Crude Oil

Because latetly there has been some confusion that the US is "energy independent"...

With Syrian strikes looking to be a 90-day minimum 'surgical strike' and being supported by the US Congress, it is hardly surprising in this bad-is-good-news 'opposite' world, that both precious metals and crude oil prices are getting slammed lower this morning...

When last week the revised Q2 GDP print was announced, which beat expectations solidly driven entirely by a surge in net exports, we said that "with China on the rocks and tightening, the Emerging Markets in free fall, and Europe still a net exporter (so not benefiting the US), anyone hoping this trade led-recovery will be sustainable, will be disappointed." Sure enough, the first trade data update for the third quarter as of July, confirmed just this, as the trade deficit widenedfrom a revised $34.5 billion deficit, to a substantially larger monthly deficit, amounting to $39.1 billion. This was $500MM more than consensus expected, or $38.6 billion, and it means that as we predicted, the downward revisions to Q3 tracking estimates are about to start rolling in, trimming ~0.1%-0.2% from US GDP for this current quarter. Specifically, imports for the month rose from $225.1 billion to $228.6 billion while exports fell from $190.5 billion to $189.5 billion. But perhaps most notable is that in July, the US trade deficit with China and the EU rose to a record of $30.1 billion (from $26.6bn last month) and $13.9 billion (from $7.1bn) respectively.

Today's morning summary is a carbon copy of yesterday's. Some things happened, China continues to make up data to fit its current policy outlook, things in Europe continue to go bump in the night ever louder as we approach the German election despite reflexive diffusion indices - this time Service PMIs - desperately signalling a surge in confidence, Italy has just reminded everyone it is a big political basket case as Berlusconi is said to consider withdrawing his support for the Letta government and calling for elections this year, and so on, but it is still all about Syria. Last night the Senate Foreign Relations Committee has agreed on a resolution on using military force against Syria. The resolution would limit the duration of any US military action in Syria to 60 days, with a 30-day extension possible if Obama determines it is necessary to meet the goals of the resolution. In other words, a "surgical strike" lasting a minimum of 90 days, and then with indefinite additional extensions tacked on. Yet judging by the modest drop in crude and gold, the market may need more than just fighting words at this point to push to th next level of risk aversion.

While gold, silver, and crude oil prices had already recovered their initial knee-jerk losses from the "war-off" moves Sunday night, US equities were sticking to their BTFD guns until Boehner, Pelosi, Cantor, and Levin came out behind President Obama's Syria strike plan. S&P futures slumped to Sunday night's open, vacillated, then the Dow dumped over 120 points from its pre-ISM highs to break red (followed by Trannies and the S&P). Treasuries have been slow to react; holding on to losses (30Y +12bps) until the decision was clear from stocks, and then yields fell more significantly as investors greatly rotated back to safety. The USD is not moving much but JPY strength (carry-off) is driving it modestly lower. VIX is back over 17%.

After a modestly weak start, India's FX and stock markets accelerated lower overnight in the currency's second biggest daily collapse in 17 years, and stocks second biggest daily plunge in 2 years. Rubbing further salt into an already gaping wound of capital outflows, S&P re-iterated its downgrade threat overnight following India dismal PMI print and this appears to have pushed the Indian government to Plan D. Following the failure to halt outflows of Plan A (status quo and blame it on the Fed/Speculators), Plan B (well something is up so 'capital controls' on FX and tariffs on gold), Plan C (that's not working so let's confiscate people's gold), the Indian government is trial-ballooning Plan D - ditch the USD for trade-payments (especially oil which is up 50% in INR terms in 4 months).

Whether it is growth hopes or Taper fears, good-news was bad-news for bond bulls this morning as better-than-expected ISM and construction spending data jarred bond yields from already rising levels to their biggest jump in two months. With the 30Y up 11bps and back over 3.8% and the 10Y pushing 10bps higher in yield to 2.89%, the line in the sand level of 3.00% grows ever closer. Equity markets are unsure of what to make of it but appear to have a bias to the downside on this good-news-is-bad-news data but gold, silver, and crude oil is rising.

The present picture for the oil price looks increasingly bullish once more. Citi asks, is this a replay of the dynamics seen in the 1970’s? We hope not... but the feedback loop (from oil prices) to the economy and markets is undeniable...

Overnight, the market continued to digest news out of the UK that the formerly solid pro-war alliance has splintered following a historic vote by the House of Commons, leaving Obama to "go it alone." The result was a rather sizable slamdown in both crude and gold, accelerating as Europe opened for trading, and pushing gold back under $1400. This happened even as data out of Europe showed that European unemployment remained at a record high 12.1%, while inflation missed expectations and printed at 1.3%, or below 2% for the seventh month. Earlier in the session, headline data out of Japan showed that inflation had risen at the fastest pace since 2008. However, before the deflation monster is proclaimed dead, the core-core figure (excluding foods and energy) of the Tokyo CPI was down 0.4% yoy, unchanged since June for three months, suggesting that prices are still largely driven by energy-related costs. In other words cost-push inflation is rampant, which is the worst possible scenario and means the BOJ's QE is going to all the wrong place.

“…  gold is the hard currency of choice, and we expect for this trend to accelerate going forward. We still believe that in the next couple of years we will be looking at a gold price of around $US3,500. As the gold/silver ratio plummets near 30, this would also suggest a silver price above $US100.”

How do markets (US equities, Gold, Crude Oil, and the USD) react around US military conflicts...? Citi shows what happened before-and-after the Gulf War, Kosovo, Afghanistan, Iraq, and Libya... and why Syria is arguably more complex than these previous conflicts...

If Syria is invaded by the West, then we should be getting ready for a hike in the price of Brent that some say may reach a much as $150 since it will escalate into a regional problem and affect supplies coming out of Iraq.

The key overnight events were already discussed previously, but here they are again: the wholesale selloff in Asia (which subsequently shifted to Europe), the accelerating outflows from India (moment ago the SEBI website announced a net INR13.7 billion selling in Indian stocks yesterday and the near record collapse in the Indian Rupee to new record lows, and the ongoing uncertainty over Syria and what it will do to crude prices (if SocGen is right, nothing good). In brief: a market conditioned and habituated to a world in which Bernanke promises "to make everything ok" suddenly finds itself in the throes of uncertainty and following 4 years of dumb trend-following,  has no idea what to do.

The increasing likelihood of some form of limited US led military action in Syria is compounding concerns about the stability of the world’s key oil producing region and Barclays warns that it will likely exert upward pressure on prices until the nature of the possible military intervention becomes apparent. But the bigger risk for the oil market is the potential for the Syrian conflict to spread to neighboring producing countries and imperil regional output, as the Syrian conflict is fueling broader sectarian tensions across the entire Middle East and has become something of a proxy war. The problem for global oil prices is that all of this Middle East volatility is taking place against the backdrop of a recent rise in unplanned outages in the oil market outside Syria. In sum, Barclays is concerned that with geopolitical tension and physical outages on the rise, crude oil markets are at an inflection point.

Less than a month ago, potash stocks around the world cratered overnight following news that Russian potash producer OAO Uralkali announced its decision to break up a 'marketing venture' that controlled around 43% of global potash exports in the process ending the cartel that many US fertilized companies enjoyed for years. The end of the cartel was also a big hit for former partner Belarusian Potash Company (BPS) and the host nation Belarus, a country of 9.5 million people, where revenue from its potash industry accounts for almost 20 percent of the budget.  Everyone, Goldman Sachs, included were confounded by the move: Such behavior by Belaruskali in a structurally oversupplied potash industry should push for stricter competition for end customers and result in a significant swift decline in pricing... " What was most surprising is that Uralkali would voluntarily engage in this move, knowing full well that the Belarus government would retaliate. The only question is how severely. Turns out the answer is "very."