India

Guest Post: Nuclear Restarts Spell Trouble for LNG

There are two major factors that have emerged in the last five years that have sparked a surge in LNG investments. First is the shale gas “revolution” in the United States, which allowed the U.S. to vault to the top spot in the world for natural gas production. This caused prices to crater to below $2 per million Btu (MMBTu) in 2012, down from their 2008 highs above $10/MMBtu. Natural gas became significantly cheaper in the U.S. than nearly everywhere else in the world.  The second major event that opened the floodgates for investment in new LNG capacity is the Fukushima nuclear crisis in Japan. Already the largest importer of LNG in the world before the triple meltdown in March 2011, Japan had to ratchet up LNG imports to make up for the power shortfall when it shut nearly all of its 49 gigawatts of nuclear capacity. In 2012, Japan accounted for 37% of total global LNG demand. The future of LNG may indeed be bright, especially when considering that global energy demand has nowhere to go but up. But, investors should be aware of the very large threat that Japanese nuclear reactors present to upstart LNG projects.

Gavekal Explains The Emerging Market Panic

With emerging markets in panic mode, investors are bound to be reminded of the enduring observation, first made by a 19th century British businessman named John Mills, that: “Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal in hopelessly unproductive works.” With that in mind, investors seem happy to link the ongoing emerging market sell-off to either a) China’s large capital misallocation triggered by the 2008-11 credit boom or b) the Federal Reserve’s promise to start tapering last May, followed up now by the real thing. But could there perhaps be another explanation?

Turkish Lira Soars Over 1000 Pips In Hours On Central Bank Intervention Suspense

As we noted earlier, the "surprise" factor of the Turkish Central Bank's (CBT) emergency meeting is seeming to have the desired effect as the Lira has rallied over 1000 pips since the announcement. Officially there has been no intervention and, despite Erdogan's political pressure on the CBT not to raise rates (because of the "interest rates lobby"), Barclays (as we noted here) and most other banks are expecting more conventional dramatic interest rate hikes (since everyone knows the FX reserves are running dry):

*TURKEY NEEDS TO RAISE O/N RATE 300BPS FOR MKT EFFECT: JPMORGAN

However, JPMorgan adds that it "strongly doubts this will regain investors confidence" and Finansbank warns it has "significant doubts" that the CBT will deliver. And this is what the rest of the market thinks...

Key Events In The Coming Week

This week, much of the market focus will remain on the policymakers' responses to the challenges emerging out of the, well, emerging markets. In particular, the response of the Turkish Central bank will be key. This week we also have eight MPC meetings, with the US FOMC on Wednesday standing out. Consensus expects the continuation of the tapering of asset purchases – by another USD10bn, split equally between Treasuries and MBS. Other than that, the announcement should be fairly uneventful. In India GS forecasts an out-of-consensus hike of the repo rate to 8.00% after the central bank published a report on suggested changes to the monetary policy framework. In New Zealand, South Africa, Israel, Mexico, Malaysia and Colombia, consensus expects no change in the monetary policy stance. Among economic data releases, the focus will be on consumer surveys, as well as business surveys (US, Germany and Italy). There are also inflation numbers from the US, Euro Area, Japan and Brazil. Advanced Q4 GDP data prints will come out for the US and the UK. US consumption and production numbers are due at the end of the week.

Emerging Market Rout Continues In Overnight Trading

A slew of favorable overnight news, including a stronger than expected German IFO business climate print, reports that Draghi has signalled he would be prepared for the ECB to buy packages of bank loans to households and companies, when he said "the ECB might be able to buy securitised bank loans if they could be packaged as asset-backed securities in a transparent manner" (a QE-lite will hardly make the market happy), a largely expected bail out of the Chinese Trust Equals Gold imminent default (more in a subsequent post), as well as the announcement of Argentina's new liberalized dollar purchase capital controls (which have a monthly purchase limit as well as a minimum income threshold), not to mention the traditional USDJPY levitation which drags all risk along with it, were unable to put an end to the ongoing rout in emerging markets, which saw the Turkish Lira collapse to fresh record lows before it jumped on news the Turkish Central Bank would hold an extraordinary meeting tomorrow (if the recent intervention by the CB is any indication, watch out), not to mention the Ruble, Zloty and even the Ukraine Hryvna dump as the outflows from EMs continued over a mixture of tapering fears as well as concern that the one way fund flow would accelerate creating its own positive feedback loop. Is today the day the fund flow exodus will finally be halted? Stay tuned to find out and keep a close eye on the USDJPY - the most manipulated, confiduing-boosting "asset" in the world right now, more so than gold even.

 

America’s Relative Decline: Should We Panic?

China’s GDP will almost certainly soon surpass America’s in absolute terms. The end of the unipolar era will create new dangers that the world mustn’t overlook. China’s relative rise and the United States’ relative decline carries significant risks, for the rest of the world probably more so than for Americans. Odds are, the world will be worse off if China and especially others reach parity with the U.S. in the coming years. This isn’t to say America is necessarily as benign a hegemon as some in the U.S. claim it to be. Regardless of your opinion on U.S. global leadership over the last two decades, however, there is good reason to fear its relative decline compared with China and other emerging nations. To begin with, hegemonic transition periods have historically been the most destabilizing eras in history.

Gold Spikes To Highest Since November

Following yesterday's early morning surge when gold jumped $30 from the low $1230, on news that India may relax its gold capital controls, today's sharp spike follow through is more a function of ongoing emerging market currency devaluation and overall risk-offness hitting equities around the globe. And with Bitcoin going nowhere even as both Turkey and Argentina continue to turmoil, it means there is only one good old faithful fiat-alternative - the barbarous relic. Sure enough, at last check, gold was trading north of $1270, back to levels last seen in November, and one sovereign default away from soaring a few hundred fiat equivalents higher. And since all hopes now rest on more BOJ easing (or else watch out below), and more of the same pent up inflation, we may have seen recent lows in gold for quite some time, especially with Gartman once again openly "hating" gold.

Frontrunning: January 24

  • Emerging market sell-off raises specter of contagion (Reuters)
  • China Bank Regulator Said to Issue Alert on Coal Mine Loans (BBG)
  • Argentina to Ease FX Controls After Peso Devaluation (BBG)
  • Pimco's Gross problem: who can succeed the 'Bond King'? (Reuters)
  • Ukraine protesters seize building, put up more barricades (Reuters)
  • Mideast Turmoil Dominates Gathering of Business Elite (WSJ)
  • Central Banks Withdraw Dollar Funding (WSJ) - oh really?
  • Samsung warns of weak earnings growth this quarter (FT)
  • Three explosions rock Cairo, killing 5 (USA Today)

Two Powder Kegs Ready to Blow: China & India

The conventional view of China and India sports not one but two pair of rose-colored glasses: Chindia (even the portmanteau word is chirpy) is the world's engine of growth, and this rapid economic growth is chipping away at structural political and social problems. Nice, especially from a distance. But on the ground, China and India (not Chindia--there is no such entity) are both powder kegs awaiting a spark for the same reason: systemic corruption in every nook and cranny of both nations. The conventional rose-colored view is that corruption will inevitably decline with modernization and economic growth. This is simply wrong on multiple levels...

Here It Comes - More Leading Economists Call For Capital Controls

As the saying goes, ‘desperate times call for desperate measures.’ The phrase is bandied about so frequently, it’s generally accepted truth. But I have to tell you that I fundamentally disagree with the premise. Desperate times, in fact, call for a complete reset in the way people think. Desperate times call for the most intelligent, effective, least destructive measures. But these sayings aren’t as catchy. This old adage has become a crutch – a way for policymakers to rationalize the idiotic measures they’ve put in place...

Bob Janjuah: "Tick Tock, Not Yet Bear O’Clock"

"What will drive this "strength"? More of the same I suspect – any weakness in earnings will be ignored (virtually all of last year's equity market gains were NOT earnings or revenue growth driven, but were rather virtually all multiple expansion driven), any bad economic data will be ignored – the weather provides a great cover,  and instead markets will I think see (one last?) reason to cheer the Fed and/or the BOJ and/or the ECB and/or the PBoC.... The only real "success" of these current policies is to create significant investment distortions and misallocations of capital, at the expense of the broad real economy, leading to excessive speculation and financial engineering. If I am right about the final outcome over 2014 and into 2015, the non-systemic three-year bear market of early 2000 to early 2003 may well be a better "template". Of course the S&P lost virtually the same amount peak-to-trough in both bear markets, and in real (as opposed to nominal) terms actually lost more in the 2000/03 sell-off than in the 2007/09 crash." -Bob Janjuah

Market Turmoiling As 104 USDJPY Support Cracks

News that India may be folding on its capital controls had sent gold and silver surging this morning but following this morning's collapse in emergency claims benefits in the US (expected, but still shocking), precious metals are extending gains, Treasury yields are tumbling, and the USD is well offered. US and German stocks are also cracking lower (with chatter of a flash-crash in Germany's DAX). The more likely driver of all this weakness is that Nomura (or some large Japanese BoJ proxy) lost the 104 USDJPY anchor...