The officials said, India has no intention of imposing capital controls. Last week, Reserve Bank cut the amount Indian firms can invest abroad without approval and said residents can remit $75,000 per financial year down from $200,000. Rupee touched an unprecedented low on Thursday as concern the Federal Reserve will taper stimulus prompted investors to pull billions of dollars from emerging markets. The 2^nd largest aluminum manufacturing company of India, Hindalco Industries Limited might move. The company is seeking enhanced terms on as much as $2.7 billion of debt as projects funded by rupee loans start. The 3^rd biggest economy of Asia might expand 5.5% in the year to March 2014, as per Central Bank estimates. The ten-year average is around 8%. Auto sales have dropped for 9 straight months through July, whereas industrial production fell 2.2% in June.

Corporate Earnings

Weak currency and economic slowdown is hurting company earnings. Anand Kumar and Jyotivardhan Jaipuria, Analysts at Bank of America Corporation said combined profits for 30 firms in Sensex increased 1.4% in 3 months ended June, unlike an estimate of 5.8% before reporting season. Around 47% of Sensex firms, which posted earnings for June quarter missed analyst estimates; that compares with 43% in 3 months ended December and 27% for March quarter. Sensex lost 5.7% in 2013 and trades at 13 times projected annual earnings unlike 9.8 times of MSCI Emerging Markets Index. Global investors sold a net $118 million of Indian shares on 21^st August; that pared this year’s inflow to $12.1 billion.