Archive - Feb 28, 2011 - Story

The paper-driven sell off in the gold market seen in January has been trumped by continuing robust physical demand in January and February. This has resulted in gold rising nearly 6% in February and silver’s strong industrial and investment demand leading to a 19% rise to new nominal 30-year highs. Political, and more importantly socioeconomic, revolutions in the Middle East and North Africa are leading to a degree of geopolitical instability and risk not seen in many years. This is leading to concerns about oil supplies from the region and hence the 14% jump in US crude oil just last week and deepening inflation concerns. With all eyes on the Middle East and North Africa, there has been less focus on the continuing European sovereign debt crisis. However, the crisis continues and recent days and weeks have seen government bonds in Greece and Ireland again come under pressure. The majority of Irish people are seeking that the massive debts of the Irish and European banking systems, incurred against them, be restructured or defaulted. Therefore, the new government will be under pressure to negotiate a fairer, more equitable settlement with the European Commission and the ECB with possible ramifications for the many European banks who lent irresponsibly to Irish banks...Mooted proposals by the Vietnamese Central Bank to ban “gold bullion trading” (see news below) are somewhat bizarre. If true this would be a very important development as the Vietnamese are some of the largest buyers of gold bullion in the world.

Markets mixed this morning. This week will see the release of a slew of economic figures, starting today with personal income estimated to rise 0.4%E v 0.4% prior and personal spending estimated to be 0.4%E v 0.7% prior. Market expectations for spending will likely be less robust than in January because of the recent rise in food and energy prices. The PCE data due out today is a reminder that we face commodity and input inflation, not wage inflation. This issue of divergent inflations will begin to rear its ugly head in the quarters to come as incomes are squeezed and the resulting impacts on spending are felt. In areas of the world where food/commodities/inputs are a significant portion of incomes, policy responses in EM and DM will be key to watch. Inflation hawks will push for rate hikes and there is concern those hikes would have little impact on the inflation at hand. Geopolitics do not help. Are we smoking at the gas station? Is our biggest worry actually not inflation, but global growth disappointment? Given a potentially disappointing consumer, tighter fiscal policies, geopolitical risks on the rise, and potentially tightening monetary policies it would appear so.

Saudi Arabia continues being on an excess capacity roll. After totally butchering the concepts of apples and oranges, specifically as pertains to light sweet and heavy sour, with the market apparently stupid enough not to know the difference, and somehow promising it can make up for lost Libyan output last week when in reality it is in desperate need to export more oil to balance its budget, the increasingly troubled country now is seen as the natural backstop to Oman disruptions. Reuters reports: "Oil prices turned lower on Monday as reassurances from Saudi Arabia that extra supply needs had been met soothed market fears over the spread of protests to oil-producer Oman. Violent uprisings in OPEC member Libya dramatically reduced exports from North Africa, but Saudi Aramco CEO Khalid al-Falih told reporters on Monday the shortfall had been made up. Falih refused to give exact figures, but an industry source on Friday said the top exporter's output had risen to more than 9 million barrels per day (bpd). This compared with roughly 8.3 million bpd in January, according to a Reuters survey." Of course, whether or not there is any actual hike in production in a country long rumored to be vastly exaggerating its spare capacity, we will only know months from now. In the meantime, Saudi will gladly take the few days of stability sub-$100 WTI grants the world, while it decides how to handle increasingly more beligerent neighbors Yemen, Oman and Bahrain.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 28/02/11

After two deaths resulted from protests spreading to that other Yemen (and Saudi) neighbor over the weekend, the situation has deteriorated once again, as Reuters reports the death tool has hit 6, and now "Omani protesters
demanding political reforms blocked roads leading to a main export port
and refinery on Monday as the death toll from Sunday clashes with police
in the Gulf Arab sultanate rose to six.  About 1,000 protesters were standing in the road to block the entrance to the industrial area of the coastal town of Sohar, which includes a port, refinery and aluminium factory. Hundreds more were protesting at a main roundabout, angry after police opened fire on Sunday at stone-throwing protesters demanding political reforms, jobs and better pay. Protesters later burned the town's police station and two state offices." Apparently not even Oman's attempt to follow through in Saudi's footsteps and paradrop money is having much of an impact: "The government, under pressure over its response to the Sohar protests,
pledged on Sunday to create 50,000 more government jobs and hand out
unemployment benefits of $390 a month to job seekers." In the meantime, according to Merrill there is little hope of a return to normalcy in Libya for a long time: "With Libya apparently at risk of a civil war, there are reasons to believe that oil supplies in that country could be off for months," it said in a note to clients, received by Reuters on Monday. So now that Saudi Arabia is the only gulf country not to be rioting, maybe someone can update us on what is happening in suddenly very quiet and even more peaceful Algeria.