Crude futures soaring by nearly 2% overnight to over $100 is what all those evil, evil speculators at work looks like. That, or the Federal Reserve's "all in" bubble reflation policy perhaps. No, it has to be the speculators: the margin hiker-in-chief said so. And for those who are surprised by Crude's move into triple digit territory, which in turn will send gas prices to the highest they have ever been for this time of year just in time for the election, wait until the reality of $150 oil is priced in, which as we explained yesterday, is the matched price for a $4 trillion Fed balance sheet.
Earlier we explained why Bernanke's actions today mean that the Fed Balance Sheet will likely grow to over $4 trillion by the end of 2013. Critically this flood of liquidity will raise the nominal price of every asset (from whimsical pieces of stockholder paper to barbarous relics and black gold). Some of these assets, like stock prices and high-yield credit spreads do have point-in-time 'value limits' to their price - though at times it seems a dream that fundamentals would ever matter again; but some have less of a binding constraint - such as gold. Should the Fed proceed, as seems likely, and do its worst/best to blow its balance sheet wad then we estimate Gold will be priced at least $2250 per ounce by the end of 2013 (of course higher if the Fed sees no evidence of recovery). Meanwhile, deeper underground, the world's mainstay source of energy, WTI Crude oil, could jump to record highs over $150 per barrel (which just happens to coincide with the 'pegged' value of oil in gold). It will be interesting indeed to see how the world's socio-economic infrastructure hangs together should that occur - can't happen? Different this time? Indeed it is, now that Ben hit the big red 'panic' button.
Now that the German high court ruling is out of the way and the Dutch elections results produced no real surprises the European equity markets are essentially flat with position squaring evident ahead of the keenly awaited FOMC rate announcement and accompanying press conference. Bund futures have followed a similar trend having ticked higher through the morning with some modest re-widening of the Spanish and Italian 10yr government bond yield spreads, wider by 9bps and 5bps respectively, also in Euribor will did see a decent bid after comments from ECB member Hansson who said the ECB council must now start debating a negative deposit rate. Today’s supply from Italy and Ireland had little impact on the general sentiment, that’s in spite of the fact that demand for debt issued by the Italian Treasury was less than impressive to say the least. Also of note, Catalan President Mas said that Spain should debate staying in the euro, which unsettled the market somewhat. Overnight it was reported that the US Navy have stepped up their security presence in Libya by ordering two warships to the country's coast, according to US officials. This is after the US ambassador to Libya and three American members of his staff were killed in the attack on the US consulate in the eastern city of Benghazi by protesters earlier in the week. Today, there were more reports of demonstrations in the region, however supplies remain unaffected.
Today's ZH articles in audio summary! "I remember 9/11 quite clearly. I was only a small tower at the time..." 8pm Everyday @ New York Time.
By now everyone knows about the collapse in Chinese iron ore consumption, electricity production and luxury good demand (see Burberry), as well as the record copper stockpiling, all of which point to the arrival of the long-deferred Chinese hard landing. Rumors, subsequential denials notwithstanding, that Chinese Hu Jintao successor Xi Jinping may or may not be missing, are not helping. Below we present yet another data point which had, for the longest time managed to diverge from the underlying Chinese economic reality, only for it too now to recouple with gravity with a bang: Chinese crude imports. Coming in at 18.4 million barrels, this was a 16% plunge from July's total imported energy needs, and is the lowest print since mid-2010 swoon, first crossed to the upside back in early 2009. Which likely is where the general Chinese economy is as well, at least in terms of actual demand. Only this time instead of going from the lower left to the upper right, to quote Dennis Gartman, it is doing the inverse.
Equities traded lower in Europe today as market participants continued to book profits after a rally to 13-month highs on growing concerns that even though the Constitutional Court in Germany will dismiss the injunction, it may enforce certain conditions. In addition to that, yesterday’s comments from Spain’s Rajoy who said that the new ECB backstop makes a bailout for his country less urgent. As a result, there is a risk that markets may scale back their expectations of an imminent full-scale bailout and in turn lead to another speculative attack on Spanish bonds. This, together with touted profit taking, saw the short-end in Spain and Italy come under pressure (2y Spanish yield up 8bps and 2y Italian yield up 7bps). In turn, this supported duration assets throughout the session. Looking elsewhere, the looming elections failed to deter investors from the latest DSL tap, which drew a record low yield. Going forward, the second half of the session will see the release of the latest Trade Balance data from the US, as well as the weekly API report. In addition to that, the US Treasury will sell USD 32bln in 3y notes.
Stocks in Europe traded lower throughout the session, as market participants reacted to another round of weak data from Asia. In particular, China’s imports fell 2.6% on the year in August vs. Exp. 3.5%, underpinning the need for policy easing measures from the People's Bank Of China. Some of the weakness in equity space was also attributed to profit taking following last week’s gains. Spanish bonds continued to benefit from the ongoing speculation that the government will seek a full scale bailout. As a result, SP/GE 10y bond yield spread is tighter even though there is an outside chance that the constitutional court vote in Germany will delay this. On the other hand, IT/GE and NE/GE bond yield spreads are wider, reflective the upcoming issuance, as well as elections. EUR/USD and GBP/USD, both seen lower on the back of touted profit taking, as well as pre-positioning into near-term risk events mentioned above. Commodity linked currencies are also weaker, weighed on by the weaker data from China, which also showed that imports of crude oil hit a 22-month low. In terms of notable stocks news, Glencore said it will not improve its offer for Xstrata after the company raised offer for Xstrata to 3.05 from 2.8.
Now that oil’s price revolution – a process that took ten years to complete – is self-evident, it is possible once again to start anew and ask: When will the next re-pricing phase begin? Most of the structural changes that carried oil from the old equilibrium price of $25 to the new equilibrium price of $100 (average of Brent and WTIC) unfolded in the 2002-2008 period. During that time, both the difficult realities of geology and a paradigm shift in awareness worked their way into the market, as a new tranche of oil resources, entirely different in cost and structure than the old oil resources, came online. The mismatch between the old price and the emergent price was resolved incrementally at first, and finally by a super-spike in 2008. However, once the dust settled on the ensuing global recession and financial crisis, oil then found its way to its new range between $90 and $110. Here, supply from a new set of resources and the continuance of less-elastic demand from the developing world have created moderate price stability. Prices above $90 are enough to bring on new supply, thus keeping production levels slightly flat. And yet those same prices roughly balance the continued decline of oil consumption in the OECD, which offsets the continued advance of consumption in the non-OECD. If oil prices can’t fall that much because of the cost of marginal supply and overall flat global production, and if oil prices can’t rise that much because of restrained Western economies, what set of factors will take the oil price outside of its current envelope?
- Jobs Gauge Carries Election Clout (WSJ)
- Draghi Lured by Fractious EU Leaders to Build Euro 2.0 (Blooomberg)
- Rajoy stance sets stage for EU stand-off (FT)
- China Approves Plan to Build New Roads to Boost Economy (Bloomberg)
- Hollande faces questions on tax pledge (FT)
- Putin Looks East for Growth as Debt-Ridden Europe Loses Sheen (Bloomberg)
- Strike Grounds Half of Lufthansa's Flights (Spiegel)
- The weakest will win in the euro battle (FT)
- Hilsenrath: Fed Economic, Interest Rate Forecasts Will Include 2015 Outlook (WSJ) - because he just figured that out
- Obama Presses Plan for U.S. Resurgence (WSJ)
- Hong Kong to Restrict Sales of Homes at Two Sites to Locals (Bloomberg)
- Drought Curbs Midwest Farm-Income Outlook, St. Louis Fed Says (Bloomberg)
The EURophoria which commenced yesterday after the repeatedly pre-leaked Mario Draghi speech, has continued into the overnight session, this time getting a helping hand from China, whose Shanghai Composite index is up by just under 4% or the most in eight months following an announcement that The National Development & Reform Commission, China’s top planning agency, said it approved plans to build 2,018 kilometers (1,254 miles) of roads, a day after it backed plans for subway projects in 18 cities. In other words China's empty cities will still be empty but will now be connected and have even better infrastructure. Irrelevant of how the extra money has been injected, or for what ends, the stock and bond markets around the world are enjoying the news, with the EURUSD rising to 1.2700 recently, the Spanish 10 Year sliding to under 6% and the lowest since March despite Industrial Output sliding 5.4% or more than the 5.2% expected, even as German 2 year yield rise to the highest since July despite strong German trade surplus and Industrial Production data, with European equities green across the board and the EURCHF in mid-1.21 territory on louder unfounded rumors the SNB will hike the peg to 1.22/1.23. And with the European action in teh rearview mirror (more below), all eyes turn to today's key report, the August Non-Farm Payrolls.
So what's driving these high ass oil prices? Fundamentals, paper pushing derivatives, fraud, or fear? A common sense discussion ensues...
- Draghi Credibility At Stake As ECB Tries To Save The Euro (Bloomberg)
- Clinton Returns to Back Obama (WSJ)
- Taxi fares up 17% in New York City (Toronto Sun)
- High Speed Scandal: Ferrari Incident Rocks China (Daily Beast)
- China’s Richest Man Benefits From Thirst For Soft Drinks (Bloomberg)
- China August export growth seen weak, imports slow (Reuters)
- Death to PowerPoint! (BusinessWeek)
- Sweden surprises with interest rate cut (WSJ)
- IMF demands greater clarity on Irish austerity plans (Reuters)
- At Abercrombie & Fitch, Sex No Longer Sells (Bloomberg)
- And the best for last: California Treasurer Backs Law to Ban Costly Long-Term Bonds (Bloomberg) -> legislating low, low yields
Gold’s seasonality is seen in the above charts which show how March, June and October are gold’s weakest months with actual losses being incurred on average in these months. Buying gold during the so-called summer doldrums has been a winning trade for most of the last 34 years. This is especially the case in the last eight years as gold averaged a gain of nearly 14% in just six months after the summer low. We tend to advise a buy and hold strategy for the majority of clients. For those who have a bit more of a risk appetite, an interesting strategy would be to buy at the start of September, sell at end of September and then buy back in on October 31st.
This is a rally based upon hope and vapors.
- Germans write off Greece, says poll (FT) - Only a quarter of Germans think Greece should stay in the eurozone
- As predicted here two months ago: ECB chief and Spanish PM on collision course (FT)
- Gold Wagers Jump To 5-Month High As Fed Spurs Rally (Bloomberg)
- Euro zone factories faltering as core crumbles (Reuters)
- Those who expected more China easing, beware: PBOC Has No Short Term Intention for Loose Money Policy (Financial Market News)
- French jobless tops three million, minister says (AFP)
- Spain Leads Europe’s $25 Billion Gamble Before ECB (Bloomberg)
- US investor is Ireland’s biggest creditor (FT)
- Draghi May See Silver Lining In Disappointing Investors (Bloomberg)
- China's steel traders expose banks' bad debts (Reuters)
- NY probes private equity tax strategy (FT)