|MRP||McAlinden Research Partners | DIBS||
Daily Intelligence Briefing - February 2, 2015
After more than a year of trailing global markets, European stocks could finally be poised to outperform thanks to the confluence of four forces: The cheap euro is a boost to exporters. Cheap oil is a boon to nearly everyone. The ECB's new quantitative easing adds history-making monetary stimulus. And – if France, Italy, Greece, and others get their way – fiscal stimulus is on the way. Much hinges on what happens next in Greece.
Greece has already declared that it will no longer work with the "troika" of international lenders. The EC President says its time to find an alternative "quickly." France says Greece needs a "new contract" with the EU. But opposition to further relief is fierce in places like Germany, Finland, and Portugal. And the clock is ticking: while Greece has enough cash on hand to meet sovereign debt obligations through June, its banks risk being cut off from the ECB's liquidity facilities by the end of February.
European politics is becoming more democratic, as fringe parties from both ends of the spectrum bring previously heretical policies to the mainstream debate on integration, immigration, as well as fiscal spending. Whether these are good ideas is another matter, but at least they can be debated in legislative chambers rather than fester on the sidelines. As for the euro, the odds that some current member countries might choose to leave – or be asked to leave – are higher now than before Greece's election. But over the past five decades, the EU has faced many crises and, so far, survived every one of them. More to the point: Greece isn't the only country that wants to reverse austerity.
While the merits and long-term implications of renewed fiscal stimulus are hotly debated, the bottom line is that policymakers have a small window of opportunity to replace austerity in Greece with something else and re-affirm the currency union. If they are able to do so and political uncertainty begins to subside, all that stimulus can be unleashed, boost economic growth, and provide a nice lift to Europe's beleaguered stocks. MRP will be monitoring events closely.
Source: Bloomberg, McAlinden Research
Today’s Issue Cluster: Greece
- Greece declares it will no longer work with the "troika" of international lenders ... the EC President says its time to find an alternative "quickly"
- The new government goes on tour to drum up support in EU capitals
- France says Greece needs a "new contract" with the EU ... Merkel says further debt reduction isn't in the cards, nor are WWII reparations
- Sovereign debt payments are coming in March ... the government probably has enough to pay debt through June, if they want to
- Greek banks could be cut of from the ECB's liquidity facilities by the end of February
- Elections loom in other countries where fringe parties are moving to the center on a platform against further relief for Greece
- Most Greeks want to keep the euro
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|MAJOR DATA POINTS||Top|
EZ – Jan: Markit Manufacturing Stays Close to Stagnation; 51.0 from 50.6 / WSJ
US – Dec: Consumer spending weakest since 2009; -0.3% from +0.5% / R / WSJ / AP
US – Jan: Markit manufacturing growth holds steady; 53.9 from 53.9 / R
US – Jan: ISM manufacturing sector growth slows; 53.5 from 55.1 / R / AP / WSJ / cr
Bonds – Asia Junk Market Struggles to Rebound
Bonds – Eurozone QE weighs on German yields
But wait. In the US and UK quantitative easing had the opposite effect to what one would expect: the more bonds the central bank bought, the higher yields went, as investors were encouraged to take more risk, meaning dumping bonds. In the eurozone bonds are, at least so far, behaving more like they have with recent Japanese QE. FT
Bonds – Caught in a debt trap
The pace at which the “negative universe” has expanded is striking. Some €1.5tn of eurozone government bonds with a maturity of more than one year — almost a quarter of the total — yield less than zero FT
US – Economy Hits Speed Bumps
US – Philly Fed State Coincident Indexes increased in 46 states / cr
US – Savings at the Pump Are Staying in Wallets
US – A Two-Tier Economy Is Reshaping the Marketplace
Since 2009, average per household spending among the top 5% of U.S. income earners—adjusting for inflation—climbed 12% through 2012, the most recent data available. Over the same period, spending by all others fell 1% per household ...
For the first time, U.S. builders last year sold slightly more homes priced above $400,000 than those below $200,000. As a result, the median price of new homes exceeded $280,000, a record in nominal terms and 2% shy of the 2006 inflation-adjusted peak. Total sales last year, however, were up just 1% WSJ
US – Benefits of Infrastructure Spending Not So Clear-Cut
Oxford Economics and consultancy PwC forecast global infrastructure spending of nearly $78 trillion between 2014 and 2025, with nearly 60% of that in the Asia-Pacific region. Washington-based Progressive Policy Institute concludes that every dollar spent on U.S. roads, bridges and public transport spurs $1.50 to $2 of growth. ...
Much of the growth often cited to justify projects is short-term stimulus from the construction phase rather than longer-term productivity dividends, Mr. Warner said.... “There’s a tendency to underestimate costs and overestimate revenue,” said Michael Pettis, professor at Peking University’s Guanghua School of Management.WSJ
|POLITICS & FISCAL POLICY||Top|
European Commission President Jean-Claude Juncker wants to scrap the troika mission from international lenders that governs Greece's 320 billion euros ($360 billion) bailout... "We have to find an alternative quickly," R
French Finance Minister Michael Sapin said on Sunday that Greece needs a “new contract” with Europe, backing the demand of the Athens government... His comments—and similar remarks by President Barack Obama —are the latest example of a pushback in Europe and beyond against Berlin’s handling of the eurozone debt crisis. WSJ
Greece's five-day-old radical left government insists it will honor pre-election promises to seek a cut on most of the country's rescue debt and scrap painful budget measures that were demanded in exchange for the loans. German Finance Minister Wolfgang Schaeuble, however, warned Athens against strong-arm negotiating tactics in its effort to win debt relief.... "There's no arguing with us about this, and what's more we are difficult to blackmail," ...
Greece's Parliamentary Budget Office, which makes quarterly recommendations to lawmakers, warned that the country faces default unless a deal with creditors is reached soon. Greece's next government debt obligations are due in March. AP
EU officials believe the country could eke out €4.3bn in payments owed to the IMF next month, but will run into a wall at the beginning of June ... Of more concern to many officials is the Greek banking system, which after massive outflows of deposits is relying on cheap ECB loans to fund day-to-day operations. ECB officials over the weekend made it clear that if the programme expires at the end of February, the central bank would be forced to cut off their liquidity loans. FT
Greece – Feisty Finance Minister Tries a More Moderate Message
“We want to sit down and rethink the whole program,” he added. “Our task is not to get the next loan tranche,” which he said would be merely “kicking the can down the road.” Instead, the task “is to restructure the debt and the economy to get the money we need.” NYT
Greece – Tries to Mend Ties Ahead of New Meetings
Neither he nor Varoufakis intend to visit Germany, which has shouldered the bulk of Greece's loans and which strongly objects to Athens' plans. German Chancellor Angela Merkel on Saturday ruled out fresh debt relief... "I do not envisage fresh debt cancellation," she said. Portugal and Finland also oppose debt relief. AFP
Greece – Starts drive to sell new debt deal to doubting Europe
Greece – Obama Expresses Sympathy for New Greek Government
Greece – Germany Sees No Need to Scrap Troika
Greece – ‘It’s Time To Compromise’
If the situation escalates and Greece exits the euro, two major dangers lurk. One is that Tsipras will secure the money his country needs from Russia or China and he has already hinted at such a direction. ... The other danger is that Europe will become a laughing stock in the international community. ... If Greece were to exit the common currency area, it would be perceived as a failure, especially for Merkel. A continent that is led poorly doesn't need to be taken particularly seriously by others.
Greece – Merkel says she doesn't see another Greek debt cut
As for demands that have surfaced in Greece for Germany to pay more compensation for Nazi crimes during World War II, Merkel said that "this question doesn't arise." AP
Greece – ‘Merkel’s Unintended Creation’
few in Europe are willing to publicly side with the new prime minister... Secretly, though, many politicians in Europe hope that the shock of the elections in Greece will upset the balance of power. Ever since he took office in May 2012, French President François Hollande has been pushing for a more relaxed approach to the debt limit. He is supported not only by Italian Prime Minister Matteo Renzi, but also by EU Commission President Jean Claude Juncker.... In short, Tsipras is the most extreme manifestation of the growing resistance in large parts of Europe to the German chancellor's austerity drive...
Syriza is more than just a protest party. Because of the crisis, it has "become a big-tent party," says economist Jens Bastian, who spent two years with the European Commission's Task Force for Greece as a banking expert. In addition to its supporters in the leftist scene and protest voters, the party has been able to attract middle class voters and retirees as well. S
Greece – ‘Beware Greeks voting for gifts’
A new Greek currency would immediately plummet in value. The IMF reckoned nearly three years ago that it would fall by 50%; some economists thought it would fall by even more.... currency depreciation would make Greece’s foreign debts, which would remain in euros, unsustainable. That would cause the country to default... The shock of Grexit would hit the economy hard. The IMF estimated in early 2012 that, in the first year, it could depress GDP (which was already falling sharply) by an additional eight percentage points. The impact now might be less severe....
Discussions with Brussels are only part of the story. Any bail-out extension must be approved by parliaments in Germany, Finland, the Netherlands and Estonia: four countries not renowned for their forbearance towards fiscal sinners... The Finnish government, which in 2011 refused to back Greece’s second bail-out until it was offered collateral, has every reason to be tough: it faces a difficult election in April... the Dutch government must contend with the threat of Geert Wilders’s populist Party for Freedom, which has lately been leading the opinion polls. E
Greece – Banks May Lose ECB Credit
On Wednesday, the E.C.B. will meet to decide whether it should approve a move by Greece’s central bank to provide emergency loans to some of the country’s largest banks....
On Saturday, one of the hard-line members of the E.C.B.’s governing council, the Finnish central banker Erkki Liikanen, said if Greece did not reach a deal with its creditors by the end of February, the central bank would stop financing Greek lenders. NYT
Greek banks, which play a key role in funding the government, lost about 11 billion euros ($12.5 billion) in deposits in January, according to four bankers who asked not to be named because the data were preliminary. The outflow accelerated from about 4 billion euros in December. Deposits totaled 160.3 billion euros at the end of 2014. B
CBR – Cuts Interest Rates
The latest inflation figures released this week showed prices had rose 13.1 per cent in January from 11.4 per cent at the end of last year. The central bank said it expects consumer price growth to be lower than 10 per cent by January next year. FT / AP
The bank said it expected gross domestic product to fall by 3.2 percent in annual terms during the first half of 2015, following growth of 0.6 percent in 2014. R / NYT
The message some Russia watchers are getting from Friday’s surprise interest-rate cut is this: Start listening more to what President Vladimir Putin’s aides say about monetary policy and less to central bankers.... In comments made just nine days ago, the country’s central bank chief indicated she saw no chance of a rate cut any time soon after inflation soared to a five-year high. A week earlier, though, one of Putin’s most vocal economic aides urged the exact opposite, saying a reduction was needed to bolster the ailing economy. B
Uber has signed up 15,000 drivers in New York since its launch in 2012, resulting in a sharp drop in the number of yellow cabs. The Committee for Taxi Safety said some fleet operators were keeping a fifth of their cars off the road.... the New York Taxi and Limousine Commission has loosened a rule introduced nearly 20 years ago prohibiting the conversion of cars with more than 500 miles on the clock into a yellow taxi. Previously, drivers would have had to purchase or lease a new car from an approved list of vehicles. Drivers will still have to rent or buy a “medallion” FT
Uber – Hard-Driving Service Gives Compromise a Try
In cities where new laws are being written for app-based car services, Uber is more willing to go along with requirements such as providing wheelchair-accessible vehicles and, during emergencies, capping fares charged by its “surge pricing” system. Executives say they are aiming to make Uber explicitly legal everywhere it operates, up from just 22 cities and states now. Many cities lack rules for car services like Uber, which says it isn’t bound by traditional taxi regulations because it owns no cars and employs no drivers. WSJ
on Friday, in an uncommon display of humility, Uber pledged to strengthen its user data privacy practices, acknowledging that “we haven’t always gotten it right.”...
Some also noted that Uber had partnerships with image-conscious companies like Spotify, United Airlines and Starbucks, and that future partnerships could be at risk if its reputation did not improve. NYT
Uber – Job creator?
Ninety percent of online respondents said they drive fewer than 35 hours a week. Once they join Uber, most drivers are keeping their job outside of the car. ... About 40 percent of drivers say Uber is their only job. An equal share say they make more money from their other job. A
Ships – Maersk in Talks Over $1.5b Order
Ships – Japan’s leading builder to invest in new dock
|TRADE & TRANSPORTATION||Top|
TTIP – German automakers lobby for trade deal
TTIP – German fear of tribunals threatens trade dea
Ironically, Germany invented the international tribunal system and has been the leading proponent of arbitration clauses in bilateral trade deals since the 1960s. If arbitration is cut from TTIP, the EU will leave itself open to a charge of double standards — that it is not giving US companies the same rights that European companies enjoy when investing within the EU. Trade officials in Brussels insist a new type of arbitration system can be crafted that will both guarantee investors’ rights and secure transparency. FT
TTP – Japan ready to meet US halfway on beef and pork tariffs
For Japan, the biggest hurdle is its negotiations with the U.S. But to conclude the overall TPP free trade talks, Tokyo needs to speed up and wrap up negotiations with other TPP member nations as well..... Observers are raising concerns over Canada's possible withdrawal from TPP talks, which could threaten to derail the negotiation overall. N
TPP – Drug Patents Pose a Major Hurdle to Deal
“If you don’t do that, your biologics companies won’t be able to compete,” Republican Sen. Orrin Hatch, chairman of the Senate Finance Committee, said ... Mr. Hatch is drafting negotiating goals for the TPP with other committee leaders that will be included in legislation known as fast track, designed to ease congressional passage of the TPP and other trade deals. WSJ
Water – US: California Drought Intensified in January
Water – US: Colorado River’s Future Is Threatened
Water – Brazil: Crops still at risk a year after epic drought
More than 90 cities have imposed water rationing affecting close to 4 million people ns
Record-high temperatures and the most severe drought in at least 80 years punished southeastern Brazil last year, a region accounting for 60 percent of the country's gross domestic product.... the southeastern state of Minas Gerais... produces half of Brazil's coffee. Drought there last year wiped out as much as a third of the crop in some areas, causing global arabica prices to rise 50 percent over the year even as most other commodity markets tumbled. Scientists said coffee trees would not recover from the extreme heat and drought quickly R
Water – China: Poor provinces forced to export to wealthier regions
Provinces that export “virtual water” products—mostly to wealthy places like Shanghai, Tianjin, and the provinces of Zhejiang and Guangdong—are using up much of their own water to do so.... Meanwhile, exporting physical water from China’s water-rich regions risks causing long-term harm,...
The real kicker is that even the regions receiving all the physical and virtual water imports are not seeing their water stress levels improve. The 12 provinces that imported the most water remained in the same category of water stress q
Water – Australia beef exports seen missing as drought eases
|ENERGY & ENVIRONMENT||Top|
Coal – US crisis deepens as gas prices fall
The immediate cause of the industry’s latest leg down is the slump in the US price of natural gas... At these prices, it is hard for coal to compete with gas for power generation in many parts of the US.... Coal exports are also declining, as falling world prices and the strong dollar make US producers uncompetitive, and are expected to fall 17 per cent this year... Meanwhile, the regulatory squeeze on the coal industry is tightening. FT
Mining companies sell most of their coal on multiyear contracts, so they are not immediately affected by the fall in the benchmark, but that price is used as a reference point for annual contract renegotiations, so it will have an effect on future revenues....
US coal production dropped in 2013 to its lowest level since 1993 and it is expected to drop back to that same level this year after a slight rebound in 2014 FT
Coal – China moves to limit glut
Coal – Fire Hasn’t Gone Out of India’s Furnace
Coal – Glencore considers closing S.Africa mines
Coal – Cost curves
commodity prices can remain below key support levels on the cost curve for a long time. Thermal coal, for example, has traded below the 90th percentile for the past three years and little or no supply has come out of the market. It’s only now that the balance sheets of the lossmaking coal producers are coming under real strain and they are considering closing or mothballing mines. FT
Warren Hatch, PhD, CFA
Portfolio Management and Global Investment Strategy
McAlinden Research Partners
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