Monday, March 17, 2014

Geopolitical risk in spades

By Phil Flynn

Crimea Vote

Crimea voted in an election to succeed from Ukraine and to join Russia leaving the markets to ask, what is next? We know that sanctions may follow assuming that Russia recognizes the vote and there is no sign that they will not. In the meantime the commodity markets are moving on not only Ukraine woes but China, Libya, Nigeria and the EU. While the initial risk on seems to be slowing, there is no doubt the markets remain on edge. Comments by Mario Draghi suggesting that the EU is looking to “act against deflation” adds a new element to buy euro, ask questions later trade is not a given.

Bloomberg News Reports that “Draghi said his forward guidance may help to weaken the euro and lower real interest rates, easing the risk that inflation won’t return to the goal set by policy makers.

Guidance “creates a de facto loosening of policy stance, as real interest rates are set to fall over the projection horizon,” Draghi said in Vienna yesterday. “At the same time, the real interest-rate spread between the euro area and the rest of the world will probably fall, thus putting downward pressure on the exchange rate, everything else being equal.”

China also is a risk as they try to engineer a soft landing and unwind and deleverage risk against a backdrop of Fed tapering. The Chinese yuan is taking a hit as the Chinese central bank widened the trading range but still will set the closing price. 

Reuters News reports that China's yuan eased against the dollar on Monday after the central bank doubled the currency's daily trading band as part of its commitment to let markets play a greater role in the economy. Yet the currency moved in a relatively narrow range reflecting market views that the People's Bank of China will seek to limit currency swings at a time when markets fret over China's cooling growth and the quality of corporate debt.

"The PBOC, with the help of major state-owned banks, will for certain tighten the grip on yuan's value in coming days and weeks to prevent what it sees as excessive volatility," said a dealer at a European bank in Shanghai.

In the longer run, however, the central bank is expected to allow the currency to move in a broader range in a sign of its confidence that it can keep speculators at bay and that the economy was mature enough to handle greater uncertainty about the exchange rate. "Over time, the widening will pave the way for the PBOC to gradually lessen intervention in daily trading and will help China's reforms to make the yuan fully convertible eventually."

On Saturday, the People's Bank of China doubled the yuan's daily trading range, so that it can now rise or fall 2% around the daily midpoint rate. The currency opened at 6.15 to the dollar, just 0.29% weaker of the official mid-point rate. It briefly fell to an intraday low of 6.1642, 0.2% weaker than Friday's close.

Since the start of this year the yuan has lost 1.8% against the dollar, largely as a result of central bank's efforts, reversing much of last year's near 3% rise as Beijing sought to change the perception the yuan was a safe one to one appreciation bet. Beijing's efforts to clamp down on such trades combined with concerns over China's economic health are expected to keep the yuan on the back foot in coming weeks.  Earlier this month, a Chinese company became the first to default on a corporate bond, and concerns about economic growth were highlighted by a dramatic 18% fall in exports in February and sluggish manufacturing. "Given China's recent relatively weak export performance, we see little upside for the yuan this coming year," said Tao Wang, an economist at UBS in Hong Kong.

Libyan oil production has played havoc with the Brent market and a tanker that was taken over by rebels has been boarded by the United States. The New York Times reports that U.S Navy commandos seized a fugitive oil tanker in the Mediterranean waters southeast of Cyprus on Monday morning, thwarting an attempt by a breakaway Libyan militia to sell its contents on the black market, the Pentagon said. No one was hurt in the operation, the Pentagon said in a statement. The fugitive tanker, called the Morning Glory, had sailed into the Libyan port of Sidra under a North Korean flag but North Korea disavowed the ship and denied providing any authorization. News reports have said it was operated by a company based in Alexandria, Egypt, and that after leaving Libyan waters it appeared to have sailed the Mediterranean in search of a buyer for its oil.

In a statement early Monday morning, the Pentagon said that the Libyan and Cypriot governments had requested American help in seizing control of the tanker. President Obama authorized the operation just after 10 p.m. Sunday night, the statement said. Within a few hours a Navy SEAL team on the guided missile destroyer Roosevelt boarded and took control of the tanker, “a stateless vessel seized earlier this month by three armed Libyans,” the statement said. The Roosevelt also provided helicopter support, the statement added, but it did not say how many Americans had participated in the seizure or what force might have been used.

The American intervention is a salvation to the fragile transitional government in Tripoli, the Libyan capital, which faced the loss of its main source of revenue and sole source of political power if renegade militias succeeded in selling Libya’s oil. Despite days of furious bluster, the Libyan authorities were unable to stop the tanker from arriving in the eastern port of Sidra early last week or from leaving with the oil a few days later. The loss of control over oil revenue threatened the government so gravely that the transitional government appeared to teeter, with Parliament voting to remove its prime minister without any consensus on his long-term replacement. The seizure of the oil, which the United States Navy says it is now returning.

The AP Is reporting that Officials say Fulani Muslim herders attacked three Christian villages and killed more than 100 civilians. Hundreds of thatched-roof huts were set ablaze. Thousands have been killed in recent years in competition for land and water between mainly Muslim Fulani herdsmen and Christian farmers across Nigeria’s Middle Belt. More than 100 people were killed in similar attacks in neighboring Katsina state last week.

Dow Jones reports that spot gold reached a fresh six-month high in early European trading hours Monday. Last week's jitters surrounding Chinese economic and credit conditions and ongoing tensions surrounding Ukraine briefly carried into the new week – gold touched $1,392.08 per troy ounce, its highest price since early September, before slightly to just below Friday's settlement price at $1,378.30 per ounce.

Bloomberg Reports that wheat traded near the highest level in almost five months, extending a weekly gain, after a referendum in Crimea to leave Ukraine and join Russia boosted concerns supplies from the Black Sea region will be disrupted. The contract for May delivery climbed as much 1% to $6.9425 a bushel on the Chicago Board of Trade and was at $6.9275 by 2:01 p.m. in Singapore. Prices climbed 5.1% last week, touching $6.965 on March 13, the highest since Oct. 25. Futures are set to gain 14% this quarter, the most since the three months through September 2012.

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