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World Trade Slows Down

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comercio mundial

 

Worth noting today the evident slowdown in global trade, massively revised down (30%) from January estimates. Japan posted a 2.7% decline in exports in May, UK was also down 5% in April and Eurozone exports stalled… but at the same time the Baltic Dry Index is down 2.58%v this month (-52.3% this year) driven by ongoing weakness in Chinese overall imports. Overcapacity paints part of the picture, but the other most relevant part is weak trade data, well below the +16% increase expected in January (see graphs below). Merrill Lynch is betting on a BDI rebound helped by seasonality, re-stocking and a rise in seaborne iron ore volumes of +16% in 2014 and +10% in 2015. I fail to be that positive, as the indications from industrial production globally are negative regarding marginal additional growth expectations, as revisions are down 12% from January estimates globally and the backwardation on coal and iron ore has steepened.

If GDP forecasts are correct, the World Trade Organization expects a broad-based but modest upturn in the volume of world trade in 2014 (+4.7%), and further consolidation of this growth in 2015 (+5.3%).

The average ratio of trade growth compared to GDP since the mid-1980s is around 2 to 1 – with trade growing at twice the pace of GDP, according to the WTO. However, in the last two years the ratio was closer to 1 to 1.

To deliver on the expected +4.7% trade growth in 2014, this ratio would have to move to 2.5 to 1 from June to December assuming that global GDP growth expectations are correct (+3.3%)

BDI May

Freight rates for panamax dry bulk vessels are now below opex, and long-term forward rates have fallen below break-even. The main reason for this weakness is in the coal market.

Chinese coal import is the most important trade for panamaxes and chinese imports of thermal coal are expected to be lower in 2014 than in 2013.

Capesize rates have come down 43% YTD and forward rates for Q4 fell 4% this Friday.

Adding to this a 100 milion tonnes of Australian capacity growth, the outlook for both coal prices and the Baltic Dry is not positive. Freight companies are growing the fleet by 4% this year so oversupply is even higher.

Brent at $113.58/bbl, and WTI at $106.87/bbl. The Norwegian Petroleum Directorate has issued its production numbers for May (this aggregates all Norwegian production each month). Oil is down 13% yoy and gas is down 9% yoy.

Worries about disruption to Iraq supply continue to support prices. The IEA in its medium term oil market report published yesterday cut its Iraqi supply forecast by close to 0.5m b/d & now expects it to reach only 4.5m bpd in 2019, commenting that the growth is “increasingly at risk” (this compares to the government’s target of 8.5-9m bpd by 2020).

Coal continues to weaken to $79.45/mt helped by lower Chinese imports and higher Australian exports. Chinese iron ore import prices are down 33.5% YTD.

CO2  at €5.80/mt still driven by backloading. Impact on power prices is inexistent. CO2 is up 13.4% this month and power prices are flat all over Europe.

UK gas is down 1.34% at 40.45p/th with all the gains of the Ukraine crisis erased from the price yet again. Both Europe and Ukraine have ample inventories and alternative supplies to offset disruptions. UK gas is down 40.7% YTD. UK power prices are down 12% YTD due to the weak gas price and poor demand.

 

Important Disclaimer: All of Daniel Lacalle’s views expressed in his books and this blog are strictly personal and should not be taken as buy or sell recommendations

Iraq and Ukraine move the commodities market

Energy, Global Economy, On the cover, Sin categoría, , ,

Geopolitical black swans are impacting commodities this morning, with Iraq conflict worsening and Russia threat of cutting supplies to Ukraine.

Brent is at $113.02/bbl and WTI at $107.32/bbl driven by concerns about Iraq. Markets are reacting well as the physical market is not affected so far but concerns are justified.

Iraq produces 3.5mbpd, or 4% of global production and is seen as a key source of future supply growth. Production is mostly in the fields in the South, so far unaffected by the latest attacks, concentrated in the North, according to JP Morgan.

So far the physical market has not seen a relevant disruption, but markets will remain nervous as long as Malaki continues to lose the grip of the key cities, and the terrorists get close to Baghdad.  Expect oil to move closer to $115/bbl Brent as the market analyses the risk of losing exportable production.

The Islamic State in Iraq and the Levant (ISIL) have seized the city of Tal Afar in Northwestern Iraq yesterday but have not continued to advance to Baghdad, so far only concentrating on northern Iraq. The rebels have control of Mosul, the second largest city in Iraq, along with Tikrit and the small towns of Dhiluiya and Yathrib, north of Baghdad. Iraq’s military spokesman Qassim Ata yesterday said that the Iraq army had killed more than 279 members of the rebel group. President Obama has indicated that he is reviewing military options to help Iraq in fighting the rebel groups.

Kurdistan PM is mentioning in the BBC the possibility of splitting Iraq into three separate regions.

The Kurdistan Regional Government has taken over security of the giant Kirkuk field (260k b/d of production) in the North Remaining oil production in the northern oil fields is another 435k b/d. Iraq has the 5th largest proven oil reserves & is the 2nd largest crude producer in OPEC, behind Saudi Arabia, at 3.5 mbpd. OECD oil inventories were 2,624mb at end April, 77mb lower than the 5-yr average & 53mb lower than last year.

My thoughts:

– The US is unable to get involved in a war. The fact that the US will likely be oil independent (including Canada) in 2016 gives little incentive to take action.

– There is very little real western support for Malaki and the country is currently too corrupt so there is risk of a bad public image and lack of popular support problem.

– Oil companies in the South have very strong armies and security is very tight. I see low risk of oil supply disruptions and the ports are working adequately.

– The three large oil companies must have anticipated these issues as they shipped most of their needed equipment last year. They also doubled security.

– Low probability of the ISIS reaching Baghdad but strong probability of a country that ends up broken in three (Kurdistan, a Sunni North capital Tikrit and a Shiia South capital Baghdad).

Helping reduce the geopolitical risk on oil is the FT reporting that US liquids production hit 11.27 mbpd in April, and is today above its previous peak in 1970 of 11.3 mbpd. With a higher percentage of NGLs, still crude production was 8.3 mbpd in April (now 8.5m), lower than the record high of 10 mbpd in November 1970.

UK gas rises +7.1% at 45p/therm and European gas seems to rise in sympathy as Gazprom threatens to cut supply to Ukraine after the deadline to pay the outstanding bill of $2bn passed with no agreement on  a timetable of payment or price. The Ukraine government is mentioning that the price has to be revised to international levels and that they cannot pay this figure or the revised price of $8.5/mmbtu. The EU is looking for an option that includes a revision of the price for a long term contract and gradual payments. Gazprom will cut off supplies unless Ukraine pays for the gas up front.

Gazprom however, will not disrupt supplies to Europe. 33% of Europe’s gas comes from Gazprom and 50% of it is transported through Ukraine. Ukraine has enough gas in storage (13bcm) to hold on to summer demand as its annual consumption is 33bcm according to UBS. Europe also has a record amount of gas in storage after a very warm winter.

Europe’s largest gas supplier after Gazprom is Statoil who mentions it can “easily” offset any short-term disruption of Russian supply.

 Coal remains weak at $80.40/mt holding on to its support level despite news that freight rates for panamax dry bulk vessels are now below opex, and long-term forward rates have fallen below break-even. Chinese coal import is the most important trade for panamaxes and chinese imports of thermal coal are expected to be lower in 2014 than in 2013. Capesize rates have come down 43% YTD and forward rates for Q4 fell 4% this Friday.Adding to this a 100 milion tonnes of Australian capacity growth, the outlook for both coal prices and the Baltic Dry is not positive. Freight companies are growing the fleet by 4% this year so oversupply is even higher.

The Baltic Dry index is down 3% this month (-60% YTD) driven by oversupply of reights and weakening Chinese imports.

 CO2 rises 53bps at €5.74/mt helped by backloading efforts to reduce the impact on CO2 prices of lower industrial demand and poor thermal output.

US gas rises 65bps at $4.67/mmbtu helped by the past six weeks injection data. It would require a very aggressive change in injection data in the next months to justify prices below $4/mmbtu… I believe we are going to see $5/mmbtu sooner rather than later. Weekly natural gas storage injection of 107 Bcf way below the consensus median injection estimate of 112 Bcf and the bears’ view of 161bcf. Total working storage is now at 1,606 Bcf, 727 Bcf below last year’s level and 877 Bcf below the 5-year average of 2,483 Bcf.

Power prices in Europe are reacting mildly… Germany at €34.70/mwh (-5.35% YTD), Nordpool at €30.78/mwh (-4% YTD). Spanish power prices are down 1.2% YTD and French -5.5% YTD.

 

Important Disclaimer: All of Daniel Lacalle’s views expressed in his books and this blog are strictly personal and should not be taken as buy or sell recommendations

European Elections show less change than feared

Global Economy, On the cover, Sin categoría,

 

Despite the headline concerns about the rise of radical parties like France´s National Front, Syriza, New Dawn and the Danish Popular Party, in the elections 172 million people voted and less than 7.5% are votes for parties who are remotely in favour of breaking-up the Euro. If we take out the UKIP impact in the UK, as the country is not in the Euro, the “anti-single-currency” vote was insignificant, especially when we look at the political manifestos of parties such as France´s National Front, with a loose message of exiting the Euro “gradually”. 

Credit Suisse wrote this morning a nice report called “Europe beats Eurosceptics 6-4”.

As such, the EUR/USD opened this morning slightly up, and equity indices throughout Europe followed in unison, while peripheral Europe bond yields opened flat or marginally higher.  

The bipartisan nature of the European parliament has not been changed dramatically either. Juncker and the European Popular Party won (212 seats) but Schulz and the Socialists (187 seats) can try to set up coalitions. The possibility of a grand coalition is not small at all.

Eurosceptic parties won in three countries: France, Denmark and the UK (as expected, and with no impact on currency or policy), but lost massively in Italy (where Renzi won a landslide 40%), Holland and Germany. In Greece, Syriza won by a narrow margin, not enough to de-stabilize the current coalition.

Only two countries saw the current government win the elections: Germany and Spain, despite major losses in support in the case of Spain (PP lost 8 seats). The debacle of major parties did not change the landscape massively.

UKIP´s extraordinary victory (27.5%) is likely to make Tories take a more aggressive stance towards the EU and move forward with the referendum on the EU.

Bond yields likely to see limited pressure from the process of electing President and the press headlines regarding radical votes.

France seen as the biggest worry followed by Greece. Radical stop of reforms or, even worse, increasing government spending could trigger new concerns about deficits, debt and widening the imbalances of the economies.

The latest batch of rating agency upgrades in Spain and Greece, added to the exit of the bailout programs for Portugal, Ireland and Greece maintain the gradual recovery on track. Meanwhile, current account surplus in the Eurozone remains a key driver of improvement, added to the reduction of deficits and modest growth. All very fragile, but pointing in the right direction.

Once the elections have passed, this clears the path for a possible EU Quantitative Easing programme aimed at SMEs and corporate, even if there are strong challenges as we mentioned in this website (“The Difficulties of Implementing QE in Europe“).

 

EU parliament

 

Important Disclaimer: All of Daniel Lacalle’s views expressed in his books and this blog are strictly personal and should not be taken as buy or sell recommendations

The Difficulties of Implementing QE in Europe (CNBC Interview)

Global Economy, Interviews, Media, On the cover, Sin categoría, , , ,

Interview at CNBC where I discuss:

The difficulties to implement Quantitative Easing in Europe.

The difficulties to implement Quantitative Easing in Europe come from the increased perception at the ECB and the EBA that a €1 trillion program could distort markets too much as in some cases the ECB would take 100% of supply.

. There is no liquidity issue: To start with, Europe already has more than €180 billion of excess liquidity according to the ECB March report.

. There is no deflation: Inflation at the Eurozone in April was 0.7% while EU was 0.8%. This is within the ECB mandate of “at or below 2% in the medium term”. CPI in April was 0.4% in Spain, and only Greece (-1.6%) and Bulgaria (-1.3%) show worrying signs.

inflacion eurozona abril 2014

. Bond yields are at historical lows. Bond yields in the periphery have fallen to the lowest level since 2005. Portugal and Greece are out of the bailout program and issuing paper.

eu bond yields

 

. ECB balance sheet is still elevated. At €2.2 trillion (2.5% capitalization) its balance sheet has fallen 20% since the peak but it’s still up 128% since 2005. The Fed balance sheet is $4.1 trillion (ECB 3.1 trillion translated in US$).

ECB-Balance-Sheet-2014

. Transmission mechanism to SMEs is improving. Lending to SMEs is up 34% in the periphery since March 2013.

. Growth is improving (+1.4% in 2014) and the strong euro has not affected dramatically export growth all over the periphery. Current account deficits have arisen in Spain for example. The biggest issue the ECB faces is that 60% of EU exports are made within Eurozone countries, therefore currency is irrelevant. The second is that with current account deficits widening, imports would suffer a big increase in price, particularly energy components. This worries the ECB more than anything else.

However, all of the ECB is studying options of QE driven mostly to help boost the next leg of growth. “Of course any private or public assets that we might buy would have to meet certain quality standards,” said Jens Weidmann, in an interview with MNI.

. What to spend the QE money on?

The European ABS market is too small (€300bn-450bn) for a €1 trillion QE and the challenges would be high when buying sovereign debt in order to adhere to the mandate.

There are three options for the ECB: yield curves, regional differences and credit spreads, which would be targeted in the ECB’s version of unconventional monetary policies. Some of the measures are more akin to Credit Easing (CE) than Quantitative Easing (QE). It is

also apparent that the approach is more qualitative because if the ECB is to make purchases it will take into account valuations.

The ECB would choose from different options, which reflects the bank-based intermediation that dominates in the Eurozone, unlike in the US where the main focus of QE has been Treasuries and MBS. As a possibility, the ECB could choose a normalisation of haircuts on its collateral.

There is also the issue of the “no deflation yet” debate. The Bundesbank is worried about a CPI that reflects massive disparities and that a QE would bring higher inflation to small consumers and average medium income families. The ECB needs more time to see if there is really a price deflation issue. So far data suggests otherwise. No deflation, just disinflation due to overcapacity and previous bubbles.

Look at March CPI in most countries, but particularly in Spain considered at the highest risk of “deflation” by the IMF. Look at essential goods like fish (+3,2%), milk (+4,4%), fruit (+6,5%), legumbres (+3,2%), cheese (+2,2%), natural gas (+2,3%), electricity (+6%) education (+3,5%), insurance (+4,1%) water (+3,3%), or even tobacco (+3,4%), alcohol (+2,4%) or travel (+4,4%).

 

When you have invested (spent) hundreds of billions of euros in “industrial plans” and productive capacity, especially in energy, car industry, textile, retail and infrastructure, what we are experiencing is a reduction of prices due to competition between oversized sectors, an overcapacity of up to 40% in some cases. On the other hand, inflation exists in other elements, very relevant to the industry and consumption, such as energy costs.

The “alleged risk of deflation” is the excuse of governments to justify greater financial repression . Trying to create false inflation through rate cuts while citizens have less purchasing power, or through monetary stimulus plans when taxes rise leads nowhere. Look at Japan, 17 consecutive months of real wage reductions.

PRICES FALL BECAUSE WE BUILT MASSIVE PRODUCTIVE CAPACITY FOR A DEMAND THAT NEVER ARRIVED AND BECAUSE THE DISPOSABLE INCOME OF CITIZENS HAS BEEN DESTROYED BY CONFISCATORY TAXATION.

To reactivate the economy governments should return money to the pockets of citizens who have stoically accepted and paid interventionist policies and supported schemes and incentives that have led the EU to spend up to 3% of GDP to destroy 4.5 million jobs and sink the economy.

 The ECB is getting a lot of pressure to do something from governments and banks, and now even Germany seems to accept the high EUR is a danger… and if something is done it will have to be something big. But these issues above do matter –specially for the Germans advocating for internal devaluation exits to the crisis- and the risks are not small of causing massive distortions in an already booming market for high yield bonds and sovereigns.

 

 See more at: https://www.dlacalle.com/deflation-no-disinflation-the-consequence-of-interventionism/#sthash.Isz8PWji.dpuf

 

Important Disclaimer: All of Daniel Lacalle’s views expressed in his books and this blog are strictly personal and should not be taken as buy or sell recommendations