Crude

Macro news from Europe has refuted claims made last week that the ESM fund would be doubled to EUR 1tln, with a German spokesman commenting that the country is not of mind that ESM resources should be increased to that level. Discussions concerning the management of the EFSF and the ESM from German members of parliament have spurred talks that the funds could be run in parallel and even together in an emergency scenario. The ECB’s Weidmann has commented on his confidence in the Eurozone and the German economy, stating that current stagnation is temporary and that we should see a recovery in the Eurozone during 2012. Financial stocks have shown volatility this morning following comments from French and German Finance Ministers that banking regulations may be relaxed under the Basel III agreement, however this was later denied by the German Finance Minister.

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Two weeks ago we wrote a post that should have made it all too clear that while the US and Europe continue to pretend that all is well, and they are, somehow, solvent, Asia has been smelling the coffee. To wit: "For anyone wondering how the abandonment of the dollar reserve status would look like we have a Hollow Men reference: not with a bang, but a whimper... Or in this case a whole series of bilateral agreements that quietly seeks to remove the US currency as an intermediate. Such as these: "World's Second (China) And Third Largest (Japan) Economies To Bypass Dollar, Engage In Direct Currency Trade", "China, Russia Drop Dollar In Bilateral Trade", "China And Iran To Bypass Dollar, Plan Oil Barter System", "India and Japan sign new $15bn currency swap agreement", and now this: "Iran, Russia Replace Dollar With Rial, Ruble in Trade, Fars Says."" Today we add the latest country to join the Asian dollar exclusion zone: "India and Iran have agreed to settle some of their $12 billion annual oil trade in rupees, a government source said on Friday, resorting to the restricted currency after more than a year of payment problems in the face of fresh, tougher U.S. sanctions." To summarize: Japan, China, Russia, India and Iran: the countries which together account for the bulk of the world's productivity and combined are among the biggest explorers and producers of energy. And now they all have partial bilateral arrangements, and all of which will very likely expand their bilateral arrangements to multilateral, courtesy of Obama's foreign relations stance which by pushing the countries into a corner has forced them to find alternative, USD-exclusive, arrangements. But yes, aside from all of the above, the dollar still is the reserve currency... if only in which to make calculations of how many imaginary money one pays in exchange for imaginary 'developed world' collateral.

While it is early to determine if the ongoing breakout is finally in anticipation of upcoming episodes of direct and indirect monetization by the Fed, ECB, or any of the many other pathological currency diluters in circulation, it is obvious that precious metals have found a new bid in recent days. Is this then, the beginning of the next surge in gold and silver to record highs? It remains to be seen, but one entity, the Duet Commodities Fund which was one of last year's best performers, has already made up its mind. 'Our central forecast in gold remains constructive as our long term view targets $2,500 in 2012. Our core view is that gold will head higher to the $2,500 range driven by consequential USD weakness once the EU crisis dissipates and the US steps into the limelight. A weaker USD is not undesirable in the world order as everyone (especially China) understands that the US consumer is the driver for global consumer confidence and consequential consumption led demand." Wow - someone in this market can actually think one step ahead of the inevitable ECB LTRO/monetization, and realize that the Fed will in turn have to escalate to that escalation. Gold, er golf clap.

European indices as well as major currency pairs are trading in slight negative territory at the midpoint of today’s session due to profit-taking and cautious sentiment dominating the market, with the worst performing sector being Oil & Gas showing volatile trading this morning.  In European macro news, Greek PSI talks are closer to coming to a conclusion, with a source saying that the haircut announcement is likely to be today.

America's loss is China's gain. In the aftermath of the Keystone XL fiasco, which will see not only a number of jobs "uncreated" but a natural source of crude lost, Canada is already planning next steps. Which will benefit Shanghai directly and immediately. As Bloomberg reports, "Prime Minister Stephen Harper, in a telephone call yesterday, told Obama “Canada will continue to work to diversify its energy exports,” according to details provided by Harper’s office. Canadian Natural Resource Minister Joe Oliver said relying less on the U.S. would help strengthen the country’s “financial security.” The “decision by the Obama administration underlines the importance of diversifying and expanding our markets, including the growing Asian market,” Oliver told reporters in Ottawa." Ironically, it is diversifying away from the US, with its ever soaring, politically-predicated uncertainty, that is a source of stability and diversification. But it is not only crude. Wonder why no jobs are being created? Wonder why despite record low mortgage rates there is no bottom in sight for housing? Simple - nobody can plan one month, let alone one year ahead for any US-based venture or business. The political risk is simply too great - whether it is contract law (see GM and Chrysler) or simple solvency (see record high levels of cash hoarded by companies), it is there, and as long as it is there, there will be no hiring, no capex spending, no growth, and no real improvement in the economy, the real economy, not that defined by where the Russell 2000 closes on any given day.

The big news of the day, aside from the idiot rally finally being back on full bore, is that the Obama administration finally pushed Canada's hand in telling it to sell its crude to China instead of the US, which we are confident it will gladly do. Much of this was largely priced on, as was the fact that opportunity for significant job creation was just kicked to the curb. What was not however expected, is that in keeping up with the fine tradition of taking responsibility for his decisions and actions, kinda sorta, America's president said that it was really the republicans whose fault it is that Keystone XL is now and will remain in its blueprint stages. From The Hill: "Obama said he was not acting on the merits of TransCanada Corp.’s plan, but instead was forced to make the decision based on the “arbitrary” deadline mandated by GOP provisions in December’s payroll tax cut extension deal. "As the State Department made clear last month, the rushed and arbitrary deadline insisted on by Congressional Republicans prevented a full assessment of the pipeline’s impact, especially the health and safety of the American people, as well as our environment," Obama said in a prepared statement. “As a result, the Secretary of State has recommended that the application be denied. And after reviewing the State Department’s report, I agree,” Obama added. In other words, do you remember where you were when the republicans blocked the Keystone Pipeline?

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There were two reasons for today's big initial market move: one was the realization that the next LTRO could be massive to quite massive (further confirmed by a report that the ECB is now seeking a "Plan B"), the second one was that, somehow, even though China's economy came in quite better than expected, and much better than whispered, the market made up its mind that the PBoC is now well on its way to significant easing even though inflation actually came in hotter than expected, and virtually every sector of the economy, except for housing, is still reeling from Bernanke's inflationary exports. While we already discussed the first matter extensively earlier, we now present some thoughts from Standard Chartered, one of the most China-focused banks, to debunk the second, which in a note to clients earlier summarized "what the economy is really doing and where it is going" as follows: "If anything, today’s data is another reason not to expect a quick move to further loosening. The economy is slowing, but not dramatically – so far." This was subsequently validated by an editorial in the China Securities Journal which said there was no reason to cut interest rates in Q1, thereby once again confirming that the market, which in its global Bernanke put pursuit of interpreting every piece of news as good news, and as evidence of imminent Central Bank intervention, has once again gotten ahead of itself. And as the Fed will be the first to admit, this type of "monetary frontrunning" ironically make the very intervention far less likely, due to a weaker political basis to justify market intervention, while risking another surge in inflation for which it is the politicians, not the "independent" central banks, who are held accountable.

We don't have to run through the maze 5 times before we know what lever to push! 

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Just out from Reuters:

• NIGERIA'S LABOUR UNION LEADERS SAY STRIKE SUSPENDED - RTRS

Minor down tick in crude on the news, maybe because everyone is still sleeping. So, does this mean that the Iran embargo is back on, and the joint US-Israel wargames are set to resume as "budgetary" conditions have loosened?

Although gold had its largest drop in the last 2 weeks on Friday, (-1.6%), it was 1.3% higher on the week and trading higher this morning.  Many analysts feel that current sovereign, macroeconomic and geopolitical risks are not reflected in gold's price. Friday's news of France's loss of its AAA rating has put the European Financial Stability Facility (EFSF) at risk. The Eurozone economy resembles a large ship sailing in rough seas since France fund's 20% of the EFSF fund and 8 other members were also downgraded. This will almost certainly lead to the EFSF's downgrade which would result in the fund too paying more to borrow as credit costs rise.  There are icebergs lurking in increasingly murky Eurozone waters. The European downgrades were long expected and may have been priced in the markets. The risk of a non orderly Greek default and of contagion in the Eurozone remains and is not priced into markets. It would lead to the euro falling sharply against other fiat currencies and particularly against gold.

Pres. Barack Obama has launched new international diplomatic poker with “a trailing hand”. It is impossible to exaggerate the forces at play, economic as well as political, foreign and domestic, and their interplay.

The last time intermodal traffic dipped to this level, we were in denial about a Recession and the Dow continued to march from 11,500 in January of 2008 all the way to just above 13,000 in May.