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Kiron Sarkar
February 7, 2012
Hi there,
Hi,
Interesting comments by US VP Biden.
Kiron
UBS Macro Derivatives Sales Daily – Tuesday 7th February 2012
(Andrew Lees London 44 207 568 4350)
Please note these ideas may differ from UBS Research / UBS house view
Geopolitics – The head of the Arab League said that Russia and China had lost diplomatic credit in the Arab world by vetoing the UN resolution on Syria, although that was the extent of his comments. Bloomberg says that part of the reason Beijing vetoed the resolution was the fear that backing the UN’s rebuke of a government’s brutal suppression of its people would have come back to haunt China of its treatment of both Tibetans and Muslims in Xingjiang, its resource rich provinces.
Commodities–West Texas (March contract) last traded at USD96.77 (April USD97.31), but the premium of Brent over West Texas widened to USD19.05 cents with Asian Minas another USD10.29 on top at USD126.22. The situation on natural gas is even more extreme given the freezing weather in Europe and Russia’s inability to meet demand, such that the Dutch gas day ahead spot price has climbed 40% since the end of January to EUR34.10 MWh. The attached chart of Brent shows that whilst it is still a long way off its highs, the chart pattern looks very constructive for a big rally. Bloomberg suggests that the highest refinery cuts in Europe and the States for 30 years will mean record fuel shipments from Asia this year, driving tanker rates to their highest level since 2008, adding to the retail cost of gasoline.
Growth in Bakken shale crude has increased its discount to West Texas to the widest level since records began in 2010 to USD24bbl. The question of course is whether this is profitable at this level or not, or whether like the gas, it is now unprofitable for most production?
CJ Peter Associates Engineering, claims that an EROIE analysis of Enbridge’s Northern Gateway Proposal to shift tar sands to China may be net energy consuming - http://thetyee.ca/News/2012/02/06/ROI-On-Bitumen/. Northern Gateway is a new global supply chain for heavy Alberta oil that begins with shipping gas liquids or condensates across the Pacific to the Canadian coastal town of Kitimat, which are then piped 1172km across creeks, rivers and mountains to Bruderheim in Alberta. It is then mixed with the steam stripped bitumen to dilute it and allow the bitumen to be piped back to Kitimat. It would then be shipped across the Pacific to refineries built to remove the condensate and turn the raw Alberta bitumen to gasoline, diesel and jet fuel. It suggests the combined EROIE is 2.41 barrels for every 1 barrel of oil used, so a net 1.41barrels only or a cost to value ratio of 41.4. The web report does not detail what is included in the energy cost, but usually these reports just look at the basics, eg the cost of pumping the bitumen mixture across the country rather than adding the cost of the pipeline itself and other tail energies which, when accounted for, usually dramatically lower the numbers still further.
Reuters suggests that a drought in South America will send China knocking on the US door for supplies of soybeans, pushing prices to fresh highs. China imports 60% of its soybeans, with the bulk coming from the US and Brazil. US 2012 closing stockpiles levels will have to be lowered by the USDA. On Friday Informa Economics lowered its estimate of the Argentine crop from 51m tonnes to 46.5m, and Brazil’s from 72m to 70m.
United States – Ten year Treasury yields last traded at 1.92% - (Five year swap spreads last traded at 28.75pts, the high yield ETF last traded at 90.74 whilst the AAA/BAA corporate credit spread tightened to 130bpts)
Britain – Ernst & Young forecasts that total bank lending in Britain will contract by 2.2% in 2012, its first decline since 2009, and that people will increasingly have to turn to payday loan firms. “We have been warning about the impact bank deleveraging could have on the economy for some time, but this was the first time there will be an annual contraction in total loans since 2009, when the UK economy was still suffering from the immediate effects of the global financial crisis”.
Europe – Merkel made it clear that her patience was wearing thin with Greece. In a fresh sign of mistrust, the German leader said she and Sarkozy agreed Greece should deposit revenue to meet future interest payments in a special escrow account to guarantee creditors were paid consistently. “We want Greece to stay in the euro” she said but “I want to make clear once again that there can be no deal if the troika proposals are not implemented. They are on the table. Something needs to happen quickly”.
To some extent Sarkozy will want to show leadership ahead of France’s presidential elections, not giving in to more demands from Greece but sticking up for France’s best interests. Last week the FT carried an article A telling tale of two Mitterands which highlights that Sarkozy risks becoming only the 2nd of the Fifth Republic’s one-term presidents as the opinion polls are in favour of the socialist Francois Hollande.Sarkozy is arguing that France has to get real and become more like Germany. He says that France has lagged behind the economic performance of its neighbour which France must emulate if it wants to create jobs. Sarkozy promised to reduce labour costs and loosen the 35 hour week straitjacket. Hollande on the other hand has promised to renegotiate Merkel’s austerity pact, relaxing the rise in the retirement ageand promising state funded employment for the young jobless.Hollande wants to pay for his spending pledges with tax increases for the wealthy and big business. The election is being seen as between Sarkozy’s realism and Hollande idealism.
The latest Reuters poll on the forthcoming LTRO suggests the ECB will supply banks with an extra EUR400bn of 3 year loans. In each of the polls the estimates have been raised, with the range of forecasts also widening considerably suggesting a high uncertainty. The range has widened from last week’s EUR100bn – EUR550bn up to EUR75bn – EUR800bn. The report does not give a net figure.
Australia – Macquarie Group warned that full year profit would be down 25%. Such a fall would take profits down to AUD717m, the lowest for 8 years. The poor results are due to low volumes. The Chief Executive said the improvement in market conditions and the return to more normality that had been expected just didn’t happen. Consequently it has to turn to cost cutting and will engineer a 10% fall in operating expenses in its markets business and a 5% cut elsewhere. In my opinion, it is quite amazing how people still expect a return to normality, still clearly not recognising the true reasons behind the economic collapse of recent years. (The central bank left rates unchanged at today’s meeting, contrary to expectations, however it left the door opening to easing if the economy weakened down the track).
India – The government has lowered growth estimates for this fiscal year to the end of March from original forecasts of 9% down to 6.9%, which would be the slowest pace in 3 years. It blamed tight monetary conditions, a logjam in policy making and the weakness in the global picture. Anand Rathi Securities said the revision was significant and that going forward growth is likely to remain subdued although “From the monetary policy point of view, signals are very clear that policy will remain accommodative”.
China – US Vice President Joe Biden warned that there is no way China will be able to sustain its current level of economic growth because of its demographics. He said that he had made it clear to China that US fiscal problems are surmountable and less significant than China’s stand to be. Reuters speculates that these were off the cuff comments and were probably not official policy, however you may recall I said a few weeks ago that one of the US Ambassador’s had made a speech at a conference I had been on which similarly suggested that China was bankrupt due to resource constraint and that energy security would increasingly be what determines economic competitiveness and sustainability.
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