Iran

While today's market session has been broadly calm for the time being, that has not prevented Oil from falling back to its old norm of being impacted by the merest rumor of geopolitical tensions, of which we have had quite a few of already, following car explosion attacks targeting Israel embassy officials in India and Georgia. While Iran has yet to make any announcement on these events, which oddly enough resulted in no deaths, Israel has already blamed Iran for everything. From Reuters: "Prime Minister Benjamin Netanyahu said Israel's  arch-foe Iran "stands behind" bombers who targeted Israeli embassy cars in India and Georgia on Monday. Netanyahu linked the incidents  to reports of foiled attacks in Thailand and Azerbaijan last month for  which, he said, Iran and its Lebanese guerrilla "proxy" Hezbollah were  responsible."Iran, which stands behind these attacks, is the  largest exporter of terror in the world," Netanyahu said, addressing his  Likud party faction in parliament." It appears that when it comes to car bomb assassination plots, Iran still has to learn from those which targeted its own nuclear scientist successfully a few weeks ago. Yet this latest escalation in attempted provocations is not unexpected: it comes on the heels of the announcement of a US Naval Official who said that "Iran is building up its forces in the Persian Gulf and has prepared speedboats loaded with explosives." Whether it actually has or has not is irrelevant: all that matters is that the US navy 'says so.'

Stocks advanced today after Greek lawmakers finally approved a new austerity package aimed at averting a default. As a result, it now looks like that the country will get the next bailout tranche and avoid failing to meet debt redemptions in March. The draft legislation published by the Greek government showed that the EFSF may provide EUR 35bln to help Greece buy back bonds held by euro-area central banks as collateral, while Greek finance minister said that EUR 70bln in bonds are to be issued in the swap and Greece needs to make debt swap offer by Friday Feb 17th at the latest. Credit metrics such as Euribor and Euribor/OIS spreads continued to improve, which in turn supported financial sector. Looking elsewhere, comments from Iranian President Ahmadinejad over the weekend who said that Iran will soon reveal "very big new achievements" in its controversial nuclear programme, together with comments from China’s Wen who said the country will begin to fine tune its economic policies in the Q1 of this year supported both Brent and WTI crude prices today. Going forward, there are no major macro-economic releases this afternoon, but both the BoE and the Fed are due to conduct another round of Asset Purchases.

Market focus tends to be almost solely on Chinese and Indian demand but demand is broad based throughout increasingly important Asian gold markets. Demand for gold remains robust in most Asian countries where consumers are buying gold as a store of wealth due to concerns about their local paper currency.  This phenomenon is happening throughout Asia including in Malaysia, Indonesia, Thailand and Vietnam and other large Asian countries (see news below regarding demand for gold by investors in Thailand).   AFP have a very interesting article on Vietnamese ‘gold fever’ which recounts how  “stashing gold at home rather than having cash in the bank is a generations-old habit in communist Vietnam”. And old habits are dying hard even if an ounce of gold bullion can now cost up to US $100 more in Hanoi than anywhere else in the world due to government meddling in the gold market. AFP quote 60-year-old retiree Truong Van Hue “I still like to keep my savings in gold. It's safe for retired people like me. I can sell the gold any time, anywhere, when I need cash,” he told AFP. Although the treasure has long been perceived as a safe haven, the recent gold rush has alarmed Vietnam's government, which is faced with an 18 percent inflation rate and an unstable national currency, the dong.

Minxin Pei, the most original of current Sinologists, makes the point authoritarian/totalitarian regimes inherently prioritize requirements for protecting regime leaders over long-term national interest.

If the U.S. and Israel sponsor terrorism, then Jimmy Carter’s National Security Adviser was correct when he told the Senate in 2007: the war on terror is “a mythical historical narrative”.

As Brent and WTI prices ebb and flow from local and global fundamentals and risk premia, Morgan Stanley notes that to be bullish from here, one would need to believe a supply disruption is coming. Considering conflict with Iran, sustained Middle East tensions, and the potential for sustained supply disruption their flowchart of price expectations notes that prices follow inventories and that as price rises, fundamentals will weaken (as without an OPEC production cut, inventories would balloon by 2Q12) and therefore to maintain current prices across the curve, supply risk premia must continue to grow. They raise their estimate for 2012 average Brent price to $105/bbl from $100/bbl which leaves them bearish given the forward curve priced around $115/bbl, as their base case adjusts to a belief that Middle East tensions persist but a conflict with Iran does not occur as they address QE3 expectations and EM inflation/hard landing concerns.

Say what you will about the tenets of Chinese economic slowdown assumptions and what not (despite inflation obviously continuing to be a rather pesky issue), at least its steadfast determination to have the world's largest crude oil stockpile is an ethos. At 23.4k metric tons of imports in January, China just imported the most crude in its history, despite the traditionally slow period around the Chinese new year. The trendline is unmissable - at this rate China will become the world's largest importer of Crude in a few short years, surpassing the US easily with its 28K metric tons of imports in a couple of years. Oh, and anyone who thinks that China will volunteer to lose Iran as a primary source of crude imports as its oil is "liberated" by Western powers as the country is obviously en route to having the world's largest crude stockpile (as to why this may be the case, read here), we have a bridge to Isfahan to sell you.

Heading into the North American open, EU equity indices are trading lower following reports that Eurozone Finance Ministers have dismissed as incomplete a budget presented to them by the Greek party leaders. In addition to that, EU lawmakers have warned Greece of more intensive involvement in the Greek economy to improve tax collection and accelerate the sale of state-owned assets. The Greek Finance Minister Venizelos said that Greece must make a “final, strategic” decision Greek membership in the Eurozone over the next six days as it decides on new austerity and reform measures or faces leaving the single currency. However, according to sources, German finance minister told MPs, Greek reform plans would bring debt to 136% of GDP by 2020, instead of targeted 120%. So it remains to be seen as to whether Greece will be able to meet the looming redemptions in March. Of note, analysts at Fitch said that the ongoing Greece talks stating that the country must secure an agreement to cut its debt burden in the next few days to prevent a “disorderly” default.

Much has been made of today's Reuters story how "Iran turns to barter for food as sanctions cripple imports" in which we learn that "Iran is turning to barter - offering gold bullion in overseas vaults or tankerloads of oil - in return for food", and whose purpose no doubt is to demonstrate just how crippled the Iranian economy is as a result of the ongoing US embargo. Incidentally this story is 100% the opposite of the Debka-spun groundless disinformation from a few weeks ago that India was preparing to pay for Iran's oil in gold (they got the asset right, but the flow of funds direction hopelessly wrong). While there is certainly truth to the fact that the US is actively seeking to destabilize the local government, we wonder why? After all as the opportunity cost for the existing regime to do something drastic gets ever lower as the popular resentment rises, leaving the local administration with few options but to engage either the US or Israel. Unless of course, this is the ultimate goal. Yet going back to the Reuters story, it would be quite dramatic, if only it was not the case that Iran has been laying the groundwork for a barter economy for many months now, something which various other analysts perceive as the basis for the destruction of the petrodollar system. Perhaps regular readers will recall that back in July, we wrote an article titled "China And Iran To Bypass Dollar, Plan Oil Barter System." Specifically, we wrote that "according to the FT, China has decided to commence a barter system in which Iranian oil is exchanged directly for Chinese exports. The net result: not only a slap for the US Dollar, but implicitly for all fiat intermediaries, as Iran and China are about to prove that when it comes to exchanging hard resources for critical Chinese goods and services, the world's so called reserve currency is completely irrelevant." Seen in this light the fact that Iran is actually proceeding with a barter system, something that had been in the works for quite a while, actually puts the Reuters story in a totally different light: instead of one predicting the imminent demise of the Iranian economy, the conclusion is inverted, and underscores the culmination of what may have been an extended barter preparation period, has finally gone from beta to (pardon the pun) gold, and Iran is now successfully engaging in global trade without the use of the historical reserve currency.

Iran has the capability of creating a world of hurt for the U.S. Navy’s 5th Fleet.

European stocks advanced today following reports that the ECB is said to be willing to exchange Greek bonds with EFSF. In addition to that, although a vast majority of officials remain adamant that no haircuts will be applied, WSJ report indicated that the concession by the ECB will contribute to the Greek debt reduction, and the concession depends on the overall debt agreement being set. However it remains to be seen what effect using the EFSF for such spurious purposes will have on the demand for EFSF issued bonds in the future. Still, the renewed sense of optimism that debt swap talks are nearing an end depressed investor appetite for fixed income securities, which in turn resulted in further tightening of peripheral bond yield spreads. The stand out was the 10-year Spanish bond, amid a syndicated issuance from the Treasury. Going forward, Greek PM is scheduled to meet party leaders on a loan deal at 1300GMT, while other reports have suggested that the Troika is keen on meeting Greek parties individually. There is little in terms of macro-economic data releases today, however the US Treasury is due to sell USD 24bln in 10y notes.

After the announcement of the Seaway reversal back in November 2011, a development which some say was oddly anticipated by the market, the Brent-WTI spread collapse from a near record $30 to just $7 in the span of three months. Further alleviating tensions was the fact that Italy is now once again back firmly in control of Libyan Brent production. Yet recent developments in the Persian Gulf, and elsewhere, have led to the Brent-WTI spread trade becoming an energy trader's widowmaker yet again, as it has doubled from $10 to $20 as of early this morning in less than a month. What happens next, and what are the implications for the energy market as a result of the violent move wider? Here is Goldman's David Greely with some observations and some suggestions.

Ahead of the North American open, European Indices are trading in negative territory following further deliberations over a Greek settlement, with a tentative meeting between the Greek PM and his respective Party Leaders scheduled for some time after 1600GMT as well as an underperforming Basic Materials sector following caution over the upcoming Glencore/Xstrata merger. In foreign exchange news, the EUR/CHF currency pair has exhibited volatility following comments from the SNB’s acting Chair Jordan. Jordan has committed the Central Banks’ resources to preventing any further appreciation of the CHF adding that the SNB will buy unlimited amounts of Forex to defend the minimum level of 1.2000. Overnight, the AUD index has appreciated following an unexpected move by the RBA to hold its base rate at 4.25%, with many analysts expecting a drop in rates due to the global economic outlook and domestic job losses. In terms of European economic releases, German Industrial Production data fell below expectations for the month of December, posting a 2.9% fall while the figure was expected to stay flat at 0.0%.

The surge in the U.S. money supply in recent years has sent gold into a series of new record nominal highs.  Money supply surged again in 2011 sending gold to new record nominal highs. Money supply has grown again, by more than 35% on an annualized basis, and this is contributing to gold’s consolidation and strong gains in January.  The Federal Reserve's latest weekly money supply report from last Thursday shows seasonally adjusted M1 rose $13.2 billion to $2.233 trillion, while M2 rose $4.5 billion to $9.768 trillion.