You can sign up to receive the email here. Oil topped $68 a barrel after falling to a five-year low near $45 in January. Saudi Arabia raised its selling prices in response to stronger demand and traders are looking beyond the currently well-supplied market to growing consumption and a slowdown in US oil output. (FT) Saudi Arabia has shown little inclination to curb its production, which has risen above 10m barrels a day, as it moves to expand its market share. It also said that it remained committed to infrastructure and development projects but admitted it would need to “rationalise” spending in light of low oil prices. (FT) The rebound in prices boosted inflation expectations and set prices tumbling across major government bond markets, pushing yields to levels not seen since the ECB began QE earlier this year. (FT)
You know that the rise in the dollar is having an impact when US newspapers write trend pieces about how great it will be to take a vacation in Europe. Here’s an excerpt from a recent Washington Post story headlined “The best places in the world to visit while the dollar is this strong”:
Canada is a large, diversified economy in which commodity extraction plays a (relatively) small role. Yet historically its currency, which was once known as the Canadian peso thanks to its 30 per cent devaluation against the US dollar in the 1990s, seems to have been driven by changes in the oil price. Here’s a chart comparing two-month changes in the amount of US dollars you can buy with a single Canadian dollar against changes in the price of West Texas Intermediate:
With an unspoken currency war supposedly upon us and a cry for China to join in — according to BofAML the market is pricing about a 30 per cent probability of a 10 per cent devaluation of the CNY this year while insistent market forces push the yuan down anyway — we thought a lopsided CNY depreciation pro and con list from Nomura might be helpful: Pros 1. Makes exports more competitive, helping to boost growth. 2. Raises the cost of imports, helping to reduce the risk of CPI deflation. Cons
This guest post is from the co-authors of UBS’s white paper for the WEF meeting 2015 in Davos, which started on Wednesday. Note that one of the co-authors, UBS Investment Bank’s chief economist Larry Hatheway, will be fielding questions on the energy chapter on Friday at 11:30am during Markets Live.
There is a ripost to our one chart bear case for US stocks. The latter was an eye catcher from Jeffrey Gundlach, showing that since 1871 the longest run of consecutive yearly gains for the US market was six. The current bull market has just entered its seventh year. True, says Lukas Daalder, chief investment officer for Robeco Investment Solutions, but only if you are a prisoner of the calendar. Look April to April, instead…
Or the risk of “lethal damage” if you’re into that sort of thing. As said before, we’ve had 34 months and counting of negative PPI inflation in China with CPI at best lacklustre — coming in at 1.5 per cent in December. The risk is that, in a country charmingly wrapped in debt based uncertainty, we get outright deflation.
One of the still to be appreciated side-effects of falling oil prices is a reduction in so-called petrodollar recycling by oil producers. As we’ve already noted, there are analysts who believe petro-induced liquidity shortages may already be impacting certain eurodollar markets. Furthermore, there’s also the fact that as liquidity shortfalls manifest in external markets, the opposite could become true for internal US markets. So, just as the dollar liquidity tap gets switched off externally, it gets turned on with gusto back at home. But Bank of America Merrill Lynch’s Jean-Michel Saliba gets to the same point somewhat differently. As Saliba noted last week (our emphasis): Lower oil for longer could imply material shifts in petrodollar recycling flows. Petrodollar recycling through the absorption channel has generally been USD negative, helping an orderly reduction of global imbalances though greater domestic investment. Although recycling through the financial account is less well understood, the bulk has likely, directly or indirectly, ended up in US financial markets and has thus been USD-positive. A prolonged period of low oil prices is thus likely to lead to lower petrodollar liquidity with, in time, an allocation shift towards more inward-looking repatriation and financing flows, in our view.
In our previous post, we looked at the ways that global corporations minimise their tax burdens by routing income through offshore tax havens and transfer pricing. The ultimate beneficiaries of these shenanigans, of course, are actual people rather than legal entities. Many of these people also take advantage of offshore tax havens to avoid reporting capital income to local authorities. In this second post, we will look at how Gabriel Zucman tracks this hidden wealth and his suggestions for governments to capture missing revenue. According to Zucman, at least 8 per cent of global household financial assets — a figure that doesn’t include bullion, art, real estate, jewelry, and other physical stores of value — are held in tax havens, although he suspects that this is a lower bound. Switzerland alone is home to about $2.5 of non-resident holdings, while Luxembourg has about $370 billion attributable to foreign households and another $350 billion held by “family offices and other intermediaries.” (More on the exact methodology can be found here.)
The UK’s current account deficit is at its widest level in decades, and over the previous four posts we’ve managed to narrow down the cause to falling earnings from UK direct investments abroad since 2011. In our final post, we will do our best to figure out which specific investments are to blame, as well as what all of this means for people who actually live and work in the UK. Our main limitation is that the most detailed data end in 2012, although we can use that information to make some reasonable inferences about what has happened since then. About half of the decline in the UK’s earnings from foreign direct investment from 2011 to 2012 came from the “information and communication” sector, which includes publishing, media, software, data processing, and telecoms. Almost all of that decline can be attributed to the European Union. So what happened?
As a brief follow-up to yesterday’s post on the impact of US trade with China on US employment and incomes, we thought it would be useful to visualize a few interesting facts about the evolution of the bilateral trade balance over time. First, look at how the deficit in the trade of goods swamps the modest surplus in the trade of services. Whilst the data on services are annual and stop in 2012, the general picture would probably not look much different even if it were more up to date:
This retrospective on predictions made in the 2003 Essay on the Revived Bretton Woods System by Deutsche’s Dooley, Folkerts-Landau, and Garber is brought to you by Deutsche’s Dooley, Folkerts-Landau, and Garber. Their premise was and is that we are part of an international system characterised by newly industrialised countries pegging their currencies to the dollar at an undervalued exchange rate in pursuit of export-led growth furnished by an excess supply of labour. Those developing countries then ship their gains back to the US et al as a form of collateral against new lending as the net foreign assets of poor countries support the risks taken by their richer brethren. More so, they suggested that we were in the China phase of this system, that it would last for 10 years-ish…
Given that modern-day warfare must at some point involve drones or autonomous vehicles, it makes sense that modern-day propaganda wars should involve Twitter and social media. The battle for cyber hearts and minds in that regard is now getting really interesting. One need only do a casual Twitter search for “пустые полки“, the Russian for empty shelves, to see what we mean. The backstory here is that in retaliation for US and EU sanctions, Russia has decided to ban the importation of large categories of food products from each.
Given that Russian subjects are reportedly being force fed a diet of Putin-esque mis-information over the downing of Malaysia Airlines Flight 17, it seems worth noting what strategists employed by Russian investment banks are saying about the threat of deeper sanctions against Russia. Here’s Charlie Robertson, global chief economist at Renaissance Capital (emphasis ours)…
Small Kurdistan-related storm on Wednesday (aside from the headline news of the Isis overthrow of Mosul)… @NatRothschild1 not happy with @FTAlphaville for saying Mosul lies between Genel assets Bina Bawi and Ber Bahr. — Rob Davies (@ByRobDavies) June 11, 2014
Camp Alphaville reminder: Tickets to nerdstock available here. Markets: Asia-Pacific equities fell back from Tuesday’s six-month highs as investors adopted a cautious stance ahead of a key meeting by Europe’s central bank on Thursday and influential jobs data from the US. Wall Street’s session overnight added to the subdued tone. The S&P 500 was flat, after striking new record highs in each of the three prior sessions, as signs of rally fatigue emerged. The CBOE Vix volatility index – Wall Street’s “fear gauge” – was up 2.4 per cent in late trade, but still at a historically low level. (FT’s Global Markets Overview)
Markets: Australian equities lost momentum after the government revealed its 2014 budget — various welfare benefits would be cut, 16,500 public jobs would be axed, and a 2 per cent levy would be temporarily imposed on incomes above A$180,000 — while Asia-Pacific bourses elsewhere sought direction as traders waited for corporate earnings. The subdued tone in Asia followed a US session in which the S&P 500 hit 1,900 for the first time ever, but then pared back to close flat at 1,897. Tech stocks resumed their slide, with the Nasdaq losing 0.3 per cent. India’s stock markets keep moving upwards, anticipating a Modi victory. The nifty has climbed nearly 7 per cent in the past week. (FT’s Global Markets Overview)
Markets: Asian bourses offered mixed reactions to Monday’s latest slip in US technology stocks, while also reflecting caution ahead of the US Federal Reserve’s meeting that is due to commence later today. (FT’s Global Markets Overview)
Markets: Trading in Asian equities was mixed, with growing jitters over developments in Ukraine depressing several markets and local data providing a filip to Japanese stocks. (FT’s Global Market Overview)
This Reuters story about China having up to 1,000 tonnes of gold tied up in financing deals is doing the rounds, courtesy of information out of the WGC. But it’s hardly a revelation. We’ve known that China has been using gold (and almost everything else under the sun) for financing purposes for ages. Goldman even blessed us with a more recent update about the shenanigans in March:
And on the seventh day it fell again, in accordance with the PBoC… which cut the fixing rate. Pity the RMB carry trade, no matter what the reason. Deliberate carry trade rumbling, trade band widening to allow greater market control of the exchange rate… or maybe, just maybe, that China is kinda thinking that a depreciating yuan ain’t a terrible policy right now.
Markets: More signs of a slowdown in the world’s second-largest economy had a ripple effects across Asia-Pacific markets. A preliminary or “flash” reading of HSBC’s closely watched purchasing managers’ index indicated that activity in China’s manufacturing sector hit a seven-month low in February, with an index reading of 48.3 missing expectations that were already subdued. (FT’s Global Markets Overview)
Following Matt Taibbi’s “Vampire Squid operates in commodities” exposé, here’s an apropos update on recent LME inventory declines from the evil one itself. As analysts at Goldman Sachs noted on Friday, it looks increasingly like copper inventory is heading off market into completely opaque stores in China as a result of renewed financing deals (CCFDs), rather than being depleted due to true market deficits: We continue to believe LME inventory declines reflect stocks shifting off market rather than a deficit market, due to CCFDs and the impact of the new LME rules. Spread tightness in our view owes to the fact that CCFDs change copper from a negative carry asset (storage costs, financing costs) to a positive carry asset (where interest rate arbitrate > storage, financing, and hedging costs). Since we do not expect these deals to end anytime soon, LME spread tightness is very likely to persist, with risks that spreads tighten further during the seasonally strong period of demand in 2Q. Which is a neat way of saying “don’t blame us for tight spreads, blame China”. And … “by the way, new LME rules aren’t working just as we predicted”.