Iran

Ahead of the US open, markets are exhibiting some modest risk appetite, with all major European bourses trading higher, and financials outperforming all other sectors. There has been little in the way of key data from Europe, however we have seen the Eurozone Trade Balance coming in alongside expectations in the seasonally adjusted reading. Bund futures continue to move lower in recent trade as US participants come into the market, with the 10-year German yield crossing the 2% level to the upside, trading at a level not seen since the 10th February. Bunds may also have experienced some pressure following the release of a research note from a major US bank recommending rotation trade with the selling of bonds and the buying of equities. USD/JPY is seen trading higher ahead of the US open following the overnight release of some relatively dovish BoJ minutes, with commentary suggesting further easing in Japan in the future. Taking a look at the energy complex, The IEA have commented on yesterday’s speculation concerning the use of the US’ Special Petroleum Reserve, stating that they have not received any contact regarding any emergency oil release. As such, WTI and Brent crude futures are seen higher; however they have seen some selling off in recent trade.

We thought it was getting stupid one post ago. Not sure what to call this then:

• REPORT OF AGREEMENT ON OIL RELEASE INACCURATE - OBAMA AIDE

But not false? At least the report of a mass aggregation of US naval assets off the coast of Iran is still 100% spot on. For those who wonder what just happened, it is called a "headline market test" - since Crude dropped less than $2 on the report of the release, the final action, which would be very politically unpopular, may just not be worth it for Barry.

And so the lunacy hits a crescendo:

• U.S., U.K. AGREE TO EMERGENCY OIL STOCKS RELEASE, REUTERS SAYS

Translation:

Hi China, this is Barrack, please buy our oil at firesale prices as you in turn build your strategic reserves. I have a reelection to win. Oh and when Iran attacks one of our 3 aircraft carriers parked next to Tehran in a false flag attack, at least oil will soar from a lower price point.

Love, B.H.O

Update: as we hit print, we see headlines that the UK will cooperate with the US on bilateral agreement to release oil stocks. Crude down big on the news, which is merely an advance move ahead of almost inevitable war with Iran, simply to make the spike more palatable.

The push to get Iran to do something terminally irrational (now that USS Enterprise in its final tour of duty is almost on location just off the side of CVN-70 Lincoln and CVN-72 Vinson in the Arabian Sea, where the US will shortly have not one, not two, but three aircraft carriers) is now in its final stretch. As AP reported earlier, Iran has been now entirely cut off from the global financial system, as that anchor of international financial transactions, SWIFT, has just taken Iran off the grid. This leaves Iran with just three options for international trade: making gold into a fully convertible currency, barter, or exchanging Rials for Renminbi and other local currencies. As a reminder, virtually the entire non-parked naval fleet will be in the Arabian Sea and Persian Gulf in the next 4-6 days, where 3 aircraft carriers and one big-deck amphibious warfare ship are just waiting for the order.

All you need to read.

Welcome to the global village.

While WTI hovers around $105.5 (slightly underperforming USD strength), Brent has notably outperformed with the Brent-WTI spread now edging towards $20 (from under $15 two weeks ago). Given the increasing tension, we thought it useful to get a grasp of just what an oil-supply shock means. BNP points out that in all but one of the historical oil price shocks of the last 40 years, equities have notably underperformed oil (understandably) but the higher the oil price rise, the higher the chance of negative absolute returns for stocks. We also note that oil prices tend to rise in anticipation of the crisis and then explode (so arguing that we are discounting an event is proved moot) and the impact (in lost supply) from closing the Straits of Hormuz is an order of magnitude larger than the next five largest events. Regionally, positioning favors the middle-eastern oil producers obviously with Asian EM nations set to suffer dramatically worse than DMs.

In what can only be seen as raising the rhetoric bar on the timing, scale, and seriousness of the Iran 'situation', Kommersant is reporting that "Tehran has one last chance" as US Secretary of State Clinton asks her Russian counterpart Sergei Lavrov to relay the message to Iranian leaders. If this 'last chance' is wasted an attack will happen in months as diplomats noted that the probability of an Israel/US attack on Iran is now a specific 'when' instead of an indefinite 'if'. The sentiment is best summarized by a quote from inside the meeting "The invasion will happen before year’s end. The Israelis are de facto blackmailing Obama. They’ve put him in this interesting position – either he supports the war or loses the support of the Jewish lobby". Russian diplomats, as Russia Today points out, criticized the 'last chance' rhetoric as unprofessional suggesting "those tempted to use military force should restrain themselves - a war will not solve any problems, but create a million new ones."

All you need to read.

Going into the US open, European equity markets have carried across some risk appetite from last night’s Wall Street news that 15 out of 19 major US banks had passed the Fed’s stress test scenarios. This risk appetite is evident in Europe today with financials outperforming all other sectors, currently up over 2%. Data released so far today has been relatively uneventful, with Eurozone CPI coming in alongside expectations and Industrial Production just below the expected reading for January. Taking a look at the energy complex, WTI and Brent crude futures are seen on a slight downwards trajectory so far in session following some overnight comments from China, highlighting the imbalance in the Chinese property market, dampening future demand for oil. Looking ahead in the session, the DOE crude oil inventories will shed further light on the current standing of US energy inventories.

The Greek CDS auction has not yet taken place, nor has one quantified how many Greece-guaranteed orphan bonds with UK-law indentures have to be made whole (at a cost to Greece of course, no matter how much Venizelos protests), and somehow the world is already moving on to bigger and better risk strawmen. Because if one sticks their head in the sand deep enough, it will be easy to ignore that European banks have gradually over the past year or quite suddenly (as in the case of Austrian KA Finanz) taken about €100 billion in now definitive losses on their Greek bonds and CDS exposure. Luckily, just like in the US, there is now over $1.3 trillion in fungible cash sloshing in the system, allowing banks to 'fungibly' fund capital shortfalls and otherwise abuse every trace of proper accounting, when it comes to a post-Greek default world. The problem is that none of this actually solves the fundamental insolvency issues plaguing the 'old world', but what it does do, is force the accelerated depletion of an aging and amortizing asset base. That's fine - as Draghi said the ECB can "always loosen collateral requirements even more." So while we await to hear just who will sue Greece and Europe, and how much cash will have to be paid out to UK-law bondholders (before the Greek default is even remotely put to rest), here is a listing of what Bank of America (recall - BofA is the one bank most desperate to remove any lipstick from the pig due to its need for more QE) believes will be the biggest risks to its outlook going forward. In order of importance: 1) Oil prices (remember when a month ago we said this then ignored issue may soon hit the very top of investors worry lists?), 2) Europe; 3) US Economy; and 4) China. That about covers it. Oh and massive debt issuance supply too as well as the even more epic straw man that is this Thursday's stress test. Remember: stress tests will continue until confidence in the ponzi returns!

An economic fiasco, a political football ... and (quietly) a growing export product in a declining market.

Just because being officially the first broke Eurozone country, having 50%+ youth unemployment, and a collapsing economy is not enough, adding absolutely insult to injury is the following chart from Reuters, which shows that compared to other European economies, Greece now has the highest gas price in the old continent. And indicatively while America complains over what is now the highest gas prices in 2012 per AAA, at $3.80 average for a gallon of regular, 30 cents higher than a month ago, and 35 cents higher compared to a year earlier, gas in Greece now sells for over $9.00/gallon. But at least the IMF's worst case projects that Greek economy will be flat in 2013. And that's the "worst case scenario." But at least Europe sure taught Iran a lesson by halting crude imports. Oh yes, that Iran just happened to be one of the biggest suppliers to Greece - oh well. At least Greece still gets to proudly say it is a European colony, everything else be damned. 

Today at noon Eastern, the storied aircraft carrier Enterprise, aka CVN-65, left its home port of Naval Station Norfolk one final time for its final voyage with a heading: Arabian Sea, aka Iran. There in a week it will join CVN 72 Lincoln and CVN 70 Vinson, as well as LHD 8 Makin Island, all of which are supporting any potential escalation of "hostilities" in the Persian Gulf region. As a reminder, back in January we learned that the Enterprise's final voyage will be in proximity to Iran, and in the meantime, the aircraft carrier held extended drills off the Florida coast to attack a "faux theocracy"  consisting of fundamentalist "Shahida" states. Why the Arabian Sea in about 7-10 days will be home to not two but three aircraft carriers and a big deck amphibious warfare ship is very much an open question, although we may have some thoughts. 

According to the doctrine of pre-emptive war, Iran can be attacked based on its alleged desire to develop nuclear weapons, just as Iraq was attacked in 2003. In fact, Congress is currently debating whether a nuclear capability alone (which Brazil, Japan, and other countries enjoy) could justify the 'preventive' attack. I believe it is time to negate this doctrine by postulating that Iran in fact has a right, as a sovereign nation, to a nuclear capability. Having traveled to Iran recently, I can attest to the Joint Chiefs' General Dempsey's reference to Iran as a 'rational' actor. The Iranians have no interest in destroying America, or Israel, at the expense of one of the oldest continuous civilizations in the world, dating back about 2600 years. Iran is currently surrounded by over 40 U.S. military installations, not counting Israel's still-unaccounted nuclear arsenal. To assert that Iran would jeopardize its culture for a one-shot nuclear attack is a complete miscalculation of the Iranian spirit; that spirit gave rise to a revolution in 1979 against what they perceived as Anglo-American imperialism in the form of the Shah, much as our own revolution opposed British imperialism.