From Arab Spring-related uprisings in Libya or Egypt, to a civil war in Syria and now violence in Iraq and the Ukraine, geopolitics are impacting oil. True, geopolitical risk measured by combat deaths does not always correlate well with market volatility. But wars and conflict are easy to spot on an oil price series. With combat deaths rising four fold in the last 10 years, oil markets should prepare for more turmoil. BofA 's Francisco Blanch asks "Can the US preserve geopolitical stability?" America still takes up 38% of global military spending, but appetite for foreign adventures has been low. As an example, a drop in US combat deaths in recent years has been mirrored by a rise elsewhere. Following a drop to multi-decade lows, implied vol in long dated oil options at 15% looks cheap. Oil after US hegemony may not be as steady.
Dispassionate overview of the week ahead, with thoughts about September.
"Their various reconnaissance aircraft have been wandering around foreign airspace for decades and watching the military secrets of other countries like a disgusting thief spying over his neighbor’s fence. However, when the neighbor comes back with a big stick, the thief will turn tail and run away, blaming the neighbor. When you show people weakness, they will bully you. When you show people strength, they will respect you. We believe the Chinese Air Force and Naval aviation should maintain a high level of vigilence and morale in southeast coastal region to prevent the further US action. America has lost face and does not want to show the world they are sick. They have been lording over other countries for so long, and they will never let it go after they eat this loss."
When we last met Sergei Glazyev, Vladimir Putin's chief 'integration' adviser (who has been regularly featured on these pages in the past (see Putin Adviser Threatens With Dumping US Treasurys, Abandoning Dollar If US Proceeds With Sanctions and Putin Adviser Proposes "Anti-Dollar Alliance" To Halt US Aggression Abroad for two examples) he explained "how the U.S. military and oligarchs are trying to maintain leadership in the global competition with China." Arguably the best informed main in Russia, his perspective seems important to grasp as he considers "The world today is going through a year of overlapping cyclical crises. This is a period when the global economy is changing as the structure that has driven economic growth for 30 years has exhausted itself. The world needs to transition to a new system and transition has always come about through war..."
A year ago, when chatter began about China lifting its one-child policy, we explained the implications (and warned of excess exuberance). As Bloomberg reports, it appears China's anticipated baby boom is more of a bust. Nine months after stock-market wagers on a baby boom in China reached record levels, the bets have turned into some of the nation’s biggest losers as living costs deter couples from having more than one child - less than 3% of the 11 million Chinese couples eligible for another child applied for permission by the end of May, jeopardizing government efforts to bolster a population that the United Nations predicts will start shrinking by 2030.
The first half of the year has been relatively quiet for the markets, but the coming months might bring more turbulence...
If you’re a girl and you’re old and you’re grey and you’re the size of a hobbit, who’s going to get angry at you? If your predecessor had all the qualities anyone could look for in a garden gnome, and his predecessor was known mainly as a forward drooling incoherent oracle, how bad could it get? Think they select Fed heads them on purpose for how well they would fit into the Shire? Janet Yellen has a serious problem: the story no longer fits.
It is clearly not in the interests of the long-standing members of the EU to escalate a 'sanctions and financial conflict' with Russia. This is why politicians are walking on eggshells, paying lip-service to America and the scared Eastern fringe members of NATO while hoping this goes no further. So long as this is the case it is clear that NATO members are powerless to stop Russia from wresting control of all or parts of Ukraine from the government in Kiev. Putin knows this; unfortunately it is not clear to us that the American government does. All in all it seems likely that after a period of slow-burn as Putin dictates the pace of developments, the political situation in Ukraine will deteriorate with some unhelpful nudges from Russia.
It appears China is as happy as Russia to show just how little respect it has for the US' superpower 'hegemony' status. In May China flew close to Japan's airforce; in June, Russia flew nose-to-nose with the US; and now The Pentagon reports a Chinese fighter plane came within 30 feet of a US Navy Poseidon 8 plane. The 'Top-Gun' move came after several passes across the nose of the P-8 about 220km east of China's Hainan Island. The US has registered "strong concerns" with the Chinese government about "unsafe and unprofessional" conduct and The White House called the incident a "provocative action."
US equity markets were led by the stodgy old low-beta Dow this week - not the high-flying muppetry of the Russell or Nasdaq - as stocks enjoyed the best week in 4 months amidst escalation of geopolitical time-bombs in Israel, Iraq, and Ukraine. Dow and Trannies gained 2% by the close as today's disappointment in Yellen and Draghi took the exuberant shine off an otherwise bottom-left-to-top-right Birinyi ruler-based market. The USDollar gained 1.1% on the week - its best week since November - closing at one-year highs. Gold was slapped almost 2% lower (worst week in almost 3 months) as did WTI (back at $1280 and $93.50 respectively). Copper surged 3.2% on the week (2nd best week in a year) on China restocking chatter. Treasuries were a mixed bag with dramatic flattening on the week (30Y +2bps, 5Y +12bps) to 2009 flat. Credit markets cratered on the day - ignoring equity's relative shrug.
Russia Releases Video Of Massive Army Drill To "Contain Armed Conflict In Imaginary State"; Schedules 2 MoreSubmitted by Tyler Durden on 08/22/2014 15:29 -0400
Two weeks ago today, on Friday, August 8, the "market" seemingly desperate for any excuse to soar, did just that when Russia, tongue-in-cheek, announced that a Russian military drill, which everyone knew in advance would end that day, and which "worried the US department of state" finished. So by that logic the announcement of a new, and even more massive, military drill by Russia should send stocks crashing, right? We are joking of course: there is no news in this world that could possibly send stocks lower as good news is great but bad news only means even more intervention of various central banks, however Russia did indeedannounce that it will take part in counter- terrorism exercise called Peace Mission in China. All this is happening as Russia is currently taking part in a third exercise, called Interaction-2014, located in Kazakhstan with members of the Collective Security Treaty Organization. The purpose of this particular drill: "seek to contain armed conflict in imaginary state."
While the Federal Reserve presents itself as free to do whatever it pleases whenever it pleases, the reality is the Fed's own policies are constraining its choices. The Fed is being forced to end its bond-buying, cutting off the "free money for financiers" that has sustained a frothy stock market.
Li & Fung’s latest results yesterday offered some interesting anecdotes. The company’s performance for the first 6 months was hampered by ongoing macroeconomic weakness, geopolitical and weather events in its key destination markets (US and Europe). Price discounting remains a theme in US retail even beyond the end of June. The company also noted a reduction of foreign tourist flow by Russian tourists into Europe which is affecting retail markets there. This fits consistently well with some of the ECB’s geopolitical concerns outlined at its previous policy meeting.
- Ukraine accuses Russia of invasion after aid convoy crosses border (Reuters)
- Hunt for Foley’s Killer Spans Old Policing and Tech Tools (BBG)
- U.S. Probe Examines GM Lawyers (WSJ)
- Argentina accuses U.S. Judge Griesa of "imperialist" attitude (Reuters)
- Violence-weary Missouri town sees second night of calm (Reuters)
- Geneva Banks Break 200-Year Silence to Unveil Earnings (BBG)
- Richest Jailed Putin Foe Says Ukraine Fears Sparked Prosecution (BBG)
- Disclosure of Failed Attempt to Rescue James Foley Is Criticized (WSJ)
- Execution of U.S. journalist reveals the changing business of war coverage (Reuters)
Communist China. Nazi Germany. Cambodia. Guatemala. Uganda. The list goes on and on. Pacification of the citizens is almost always a prerequisite to totalitarianism. There have been a lot of attempts to disarm, or at least partially disarm, people in the US throughout history as well. Each time there’s a major shooting somewhere, the chant to ban firearms grows louder. But the latest proposal is especially telling. H.R. 5344 is a bill currently going through Congress that would ban the purchase of body armor.