DPC Union Station, Worcester, Massachusetts 1906
“Naimi made it clear: OPEC will not cut alone ..”
• No Chance Of OPEC Output Cut, Even After Oil Dips Below $50 (Reuters)
Saudi Arabia and its Gulf OPEC allies are showing no sign of considering cutting output to boost oil prices, even though they dipped below $50 a barrel this week. OPEC decided against limiting production at its last meeting on Nov 27, despite misgivings from non-Gulf members, after Saudi Oil Minister Ali al-Naimi said the group needed to defend market share against U.S. shale oil and other competing sources. Those misgivings have grown with a slide in oil prices to below half their level in June, hurting the economies of OPEC’s smaller producers. Benchmark Brent dipped to $49.66 on Wednesday, its lowest since April 2009, before rising to $51 on Thursday. OPEC has forecast an increasing surplus in 2015, citing rising supplies outside the group and lackluster growth in global demand.
But the Gulf members, who account for more than half of OPEC output, are not wavering, arguing lower prices will slow competing supplies, spur economic growth and revive demand. One delegate from a Gulf OPEC member said there was “no chance” of a rethink while another referred to the view that non-OPEC producers were to blame for the glut. “Naimi made it clear: OPEC will not cut alone,” the second delegate said. OPEC ministers and delegates have blamed non-OPEC producers such as Russia, Mexico and Kazakhstan, as well as U.S. shale and tight oil production, for the oversupply in the market. U.S. oil production has surged from around 5 million barrels per day to reach a near 30-year record of more than 9 million bpd over the past six years, propelled by the sudden emergence of shale oil output from North Dakota to Texas.
They won’t go as far as bond yields.
• There’s No Telling How Low Oil Prices Could Go (Bloomberg)
Oil’s drop has been so rapid and so driven by sentiment that forecasters from Bank of America to UBS say there are no clear signs for when the rout will end. Brent crude slumped below $50 a barrel yesterday, 57% less than the peak of $115.71 reached in June. UBS analysts say investors should avoid oil until the “free fall” ends. Traders are ignoring supply disruptions that would normally boost prices, ABN Amro Bank NV analysts said. Oil’s slump accelerated after Saudi Arabia and other members of the Organization of Petroleum Exporting Countries decided Nov. 27 to maintain their production ceiling. The 12-member group is seeking to protect market share rather than prices, challenging U.S. shale drillers and other rivals to pare their output instead.
“It’s not clear that anyone can answer how low it will go,” Ed Morse, global head of commodities research for Citigroup, said. “It’s always hard to call a bottom. The Saudis took the shale revolution seriously and are acting accordingly. They’re testing how much production growth can be curtailed by the drop in prices.” Crude slumped by 48% last year, the most since the 2008 financial crisis, as the U.S. pumped at the fastest pace in more than three decades. U.S. output gained to 9.132 million barrels a day last week, Energy Information Administration data released yesterday showed. That’s close to the 9.137 million-barrel figure in the period to Dec. 12, the highest in weekly data that started in January 1983.
“The bottom for the oil price is a mirage,” Eugen Weinberg, head of commodities research at Commerzbank said. “It’s more important, just as it was during the crash to $30 a barrel five years ago, to recognize that the slump is irrational exuberance and prices will recover.” The market is “obsessed” with the perception of a supply glut and traders are ignoring disruptions such as those caused by fighting in Libya, Hans van Cleef, an energy economist at ABN Amro in Amsterdam, said by phone Jan. 6. A crude tanker was bombed there on Jan. 4 while storage tanks at its biggest oil port were blown up last month. Libya has Africa’s largest oil reserves. “Prices remain in a free fall,” Giovanni Staunovo, an analyst at UBS in Zurich, wrote in a report yesterday. “We think it is too early to call for a solid short-term price floor.”
Not a lot of understanding of the situation Saudi Arabia finds itself in.
• Why OPEC Is Talking Oil Down Not Up (Bloomberg)
If there ever was doubt about the strategy of OPEC, its wealthiest members are putting that issue to rest. Representatives of Saudi Arabia, the United Arab Emirates and Kuwait stressed a dozen times in the past six weeks that the group won’t curb output to halt the biggest drop in crude since 2008. Qatar’s estimate for the global oversupply is among the biggest of any producing country. These countries actually want – and are achieving – further price declines as part of an attempt to hasten cutbacks by U.S. shale drillers, according to Barclays and Commerzbank. Crude fell 48% last year and has declined 35% since OPEC affirmed its output target on Nov. 27. That decision, while squeezing revenues for OPEC members in 2015, aims at preserving their market share for years to come.
“The faster you bring the price down, the quicker you will have a response from U.S. production – that is the expectation and the hope,” said Jamie Webster, an analyst at consultants IHS Inc. in Washington. “I cannot recall a time when several members were actively pushing the price down in both word and deed.” U.S. crude production totaled 9.13 million barrels a day last week, up about 1 million barrels from a year ago and 49,000 from the OPEC meeting in November. Horizontal drilling and hydraulic fracturing in underground shale rock have boosted output by 66% over the past five years. Exports, still limited by law, reached a record 502,000 barrels a day in November, according to the Energy Information Administration. The four Middle East OPEC members are counting on combined reserve assets estimated by the International Monetary Fund at $826.4 billion to withstand the plunge in prices. Petroleum represents 63% of their exports.
There goes cheap gas.
• Oil Taxes Tempt Recession-Scarred U.S. States as Prices Plummet (Bloomberg)
U.S. states are renewing efforts to pass taxes on oil and gas extraction and, while falling energy prices may please consumers, drillers say it’s just the wrong time to raise their costs. At least 17 states last year considered imposing or amending so-called severance taxes, which generated more than $16 billion in 2013 in the U.S. Many are expected to introduce similar bills this year, according to the National Conference of State Legislatures in Denver. Ohio Governor John Kasich plans to seek a higher levy on drillers to offset an income-tax cut after opposition from the industry and lawmakers in his own Republican Party frustrated past attempts. Democratic Governor-elect Tom Wolf in Pennsylvania wants a severance tax to fund education and infrastructure.
Billionaire environmentalist Tom Steyer is leading a push for a California production tax to raise as much as $2 billion a year. The price of oil dropped almost 50 percent in 2014 and fell to a five-year low of less than $50 a barrel this week, which drillers say is prompting them to reduce spending and production plans. While the industry says higher taxes would worsen the situation, governors say energy companies can pay more for the natural resources they extract. “This is a total and complete rip-off to the people in this state,” Kasich said during an Oct. 28 speech in Columbus.
States are still recovering from revenue reductions and spending cuts caused by the 18-month recession that ended in 2009, and severance taxes have been a significant revenue stream for some, said Kristy Hartman, an NCSL policy specialist. Thirty-five states levy taxes or fees on oil and gas extraction, and while most considering bills will act with the expectation that prices will eventually rise, the short-term drop might prevent “aggressive action,” Hartman said. Kasich proposed increasing Ohio’s tax in 2013 and 2014, holding up a pair of dimes in speeches to signify the current 20-cent-per-barrel levy on oil. The Republican led-legislature failed to enact a measure, and Kasich has said “every day they wait, it goes higher.”
“The final decision on QE will be complicated by a European Court of Justice opinion on a previous government-bond purchase program due on Jan. 14, and elections in Greece scheduled for Jan. 25.” And German court cases.
• ECB Said to Study Bond-Purchase Models Up to $590 Billion (Bloomberg)
European Central Bank staff presented policy makers with models for buying as much as €500 billion ($591 billion) of investment-grade assets, according to a person who attended a meeting of the Governing Council. Various quantitative-easing options were shown to governors on Jan. 7 in Frankfurt, including buying only AAA-rated debt or bonds rated at least BBB-, the euro-area central bank official said. Governors took no decision on the design or implementation of any package after the presentation, according to the person and another official who attended the meeting. The people asked not to be identified because the deliberations were private. A €500 billion purchase program would take the ECB halfway toward its goal of boosting its balance sheet to avert a deflationary spiral in the euro area.
The institution is also buying asset-backed securities and covered bonds, and government bond-buying would be part of fresh stimulus to be considered at the Governing Council’s Jan. 22 meeting. Euro-area consumer prices fell last month for the first time in more than five years and ECB President Mario Draghi has signaled the deflationary risks may demand a response. The central bank intends to expand its balance sheet toward 3 trillion euros, from 2.2 trillion euros now. Banks must repay more than 200 billion euros in outstanding loans early this year. The staff presentation focused on government-bond purchases, the people said. Program sizes below 500 billion euros were also considered, along with monthly targets, one of the officials said. Governors were asked not to give their opinions on the options, both people said.
A minority of officials including Bundesbank President Jens Weidmann oppose buying sovereign debt on the grounds that it involves unwarranted risks and undermines the incentive of governments to make economic reforms. Exceptions for government debt rated below investment grade, such as Greek bonds, didn’t feature in the presentation, though the treatment of such securities in previous programs was mentioned, one person said. The ECB currently grants Greek and Cypriot government debt a waiver in its operations as long as the countries stay in a program that ensures their reform efforts stay on track. The final decision on QE will be complicated by a European Court of Justice opinion on a previous government-bond purchase program due on Jan. 14, and elections in Greece scheduled for Jan. 25. Greek opposition party Syriza, which leads in opinion polls, has campaigned on an anti-austerity platform that includes relief on the nation’s debt.
Parity. And then some.
• Euro Tests Low Last Seen At Its Birth In 1999 (CNBC)
The euro hit a fresh nine-year low against the U.S. dollar on Thursday, taking it close to its starting point in 1999 when the single currency was launched in 11 European countries. The single currency fell as low as $1.17625 on Thursday, its lowest since December 2005 and dangerously close to the $1.1747 level at which it traded at its launch in January 16 years ago. The decline came as more weak economic data from the euro zone piqued hopes the ECB will implement further aggressive stimulus measures after it meets this month. German factory orders data on Thursday morning showed a sharp monthly fall in November, with new orders down 2.4%. This, coupled with the consistent rise in the dollar, pushed the bloc’s currency lower.
Meanwhile, data from the euro zone on Wednesday showed the currency union’s inflation rate fell into negative territory in December for the first time since 2009, adding to pressure on the ECB to launch a U.S. Federal-Reserve-style bond-buying program. “Market participants seem to believe yesterday’s ‘flash’ estimate, that euro zone consumer prices had fallen 0.2% in the year to December, raises the chances that the ECB will resort to full-blown QE at its meeting on 22 January,” said chief economist at ADM ISI, Stephen Lewis. “In truth, the figures were probably no surprise to members of the ECB’s Policy Council, who have been talking for several weeks past about the pending impact on consumer prices of the sliding oil market.” When the euro was launched it became the currency of 11 euro zone member states, replacing old national currencies including the German Deutschmark and the French franc. It is now used by 19 countries.
“The way for Europe to avoid a deflationary period is to clock 4 to 5% GDP growth ..”
• Europe Could Face 5 Years of Japan-Style Deflation (CNBC)
Europe could be looking at a Japan-style deflationary environment for the next five years, investor Marc Lasry told CNBC on Wednesday. Lasry’s Avenue Capital is continuing to buy credit-side debt at a discount in Europe. Over the last three or four years, the amount of debt that European banks have sold has increased by 100%, he said in a “Squawk Box” interview. “The way that the banks were able to sell this debt is, they keep on buying sovereign debt, and then through that they make their profits, and then each year they end up using those profits to offset losses on that. And that’s sort of of what happened in Japan over a 10 year period,” said Lasry, who specializes in distressed debt investments. The way for Europe to avoid a deflationary period is to clock 4 to 5% GDP growth, he said.
“You’re not having that. The reason everybody focuses on that is because GDP growth in Europe today is sort of, negative one, flat, up one. It’s really not moving that much,” he said. The chairman and CEO of Avenue Capital said his firm is playing the credit side of the European debt market because the pressure is still on the banks to deleverage. “This is sort of a five year process, so for us it’s going to be the gift that keeps on giving,” he said. Lasry is personally invested in Greek debt, but Avenue Capital does not buy sovereign bonds, he said. Europe is still in an investing phase because there is $2.5 trillion of debt, he said. “The supply side in Europe is still so great relative to the demand side in Europe,” he added.
“A McKinsey study in 2011 estimated that of the €332 billion the single currency helped generate for the region’s economy in 2010, about half of it flowed to Germany.”
• Don’t Believe the Hype: Why Germany Needs Greece to Stay in Euro (Bloomberg)
Don’t believe the hype. A reading of the German press suggests Chancellor Angela Merkel is at peace with the idea of Greece quitting the euro. Der Spiegel says her government views that as a manageable outcome; Bild reports that officials are preparing for the prospect. Lawmaker Michael Fuchs says Greece is no longer a threat to financial stability. All that is mostly posturing for an electorate tired of the aid and angst Greece has demanded since 2010. In fact, Germany has no interest in risking the dissolution of the single currency that a Grexit could entail. That’s because the status quo is a boon for Germany economically and politically. Indeed, the biggest European economy benefits more than most of its fellow euro members from the single currency.
While a Greek departure alone may not end the euro, the risk would be of contagion through the bloc’s financial markets that forced others out. If it had to return to the deutsche mark, German exporters, which account for about half of gross domestic product, would become much less competitive and Merkel’s prized current-account surplus would shrink. Inflation would weaken further. Boris Schlossberg of BK Asset Management in New York reckons a deutsche mark would now trade around $1.50, about 25% more than the euro’s level of about $1.18. A 2013 report by the Bertelsmann Foundation estimated that without the euro, German GDP would be about 0.5 percentage point a year smaller through 2025 – equivalent to a loss of €1.2 trillion, or €14,000 per resident – and cost 200,000 jobs.
A McKinsey study in 2011 estimated that of the €332 billion the single currency helped generate for the region’s economy in 2010, about half of it flowed to Germany. Such numbers dwarf the €77 billion that the Ifo economic institute calculates Germany contributed to Greece’s bailout. On the geopolitical stage, Germany would also see its star dimmed. Former U.S. Treasury Secretary Timothy F. Geithner last year identified German Finance Minister Wolfgang Schaeuble as the go-to-guy for the U.S. during Europe’s crisis. Russian President Vladimir Putin would also welcome strains on the continent. “Europe can’t afford a Greek exit,” Joachim Poss, the Social Democrats’ deputy finance spokesman in the German parliament, said in an interview this week. Suggestions by allies of Merkel that the 19-nation currency bloc could weather Greece’s departure amount to “playing with fire,” he said.
“The ministry said on Thursday that the share of bulk orders was “drastically” below average.”
• German Factory Orders Plunged in November (WSJ)
German manufacturing orders fell unexpectedly sharply in November in contrast with robust growth recorded the previous month, according to latest data from the country’s economy ministry. New factory orders in November were down 2.4% in adjusted terms in the eurozone’s largest economy, coming in below the 0.8% decline expected in a Dow Jones Newswires survey of economists. Domestic orders fell 4.7% on the month while foreign orders declined 0.7%. The ministry said on Thursday that the share of bulk orders was “drastically” below average.
Some experts shrugged off the weak headline figure, saying that the broader economic picture for Germany still looks good. “The data adds to the upside risk to our fourth-quarter forecast for German [economic] growth,” said Berenberg economist Christian Schulz in a research note. New orders for the two months, October and November, were up 0.9% compared with average growth of 0.2% in the third quarter from the previous three months. Orders from the eurozone rose 2.0% in the October-November period versus the third quarter.
“The most important message is that we have to be a bit more patient ..” Great spin!
• German Industrial Production Falls Amid Plunge in Energy Output (Bloomberg)
German industrial production unexpectedly fell for the first time in three months in November as energy output slumped, signaling that the recovery in Europe’s largest economy remains vulnerable. Output, adjusted for seasonal swings, fell 0.1% from October, when it climbed a revised 0.6%, the Economy Ministry in Berlin said today. Economists in a Bloomberg News survey predicted an increase of 0.3%, according to the median of 25 estimates. Production dropped 0.5% from a year earlier. The Bundesbank has said the German economy managed only a “modest start” to the fourth quarter, after effectively stagnating in the prior six months. While surveys have shown that economic sentiment in the country is improving, the outlook is clouded by the euro area’s struggle with sluggish growth, falling prices and Greek political instability.
“The most important message is that we have to be a bit more patient,” said Andreas Rees, chief German economist at UniCredit MIB in Munich. “In terms of business sentiment, there is more and more evidence that German companies already turned the corner. However, in line with economics 101, hard data typically lag behind such leading indicators.” Energy output declined 2.4% in November from the previous month and construction fell 0.6%, today’s data show. Manufacturing rose 0.3%, driven by gains in output of investment and consumer goods. “Industrial production has passed the trough” and “should have embarked on a moderate upward trend,” the Economy Ministry said in the statement. Exports fell 2.1% in November from October, when they declined 0.5%, separate data published today by the Federal Statistics Office in Wiesbaden show. Imports rose 1.5% in November.
Dragged down by the rest of Europe.
• Scandinavian Economies Face Triple Threat (CNBC)
Falling oil prices and deflation are weighing on the once-rock solid economies of Norway and Sweden, while Finland has been hit by the recession in Russia, Danske Bank has warned. “The Nordic countries have been looking strong in recent years, with economic and financial crisis in much of Europe… However, after years of robust growth, the shine seems to be wearing a bit off,” said economists led by Steen Bocian in a report from the Scandinavian bank out Thursday. Norway and Sweden outperformed the rest of Europe in 2013, posting economic growth of 0.7% and 1.3% respectively, versus a EU average of no growth. The two countries’ relative strength has waned in recent months, however. Norway (which is not part of the EU) posted growth of 0.5% quarter-on-quarter between July and September 2014, just above the EU average of 0.3%, which Sweden matched.
“This does not mean that there are signs of economic crisis in the two otherwise very strong economies, but growth rates are heading towards the European average and downside risks have increased,” said Bocian. As Europe’s biggest oil exporter, falling oil prices are weighing on Norway, although its reserves are bolstered by a sizeable sovereign wealth fund. The Norwegian krone, whose performance is strongly tied to oil prices, has steadily weakened against the U.S. dollar since mid-August last year, and is down around 2.5% since the start of 2015—providing a possible spur to exports. In December, Norway’s central bank cut interest rates in an attempt to deflect the hit from falling offshore investments, lower oil prices and weak growth in Europe. “Activity in the petroleum industry is softening and the sharp fall in oil prices is likely to amplify this tendency,” the bank said in a statement. “This will have spillover effects on the wider economy and unemployment may edge up ahead.”
Sweden is less susceptible to oil price movements, but growth slowed in 2014 as the country struggled with deflation—CPI inflation fell by 0.2% in November on the corresponding period the year before—and an overpriced housing market. Bocian and colleagues forecast that growth would remain a challenge for the country in 2015. “To reduce the risks linked to the increasing household debt, Sweden has introduced stricter rules for amortisation, which will increase savings and thereby reduce the strength of domestic demand – the main engine in the Swedish economy in recent years,” he said.
China is having a much harder time than anyone seems to want to admit.
• Analysts Fear China Financial Crisis (Guardian)
A credit crunch in China is “highly probable” this year as slowing economic growth prompts a surge in bad debts, Bank of America Merrill Lynch predicts. Chinese president Xi Jinping this week trumpeted the “new normal” referring to slower growth as the government tries to rein in the credit boom – which has led to a debt pile of $26 trillion – and rebalance the economy from overly relying on exports and investment to consumer spending. Bank of America Merrill Lynch strategists David Cui, Tracy Tian and Katherine Tai argue: “Few countries that had grown debt relative to GDP as fast as China did over the past few years escaped from a financial crisis in the form of significant currency devaluation, major banking sector recap, credit crunch and/or sovereign debt default (often a combination of these).”
The analysts believe that the government has unlimited resources to bail out banks and other organisations as the debts are mostly in renminbi, and the country’s central bank can always print more money. They argue: “We suspect that the most likely scenario for China is a bad debt surge as growth slows, followed by a credit crunch in the shadow banking sector as investors become risk averse, and followed by a major financial system recap engineered by the government with the People’s Bank of China playing a central role.” The US investment bank’s research report– “To focus on the three Ds: Deflation, Devaluation and Default” – notes that China had to pump money into the banking sector to the tune of 15% of GDP in the mid 2000s after a smaller debt surge in the late 1990s.
Beijing is expected to come up with more stimulus measures to avert a sharp economic slowdown which would trigger a wave of job losses and companies defaulting on their debts, after the People’s Bank of China cut interest rates for the first time in over two years in November. However, China’s economic planning agency on Thursday ruled out a repeat of the fiscal stimulus programme started in 2008. China will publish 2014 growth figures on 20 January that are set to miss the government’s economic target for the first time since 1998. Economists forecast the country grew 7.3%, below the target of 7.5%, with growth likely to slow further this year.
• China Factory-Gate Deflation Deepens on Commodity Price Fall (Bloomberg)
China’s factory-gate prices extended a record stretch of declines, with the sharpest drop in two years in December, suggesting room for further monetary easing. The producer-price index slumped 3.3% from a year earlier, the National Bureau of Statistics said in Beijing today, compared with the median projection for a 3.1% decline in a survey of analysts by Bloomberg News. The slide has yet to be fully reflected in consumer prices, which rose 1.5%, matching the median estimate. Tumbling oil and metal prices have extended the run of producer-price declines to a record 34 months, adding to deflationary pressures worldwide as China’s export prices drop. Economists anticipate the central bank will follow up a November interest-rate cut with further reductions, and with lower reserve requirements for lenders.
“The oil price drop is one factor, but the more important factor of the PPI decline is the weakness of the global economy – look at Europe and Japan,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. “With trade and other inflation transmission methods, the whole world is facing disinflation pressure.” Factory-gate prices of oil and gas slumped 19.7% from a year earlier in December, while coal tumbled 12.2% and ferrous metals 19%, according to a statement on the NBS website. “The oil price slump is way faster than expected and domestic demand is weak,” said Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong. Zhu said an expected weak start of 2015 will prompt the government to step up measures to support the economy.
1.5% CPI, but still 7.5% growth? It’s not impossible perhaps, but it is highly unlikely.
• China’s Deflation Risks May Be Rising (MarketWatch)
China’s consumer inflation ticked up slightly in December, keeping price increases for the year well below the government ceiling, but a further slide in factory prices raised new concerns over weak demand in the world’s second-largest economy. Analysts said that latest price data gave the central bank plenty of room to ease monetary policy further – following a surprise cut in interest rates in November – and that more aggressive measures could be taken in the months ahead. “I think China’s deflation risks are rising and the central bank has room to ease monetary policy,” said Ma Xiaoping, economist at HSBC in Beijing. The consumer-price index gained 1.5% year-over-year in December compared with a 1.4% increase in November, the National bureau of Statistics said on Friday.
The uptick in prices largely reflected a slightly faster pace in food-price increases, with the consumer-price index rising 2% for all of 2014–well below the government’s 3.5% target and representing its smallest increase in five years. In December, the producer-price index, which measures prices at the factory gate, slipped 3.3% from a year ago for its 34th month in a row of declines, with the fall accelerating from the 2.7% drop in November. For 2014 as a whole, the producer-price index fell 1.9%. Excess capacity, particularly in heavy industry, has been blamed for much of the drop. China’s economy has been showing slower growth in recent years, and the expansion for 2014 could fall short of the government’s target of about 7.5%.
Economic growth in the third quarter of last year was 7.3%, the poorest showing in over five years. A weak real estate sector and disappointing growth in manufacturing have been behind the sluggish growth picture. Despite the November cut in interest rates, policy makers have generally been leaning toward more targeted measures to help the economy, preferring to free up more funds for certain sectors such as small business and agriculture. They fear that a broader policy tool, such as letting banks lend more of their deposits, would direct more credit to areas where there already is excess capacity, in turn aggravating problems with slumping prices in heavy industry. “I hope [the policy makers] won’t repeat what they did last year–injecting liquidity by targeted easing measures. It has proved to be ineffective,” said Ms. Ma.
Make money on misery.
• Wall Street’s Guide to Surviving Emerging-Market Despair (Bloomberg)
It’s discouraging to be an emerging-markets investor right now. No matter how you slice it, 2014 was a rough year: Stocks posted their second straight 5% annual decline; currencies sank to a 12-year low against the dollar; and developing nations’ borrowing costs climbed relative to benchmark U.S. Treasuries. Don’t give up yet. Some of the world’s biggest banks – names like Goldman Sachs, Morgan Stanley and UBS – have cobbled together a handful of money-making trade ideas for the new year. A couple of them entail using the weakness in developing-nation economies to your advantage. Here’s a brief sampling of the recommendations:
• Invest in Brazilian interest-rate swaps and sell stocks. The 12.6% yield on interest-rate swaps contracts due in 2017 is too high given how weak the economy is, according to UBS. Policy makers won’t raise rates as much as that yield suggests, the bank’s analysts said Dec. 18. Their recommendation: Pile into the swaps, collect those fat yields and get out of stocks, which will continue to falter as the economy sputters.
• Sell the South African rand and Hungarian forint. In a rising dollar environment, the rand and forint look particularly vulnerable, according to Goldman Sachs. South Africa is struggling to contain an annual current-account deficit of $78 billion while Hungary is counting on a weaker forint to avoid deflation. Sell both currencies against the dollar, Goldman analysts said Jan. 5, reiterating a trade idea they had mentioned weeks earlier. It’s one of the bank’s top eight global trade recommendations for 2015. In 2014, Goldman unveiled six top investing ideas. Five of them proved profitable.
• Buy stocks in Taiwan, Turkey and India. These are three of the developing nations that benefit the most from the plunge in oil prices. Each of them imports at least 80% of the crude they consume. Stocks in the three countries haven’t risen enough to fully account for the lift that these economies will get from the lower oil prices, according to Goldman analysts. They predicted in November that the markets will post average returns of 15% this year.
• Buy Indian bonds. Prime Minister Narendra Modi is winning over analysts at Morgan Stanley less than two years after they put the country on their list of the most fragile emerging markets. Modi’s initiatives to strengthen the economy, including the implementation of more market-based energy pricing, will spark gains in local bonds after they returned 14% in dollar terms in 2014, the Morgan Stanley analysts said Dec. 1.
• Buy Indonesia’s rupiah, India’s rupee, and Brazil’s real against the euro. Borrowing money in euros and investing the proceeds in these higher-yielding emerging-market nations will provide good returns this year, according to Barclays analysts. In a Dec. 10 note, they said that with the European Central Bank set to ease monetary policy further, the euro will extend its declines against major currencies, boosting returns from this investment strategy, known as the carry trade.
China is NOT doing very well.
• BRICs Will Be Cut to ICs if Brazil and Russia Don’t Shape Up (Bloomberg)
Brazil and Russia’s membership of the BRICs may expire by the end of this decade if they fail to revive their flagging economies, according to Jim O’Neill, the former Goldman Sachs chief economist who coined the acronym. Asked if he would still group Brazil, Russia, India and China together as emerging market powerhouses as he did in 2001, O’Neill said in an e-mail “I might be tempted to call it just ’IC’ or if the next three years are the same as the last for Brazil and Russia I might in 2019!!” The BRIC grouping will be dragged down by a 1.8% contraction in Russia and less than 1% expansion in Brazil, according to the median estimate of economists surveyed by Bloomberg News. China is seen growing 7% and India 5.5%.
The BRICs were still booming as recently as 2007 with Russia expanding 8.5% and Brazil in excess of 6% that year. The bull market in commodities that helped propel growth in those nations has since ended, while Russia has been battered by sanctions linked to the crisis in Ukraine and Brazil has grappled with an unprecedented corruption scandal involving its state-owned oil company. “It is tough for the BRIC countries to all repeat their remarkable growth rates” of the first decade of this century, said O’Neill, a Bloomberg View columnist and former chairman of Goldman Sachs Asset Management. “There was a lot of very powerful and fortuitous forces taking place, some of which have now gone.”
The growth slump this year isn’t a new normal though and O’Neill sees expansion in Brazil and Russia partially recovering, helping the BRICs average about 6% growth per annum this decade — still more than double the average for the Group of Seven nations. Their share of global gross domestic product will “rise sharply,” he said. O’Neill had previously estimated average annual growth of 6.6% for the BRICs this decade. Unlike Brazil and Russia, China is embracing economic change while India, after the election of Narendra Modi as prime minister and benefiting from low oil prices and a young labor pool, may have brighter prospects this decade than last, O’Neill said. With China and India spurring growth, the BRICs will remain the most dominant and positive force in the world economy “easily,” said O’Neill.
Negotiations could be very hard. Better elect Tsipras directly.
• Greek Kingmaker-in-Waiting Says He Won’t Gamble Euro Exit (Bloomberg)
A Greek political party founded less than a year ago that might end up deciding the makeup of the next government won’t lend support to any coalition willing to gamble with the country’s place in the euro, its leader said. To Potami, or “the River” in Greek, is polling in third place ahead of Jan. 25 elections. It trails the governing New Democracy party and rival Syriza, which opposes austerity measures imposed as a condition of Greece’s two bailouts and aims to negotiate a writedown on some debt. “We won’t play with the euro, and we won’t allow any gamble with Greece’s membership in the euro area,” Stavros Theodorakis, 51, who previously worked as a journalist, said in an interview in Athens yesterday. “We will defend the country’s European course.”
Speculation over Greece’s future has roiled markets, pushing benchmark 10-year bond yields above 10% for the first time in 15 months this week. Prime Minister Antonis Samaras has said the Syriza victory predicted in opinion polls would lead to default and an exit from the euro. Yet most surveys suggest Syriza, an acronym for Coalition of the Radical Left, wouldn’t garner enough support to secure a parliamentary majority and form a government without a junior partner. That would leave To Potami as the potential kingmaker. The alternative scenario is if neither Syriza leader Alexis Tsipras, 40, nor Samaras, 63, win by a sufficient margin to form a coalition of their choosing. In that case, according to Theodorakis, the most obvious option would be for the two rival forces to unite. “If the gap between the winner and the second party is very small, then there will be huge pressure to form a grand coalition,” he said.
And still went to junk status.
• Tesco Chief Unveils Dramatic Shakeup At Troubled Supermarket (Guardian)
The new chief executive of Tesco has made a decisive break with the troubled supermarket’s past, axing the retailer’s emblematic Cheshunt head office in Hertfordshire and raising the spectre of thousands of job cuts as part of a shakeup that will also see the closure or abandonment of nearly 100 stores. As the architect of the major restructuring, Dave Lewis lived up to his nickname “Drastic Dave”, which was earned on the back of a brutal drive he led at former employer Unilever. Lewis declined to put a figure on potential job losses but admitted: “This is a significant restructuring of a significant-sized business.” With 314,000 UK staff Tesco is the country’s biggest private sector employer, and with a goal to reduce head office costs by 30% – part of a plan to shave £250m from the group’s annual running costs – the number of job losses is expected to be substantial.
After the markets had closed on Thursday, credit rating agency Moody’s slashed Tesco’s investment rating to junk, saying discounters such as Aldi and Lidl posed a continuing problem, Lewis’s turnaround plan was not guaranteed to work and would take time to take effect. Some 3,000 people are employed in Cheshunt, which will close next year, while a significant number of store staff will be affected by the unprecedented shutdown of 43 loss-making stores and a plan to strip out layers of store managers. Lewis has hired a new boss for the key UK stores, Matt Davies, who has been poached from Halfords. “We are restructuring the group in a way that does not sacrifice any customer-facing roles,” said Lewis. “These stores [the 43 closing] are a drain on the finances of the business and a loss we can no longer bear.” He refused to identify the locations of the stores to be closed.
Francis and Farrell. Nice pair.
• Pope Francis’s 2015 War On Climate-Denying Capitalists (Paul B. Farrell)
Headlines warn us. He’s throwing down the gauntlet. Forget “Prince of Peace.” It’s 2015. Pope Francis is igniting WWIII. The big one. He knows capitalism’s already at war everywhere, destroying the planet’s environment. So he’s taking command, launching a counter-offensive, demanding action, leading his army of 1.2 billion worldwide, inspiring environmental activists everywhere. Yes, folks, it’s 2015 and Pope Francis launched a full-on, major assault on capitalism, like Ike’s D-Day, a major battle, a counter-attack promising to dominate global headlines for the year, as opponents scramble, regrouping to repel his war on climate-denying capitalists. The thunder is already roaring: “Pope Francis declares war on climate deniers” reads a New Republic headline. And the Guardian headline throws jet fuel on the flames: “Pope Francis’s edict on climate change will anger deniers and U.S. churches.”
Anger? No, he’s provoking, infuriating, enraging! Because this “radical, anticapitalist revolutionary’ pope is a huge threat to everything capitalists stand for, a clear and present danger to the ideology driving Big Oil, Koch Bros, conservative billionaires, and all GOP senators and governors already on record as climate-science deniers, opposed to all taxes and regulation of their profits and toxic carbon emissions. No, folks, it doesn’t take much to imagine their reactions when Pope Francis speaks to the world leaders at his upcoming historic speech in New York at the United Nations General Assembly. Enraged, superrich capitalists everywhere will be seeing red, later worried about grassroots rebellions, like the 1789 French Revolution attacking the rich, ruling elite.
Yes, 2015 promises to be a turning point in the history of capitalism, not just climate change. Our “Warrior Pope” has ignited WWIII with a counterattack on capitalism that many historians already see as the defining issue of the 21st century — free-market capitalism versus global warming, climate change, the environment, triggering revolutions by citizens everywhere rising up against the world’s superrich for destroying the planet. “Pope Francis plans to make climate change a personal issue for the world’s 1.2 billion Catholics,” continues the New Republic’s Rebecca Leber. In early 2015 Francis “will publish an encyclical (a letter to the world’s bishops) … he will speak directly to United Nations leaders in the fall … and he will organize a summit of world religions — all aimed at pressuring countries to commit to a strong climate agreement at a Paris meeting next December,” citing John Vidal of the Guardian. Now that is WWIII.
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