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Daily Insight

Group Economics Macro & Financial Markets Research

01 December 2016

OPEC deal to speed up re-balancing Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com

Oil view: OPEC finally agrees; we see higher prices in 2017 - Oil prices surged more than 8% yesterday after OPEC decided to cut its crude production by 1.2 million barrels per day (mb/d) as already indicated at the September meeting in Algeria. Non-OPEC producers will cut production by another 0.6 mb/d, of which half will be borne by Russia. Although reaching an agreement was already quite a struggle, executing the agreement in practice will be an even greater challenge. Many OPEC members will have difficulty in cutting production although their fiscal budgets are based on higher oil prices. After all, there is a risk that higher oil prices would trigger a rise in Non-OPEC crude production, which would lead to a shift in market share, rather than a sustainablely higher oil price. Deal or no deal, we expect higher oil prices in the course of 2017. That is because the market is heading for a balance between supply and demand anyway. Global demand is expected to rise by 1.2 mb/d in 2017, and non-OPEC supply falls under pressure due to a lack of investments in the sector as low oil prices still hurt. This agreement may speed-up the process of shifting towards a balance, bringing oil prices towards USD 60/bbl next year. So, if this agreement fails after all, it would only temporarily cap the upside potential of oil prices. (Hans van Cleef) European Financials: Three banks falter in latest UK stress tests - The BoE released the results of their third annual stress test on Wednesday. Six major UK banks and one building society were tested. Overall the Royal Bank of Scotland (RBS) performed the worst in the results, both by having the lowest common equity tier one in a stressed scenario (CET1) and by it falling by largest amount when compared with peers. As a consequence of the results, RBS produced an updated capital plan to incorporate further capital strengthening. Barclays and Standard Chartered also underperformed, but not to the degree of RBS, and they did not have to submit supplementary plans that altered from their existing capital programs. The newly added 'stressed misconduct projections' were the thorn in the side for the UK banks. The misconduct calculations were significant, and contributed to one third of the negative impact to the banks. These often 'legacy issues' in regard to misconduct still hound the industry, and have the potential to hit future profits significantly. Overall, the test was more severe than previous years and the banks themselves will not consider the results too damning. The majority of the banks have increased their capital over 2016, and will continue to do so for the next few years. We believe the tests are important for monitoring, but should not fundamentally change the funding profiles of the banks. The senior debt funding costs for the institutions increased just marginally to one basis point wider for the day. (Tom Kinmonth) Euro Macro: Italy referendum implications - Investor concern about European political risk has sharpened further following the surprise outcome in the US presidential elections. That result, following Brexit, is seen as confirming the surge of an anti-establishment movement fuelled by discontent at the impact of globalisation. There are a number of polls coming up, but the Italian referendum on 4 December and its potential ramifications have been in the spotlight recently. The impact of Italy’s referendum on the outlook for its economy and wider financial markets is far from black and white. There are a lot of possible

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Bloomberg: ABNM


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Daily Insight - OPEC deal to speed up re-balancing - 01 December 2016

scenarios, given the uncertainty about polls and elections, as well as the feedback loops between electoral reforms and the implications for government formation. In case of a No vote, an interim government will likely take over and political instability and policy stagnation are likely, but the risks for euro exit in the medium term actually diminish. A Yes vote opens up the possibility of a reformist government from 2018, but also for a euro referendum, depending on the election outcome – so it increases the tail risk on both sides. The immediate reaction of Italian bonds will be to sell-off in a No and rally on a Yes but in both cases spreads will remain elevated. The size of government debt, NPLs and economic stagnation mean the country remains vulnerable in either scenario. For more please see our note Euro Watch – Italy referendum ramifications (Nick Kounis)

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Daily Insight - OPEC deal to speed up re-balancing - 01 December 2016


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