TheChek News Flow

Oil prices slipped on Monday, reversing gains made earlier in the session as evidence of rising U.S. drilling offset news that OPEC and other producers may extend their production cuts.

Brent crude was down 37 cents on the day at $48.73 a barrel at 1246 GMT (8.46 a.m. ET), having risen to a high of $49.92 earlier in the session. U.S. light crude fell by 30 cents to $45.92 a barrel, down from a intra-day high of $46.98.

Both futures contracts have dropped by more than 10 percent in the last month despite moves by the Organization of the Petroleum Exporting Countries and other exporters, including Russia, to restrict supply in the first half of 2017.

The OPEC-led efforts to reduce bulging global oil inventories have been undermined by a surge in drilling in the United States, filling much of the gap left by OPEC.

OPEC meets on May 25 when it is expected to discuss extending the cuts to the end of 2017, although analysts say a further six-month extension may not be enough.

"The market is in a very dangerous condition," said Robin Bieber, technical chart analyst at London brokerage PVM Oil Associates. "The trend is still down, but just correcting."

Data from the InterContinental Exchange on Monday showed investors cut their bullish bets on Brent to the lowest level since late November.

Russia said on Monday it was discussing prolonging cuts with other producers beyond 2017, without giving a clear timeline. Saudi Arabia's Energy Minister Khalid Al-Falih also talked of the possibility of prolonging curbs beyond 2017.

Countering those efforts, U.S. drillers added oil rigs for a 16th week in a row last week, extending a drilling recovery into a 12th month, energy services firm Baker Hughes Inc said on Friday.

Since a low point in May 2016, U.S. producers have added 387 oil rigs, or about 123 percent, Goldman Sachs said.

U.S. crude output averaged 9.3 million bpd in the week ended April 28, its highest since August 2015, according to federal data [EIA/S].

Many analysts now see U.S. crude output heading towards 10 million bpd over the next year or so.

"It's all about inventories and U.S. shale versus OPEC," said Hussein Sayed of brokerage FXTM. "OPEC members have no choice but to talk up prices by signalling an extension to the production cuts agreement."

He said oil prices would probably rally "but the recovery won't be a straight line."

They contend that the tech industry and its practices have been “instrumental to the rise of ISIS.”

Family members of three victims in the deadly 2015 terrorist attack on a San Bernardino, Calif., health facility filed a lawsuit this week against Twitter, Facebook and Google, alleging that they “knowingly and recklessly provided the terrorist group ISIS with accounts” and aid to spread extremism.

In their complaint, the families told a federal court that the three social platforms — in failing to monitor profiles and take action against extremist accounts — had helped ISIS “raise funds, recruit and conduct terrorist operations,” including the attack that killed 14 about a year and a half ago.

“This material support has been instrumental to the rise of ISIS and has enabled it to carry out or cause to be carried out, numerous terrorist attacks, including December 2, 2015, attack in San Bernadino,” they allege.

Concerning Twitter, for example, the families point out the flood of ISIS-related accounts on the platform in recent years. About Facebook, they contend that the San Bernardino shooters, including Tashfeen Malik, had declared their allegiance to ISIS in a previous Facebook post. As for Google, they allege that it essentially helps fund ISIS through advertisements that run before YouTube videos.

Spokespeople for all three companies did not immediately comment for this story.

The attack in December 2015 ignited fierce debate about the role of the tech industry in protecting national security. In the months after the attack, then-President Barack Obama and others in Washington pushed Silicon Valley to play a greater role in policing its platforms for potential threats. While companies have made progress, combatting radical organizations remains a major challenge. Google, in particular, has faced blowback from brands whose ads have appeared alongside other extremist content.

Other in government would like to see tech companies make it easier for law enforcement to access their services and devices. That stance led to another court spat between the FBI and Apple, as investigators sought to force the company to crack a password-protected iPhone tied to the attack. Ultimately, the FBI gained entry into the device on its own.

Families of victims of other attacks similarly have taken aim at the tech industry. The relatives of a woman who was killed during the 2015 attack in Paris sued Facebook, Google and Twitter last year, specifically citing the fact they profited from ads on extremist videos. A number of families sued the same companies in March following the deadly June 2016 attack on the Pulse nightclub in Orlando, Fla.

Gapping up
In reaction to strong earnings/guidance:

M&A news:

Select mining stocks trading higher:

Other news:

Analyst comments:

Gapping down
In reaction to disappointing earnings/guidance:

M&A news:

Select EU financial related names showing weakness:

Select metal producers trading lower:

Other news:

Analyst comments:

 Further to the signals we highlighted in our May Chartbook, and following a

very strong market upmove, we think it is now prudent to start reducing

the beta in our sectoral allocation.

 To be sure, at the overall market level, we still envisage that the ongoing

capitulation by bears and the return of inflows into European equities, are

likely to keep providing support to equities over the next few weeks.

Once these inflows are spent, we would look to use higher market levels as

a good opportunity to reduce directional exposure, as well.

 Broad indices might remain well bid short term, but within the market, the

leadership is likely to turn more defensive. As the top chart shows, following

dramatic gains in 2H ’16, US Cyclicals are beating Defensives by a further

510bp ytd and globally by 320bp, with the gap with CESI opening up. This is a

good opportunity, in our view, to lock in some profits for the next 3-4 months.

 Our work with respect to US CESI shows that once CESI moves below

zero, Cyclicals tend to clearly lag over the next 1 and 3 months, losing

200bp relative. The air pocket in final demand is a clear risk, as seen in the

latest Chinese and US data softening, Cyclicals are overbought on RSI, bond

yields could remain range-bound and seasonals are moving against beta.

 Also, Cyclicals have closed the gap with earnings. Q1 results were great, as

we hoped, but everybody has turned bullish on earnings now, and the bar

for Q2 and 2H has been raised materially. Earnings could, in fact, soften

over the next few months, following a likely rollover in PPI, which keeps

tracking the oil price – see middle chart.

 Specifically, we are cutting Capital Goods and Chemicals to UW. Both

are very expensive, with Capital Goods in particular trading back at ’07 and

’11 P/E relative extremes – see bottom chart. The sector appears to have

clearly overshot the move in global PMI orders to inventories ratio. We also

reiterate our recent downgrade of Tech, noting a rollover in Taiwan orders.

 What to do with Banks? Banks remain the most correlated sector to bond

yields and PMIs, and are back to highs in Europe as French risks have fallen.

Yields could stay range-bound in coming months as inflation prints roll over

and China PPI weakens. These are concerns, and we are cutting our OW in

Banks by half, but not exiting completely as the Euro recovery trade is still

in the early stages. We keep preference for Eurozone and EM Banks, and a

pair trade of long Eurozone vs short US Banks should keep working.

 On the other side, we are raising Telecoms to OW and Staples to Neutral.

Telecoms are extremely cheap post terrible performance. Staples

valuations have de-rated somewhat. Overall, this makes us Neutral between

Cyclicals and Defensives, and we are also Neutral Value vs Growth. We

prefer domestic plays over exporters and stay OW Eurozone vs the US. In

Eurozone, we had Germany and Spain as OW markets, but we are exiting

Germany. Germany is up 29% in the past 12 months, it is a global cycle

play, which in the near term might not be that helpful, and we think Euro

will be stronger, rather than weaker. We stick to our OW Spain, however.