2015.02.15 News


Let’s start with the situation in Ukraine where it seems we’ve reached another ceasefire “deal”. There are two remaining problems however:

1. The Russian government has no incentives to stabilize the situation. Putin would like to show the world how the West has failed by supporting the new government in Kiev. And the best way to achieve that is via the “proxy” war (inflicting pain on Western nations via Ukraine). Moscow can sign all the agreements and then deny any control over the situation in eastern Ukraine. People forget that Putin is a lawyer by training.

The photo below shows the pro-Russian separatists in eastern Ukraine (outside of Horlivka) with high tech T-72BA tanks. They must have manufactured these in their garage.

2. Ukraine’s government is about to default. And the “peace agreement” will do little to prevent that. That’s why the Ukrainian currency (hryvnia) breached 30 to one euro today – another record low. Unless we see a massive bailout soon, this is not going to end well.

In the Eurozone we see further signs of deflationary pressure as German CPI moves deeper in the red (and lower than consensus).

Let me point out once again that with all of this in the background and in spite of Greece, the Eurozone’s economy is poised to surprise to the upside.

We can already see investors moving in.

Sweden’s central bank (Riksbank) followed the ECB today by setting the benchmark rate below zero and announcing quantitative easing.

But so far Sweden’s announced QE is dwarfed by programs other central banks have implemented. Here is what it looks like as a percentage of the starting monetary base as well as percentage of the GDP.

But Sweden has been in deflation for quite some time and will probably need a more aggressive bond buying program to have much of an impact.

Now on to Japan where some central bankers at the BOJ are becoming uneasy with weakening the yen further. They fear that while weaker yen helps the nation’s exporters, it is hurting the consumer by making imported goods more expensive. With wage growth inadequate, higher food and electricity prices have been painful. Will the BoJ abandon it’s 2% inflation target?

WSJ: – Some Bank of Japan officials have grown more concerned about the drawbacks of a weak yen, making them increasingly cautious about the central bank undertaking additional quantitative easing, according to people familiar with their thinking.

These officials are worried that a further sharp decline in the currency could hurt Japan’s fragile economic recovery by damping consumer spending, which accounts for around 60% of gross domestic product, the people said.

JGBs continued to sell off as a result, with the 10-year moving above 40bp. As a comparison, the German 10-year yield is 33bp.

Nigerian currency (naira) continues to fall as the nation comes under pressure from the collapse in oil prices as well as Boko Haram’s attacks. Political instability related to the elections is not helping.

Speaking of crude oil, the WTI futures curve remains steep (contango).

This is encouraging market participants to store more crude: buy spot, sell forward, store (Profit = Forward Price – Spot Price – Storage Costs – Financing Costs). As long as the arb makes sense there will be more storage demand.

The question remains: is there enough storage? According to Bloomberg’s projection, Cushing Oklahoma (where WTI futures are settled) will run out of storage sometime in Q2.

As a result we are likely to see even more floating storage. Of course with so much oil in storage it will be hard for oil to rally significantly in the nearterm.

Speaking of energy, here is a chart that shows the staying power of Saudi Arabia in the face of lower oil prices. The Saudis are not worried.

In the United States the retail sales report was considerably worse than expected.

This tells us that the US Q1 economic growth has been on a softer side. Once again it’s hard to see the Fed doing much if this persists.

Interestingly, retailers’s shares are unaffected as they continue to outperform – hitting new highs.
Red = S&P Retail, Blue = S&P500


– The European Central Bank extended another EUR5bn in emergency loans to banks in Greece after fears that a spate of bank withdrawals could dry up funding. (FT)

Meanwhile at an EU summit in Brussels, Greek prime minister Alexis Tsipras argued for a new bailout agreement with fewer austerity demands but the impervious – and sleepless – Angela Merkel stuck to her guns.

Greece will start technical negotiations with the European Commission, the ECB and the IMF today, to determine which parts of the current bailout the Tsipras government will agree to continue. (FT)

– Minsk 2 After 16 hours of talks the leaders of Germany, France, Ukraine and Russia agreed to a ceasefire starting on Saturday but European leaders and analysts are sceptical. Some warned that Vladimir Putin appears to have come out on top. (FT)
– Extreme central banking The Swedish Riksbank became the firstcentral bank to set a negative main policy interest rate – evidence of ever more radical means to prevent deflation strengthening its grip over European economies. (FT)
– JPMorgan executives “pushed out” Two senior executivesconnected to an investigation into the bank’s hiring practices in Asia will leave the firm. US prosecutors and regulators are investigating whether the bank gave jobs to Chinese government officials’ children in return for lucrative investment banking mandates. (WSJ$)


– UK CPI to fall below zero but BoE warns on rates
“The central bank stressed that if pay rises moderated in response to low inflation, they might need to loosen monetary policy further.”
– Bank of England forecasts falling prices: reaction
“The BoE also said markets were mistaken in predicting no interest rate rise until mid-2016.”
– US retail sales disappoint with and without gas
“The sluggish 0.2 per cent increase (without car and gas sales) suggest the first quarter hasn’t begun with much momentum. Despite the limp showing in December and January, economists remain optimistic that a buoyant labour market and still rising house prices will be enough to keep Americans spending.”
– ECB extends a further €5bn to Greek lenders
– French GDP was 0.4% in 2014
– German GDP powers ahead of expectations
– Dutch GDP comes in well ahead of forecast
– Spanish prices tumble 2.2% in January
– Italy latest eurozone nation to beat GDP forecast
– Portuguese fourth quarter surprises on the upside
– ECB QE offsets Greece for equity investors
– Nasdaq leads rally in US stocks
– Investors pour $3bn into junk bonds
– Fast Asia Open: return to risk on?
– Greek bonds recover after banking sector reprieve
– Germany’s Dax index surges above 11,000
– Greek bank stocks surge following ECB move

– Retail Sales Mystery: Where Are Americans’ Gas Savings Going?
“With lower gasoline prices leaving households with more to spend on other goods and services, the labor market on fire and consumer confidence back at its pre-recession level, we had hoped to see a much stronger performance from underlying retail sales. The personal saving rate jumped in December to 4.9% from 4.3% in November, the Commerce Department estimated in a separate report.”
– WSJ Survey: Economists Trim Forecasts of Fed Rate Rises
“We think the Fed has the leeway to wait until September, on the premise that seeing a bottom in core inflation is important”
– Winter Snow Weighs on First-Quarter GDP



Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s