Crude

Remember the cold war: evil Empire, 5 year plans, Lada cars, etc? It may very well be back, this time over the simple matter of a few million barrels of crude per day, after Russia was found to be quietly supplying an embargoed Syria with ammunition, in violation of a weapons embargo. Reuters reports: "A Russian-operated ship carrying a cargo of ammunition has reached conflict-torn Syria after being temporarily halted during a refuelling stop in Cyprus, sources in Russia and Cyprus said on Friday. A source in Cyprus, where the ship made an unscheduled stop for refuelling late on Tuesday, said the ship had given written assurances to authorities its destination would not be Syria but Turkey. It was allowed to sail a day later, whereupon it dropped off conventional tracking systems, switched course and reached Syria on Thursday. "It had bullets. There were four containers on board," a Cypriot official told Reuters." And here the plot thickens: we now have some war mongering deepthroat somewhere in Leningrad, pardon, St. Petersburg: "The ship was carrying a dangerous cargo," the source at St. Petersburg-based Westberg Ltd. said by telephone on condition of anonymity. "It reached Syria on Jan. 11th." Needless to say, the US is not very happy that Russia is doing precisely what it warned a few months ago it would do: namely protect its sphere of influence especially in light of the ever-encroaching NATO aspirations (yes, provocations go both ways as Ron Paul has long been warning): "The United States said on Friday it had raised concerns with Moscow over a Russian-operated ship that has arrived in Syria and which sources said contained a cargo of bullets. "With regard to the ship we have raised our concerns about this both with Russia and with Cyprus, which was the last port of call for the ship, and we are continuing to seek clarification as to what went down here," State Department spokeswoman Victoria Nuland said." Looks like the escalation in the Straits of Hormuz is about to shift to the backburner as we finally go back to where the real tension is and always has been: between West and East.

European Indices are trading up at the midpoint of the session following strong performance from financials, however, Italian bond auction results dampened this effect after failing to replicate the success of the Spanish bond auction yesterday with relatively lacklustre demand. There has been market talk that this lull in demand for Italian bonds is due to technical error preventing some participants from bidding in the auction, but this still remains unconfirmed. Heading into the North American open, fixed income futures are still trading higher on the day having seen the Bund touch on a fresh session high and with peripheral 10-year government bond yield spreads widening ahead of the treasury pit open. Markets now anticipate the release of US trade balance figures and The University of Michigan confidence report.

All you need to read.

UPDATE: Oil Sub $100.

And so the escalation ends, if only for the time being, as Iran chalks a (Pyrrhic?) victory.

• EU IRAN OIL EMBARGO SAID TO BE LIKELY DELAYED BY SIX MONTHS

Why? Because the world slowly realized that the potential surge in oil prices would tip a world already on the verge of a recession even deeper into economic contraction. Not rocket science, but certainly something the US president apparently has been unable to comprehend, especially if hoping that he would merely transfer exports from Iran to his close ally Saudi Arabia which would cement its European market monopoly even further. Or, perhaps, someone just explained to Obama that Embargo in January + QE3 in March = No Reelection...

In other news, crude is now dumping.

Imagine pensions not paying retiree funds, insurers not paying claims, and banks collapsing everywhere. Sounds like fun? I will be discussing this live on RT's Capital Account with the lusciously locquacious Lauryn Lyster at 4:30pm.

All you need to read.

Crude prices rose modestly this morning so far (up to $102) as news of the Nigerian oil and gas union will shut down all production starting Sunday in a nationwide strike over fuel prices. As the Associated Press reports, the nationwide strike has been under way since Monday and the 20,000 oil and gas union members joining on Sunday will mean a top supplier of crude to the US (approximately 2.4mm barrels per day) will stop production. The union notes that the Nigerian government's reversal of a two-decade-long subsidy program to keep gas prices low for Nigerians "forced them to go ahead and apply the bitter option of ordering the systematic shutting down of oil and gas production." The market for now does not seem too bothered by this drop in supply, even in the tight markets we are facing, as most of the oil move seems driven by USD weakness post the ECB decision - perhaps things will change when the unions call the market's bluff on Sunday?

• Hedge Funds Try to Profit From Greece as Banks Face Losses (Bloomberg)
• Spain Doubles Target in Debt Auction, Yields Down (Reuters)
• Italy 1-Year Debt Costs More Than Halve at Auction (Reuters)
• Obama to Propose Tax Breaks to Get Jobs (WSJ)
• GOP Seeks to Pass Keystone Pipeline Without Obama (Reuters)
• Debt Downgrades to Rise ‘Substantially’ in 2012, Moody’s Says (Bloomberg)
• Petroplus wins last-minute reprieve (FT)
• Geithner gets China snub on Iranian oil as Japan plans cut (Bloomberg)
• Fed officials split over easing as they prepare interest rate forecasts (Bloomberg)
• Draft eurozone treaty pleases UK (FT)
• Premier Wen looks at the big picture (China Daily)
• US Foreclosure Filings Hit 4-Year Low in 2011 (Reuters)

Heading into the North American open, European equity futures are trading lower, with comments from Fitch’s Riley, who suggested that the ECB must do more to prevent cataclysmic EURO collapse, causing the most recent bout of risk averse sentiment. As a result, major FX pairs are trading lower, with EUR/USD testing 1.2700, while GBP/USD fell through 1.5400 level. Looking elsewhere, apart from being buoyed by Fitch comments, German Bunds benefited from a well received German Bobl auction. Of note, European bond yield spreads are predominantly tighter for the time being, with analysts noting buying of Spanish and Italian paper by domestic and real money account names.  Finally, there is little in terms of macro-economic data and instead the attention will be on the publication of various EU related economic outlooks and the US Treasury is set to sell USD 21bln in 10-y notes.

Over the past hour the EURUSD has tumbled by nearly 100 pips on what some believe is a liquidation program, but is largely driven off continued European data weakness (and with the recession here, we will be getting much more of this in the days to come), as well as continued scramble for safety. Germany auctioned off a 5 year note which received €9billion bids for €4billion target; the bund yield 2.3bps was indicative of a safe haven bid, and explains why bank deposits with the ECB rose to a new record €486billion. The strength is somewhat peculiar as it was earlier reported that the German economy contracted by 0.25 bps in Q4, which is never a good thing, but the assessment is that German weakness will hit others more than Germany itself. Elsewhere, Spanish industrial production declined -7.0% Y/y vs an estimated -5.4%, the worst decline since Oct. 2009. Spain 2-year yield down -34bps, causing spread to bunds to fall 33bps. We doubt that this contraction will last, or the BTP yield flirting with the 7% barrier especially after Rabobank finally noted what we have been saying for a while, namely that LCH will soon have to hike Italian margins again. In Greece, CPI rose 2.2% Y/y vs est. 2.7%; a decline which is seen as a symptom of economic downturn. Confirming the slowdown, we learn that Euroarea Q3 economic growth was reduced to 0.1%, meaning that the recession likely started in Q4. Hungary is again a center of attention, after the forint drops following an EU statement it may suspend Hungary funding (unless the country hands over its legislative apparatus to the EU entirely). Finally, we find out that French Fitch is now channeling France, after saying that the ECB must do more to prevent a cataclysmic Euro collapse. All this leads to a drop in the EUR to under 1.27, a slide in crude to under $102, and a decline in gold to $1634 after nearly hitting $1650 in overnight trading as the world realizes that a return in Chinese inflation (that SHCOMP surge isnt coming on its own) courtesy of a loose PBOC, will mean a prompt retrace of the metal's all time highs.

All you need to read.

Markets are moving positively across the board today following comments from Fitch, dampening speculation that France may be downgraded from its Triple A status. Fitch’s Parker commented that he does not expect to see France downgraded at all throughout 2012. However he added that there are continuing pressures for France from national banks and EFSF liabilities, Parker also reinforced German confidence stating that Germany’s Triple A rating is safe. Markets were also experiencing upwards pressure from strong French manufacturing data performing above expectations and successful Austrian auctions today, tightening the spread between France and Austria on 10-year bunds.

All you need to know.

The bullishness is rather interesting considering the notable headwinds that exist in the European sovereign debt markets, the geopolitical risk seen in light sweet crude oil futures, and the potential for a recession to play out in Europe.

In keeping with the theme of everything decoupling from everything else these days, a comparable decoupling pattern could be observed in China's December trade data, which experienced a surprising jump in its trade surplus from $14.5 billion in November to $16.5 billion in December, even if exports broadly slowed down and grew at the slowest pace in 10 months. This number was quite odd as it represents almost double the consensus forecast $8.8 billion, predicated by a matched slow down in imports which were up only 11.8% Y/Y, the smallest rise since the October 2009 decline of 6.4%. The odd jump in the trade surplus appeared at a time when many were expecting that the slowing Chinese economy would be well on its way to shifting from surplus to deficit, leading to a devaluation of the CNY (as opposed to the constant badgering form the US and Chuck Schumer demanding a revaluation of the renminbi). Furthermore, as the year winds down to the Chinese Near Year in February, this has been a traditional time when Chinese surpluses decline and go negative, even in good years (see 2010 and 2011). Yet a quick glance at China's two primary trading partners: the US and EU does not reveal anything peculiar: both were either flat or saw just a modest drop in the trade surplus - good news for anyone concerned if the European slowdown would hit the country's largest trading partner. Which is where the decoupling occurred, as the surplus soared in the "rest of the world" or the non-EU/US category. As can be seen below, December is traditionally a month when the surplus contracts and approaches the flatline. Yet this year, oddly enough, the December surplus doubled from $5.8 billion to $11.4 billion. Just who is it, outside of the US and EU, that suddenly saw a pressing need for Chinese imports?And yet all of the above is likely just minutae when one considers something far more important: Chinese Oil imports. As the chart below shows, sooner or later excess capacity within the OPEC system is going to disappear. And then it gets really interesting.