I come from a background where news is important. In the minutes preceding a scheduled major announcement of any kind, an eerie quiet would descend on the normally brash and chaotic dealing rooms where I used to work as everybody stared intensely at their monitors, ready to spring into action once the news was out. What I quickly came to understand though was that it wasn’t the news itself that was eagerly anticipated; it was the reaction to it. News creates volatility, and for a trader volatility equates to opportunity. The actual data or news may decide the initial direction of that volatility but really has little impact beyond that. It was, therefore, with a wry smile that I watched the reaction this week to the “news” that President Trump would be pulling the U.S. out of the Paris Climate Accord, news that energy investors should ignore for a whole host of reasons.
Talking heads on business channels clearly felt that they should react to the announcement and duly did so, often with absolutely no regard to common sense, and usually based on their political bias. I have no time for the extremists either side of the political divide on this issue. The dealing room background that I alluded to above taught me to respect data and expertise over emotion in decision making, so when over 98% of scientists agree that climate change is a problem the logical thing to do is act on the assumption that they are right. That, however, doesn’t excuse those on the other side of the argument who greeted the news with wailing and the gnashing of teeth, and who painted a dystopian picture of the future as a result of the decision.
In reality, as a few clearer minds have pointed out, the U.S. pulling out of the Paris agreement will have absolutely no effect, at least in the immediate future. It is purely political grandstanding. Traders, who react to this sort of thing for a living, certainly felt that way. The announcement came shortly after 3PM yesterday, a point marked by the blue arrow on the chart below. That chart is for the E-Mini WTI futures contract QM with 5 minute candles. You would expect to see a spike in oil when this “job creating” fossil fuel friendly announcement was made, but, as you can see, it passed with little or no reaction in the market.
(Click to enlarge)
In case you think that was an anomaly I can assure you that the same indifference is evident in the charts for First Solar (FSLR), Tesla (TSLA), and every stock that you might expect to react to the news.
There are several reasons for this. First and foremost, it wasn’t actually “news”. The decision had been expected for some time and whatever limited effects there may have been were priced in a long time ago. That, though, assumes that there will be some effects but, given that most effective and influential environmental regulations are made at the state and local level in America, that is a big assumption. In the long term, it may make exploration more attractive, but could also prompt “carbon tariffs” or disinvestment in the U.S. by other countries. The outcome is therefore by no means certain
The announcement will no doubt please some of Trump’s supporters, but it is more of a statement of intent than anything. As with any major international agreement or treaty (see Brexit) the Paris accord has an exit procedure that is long and tortuous. Indeed, immediately following Trump’s event, White House officials pointed out to press members that the exit cannot be effected before around 2020. I am not making any early predictions but based on current polls there has to be a good chance that Trump will not be President soon after that, if he survives that long.
Investors, then, should not be fooled by the hysteria on both sides of the political divide that has greeted this decision. It will not reverse the move away from coal in power generation as long as natural gas remains cheaper as well as cleaner. It will not help U.S. oil companies who compete in a global market, nor will it hurt renewable energy firms who do the same. It will not result in an immediate apocalypse. It will, most likely, never even be fully enacted. From an energy investor’s perspective, as significant as this move seems on the surface, it can safely be ignored.