Greek bailout talks with Europe break down Recrimination as two sides fail to agree on way forward
Germany faces impossible choice as Greek austerity revolt spreads “What’s happening to Greece today, will be happening to Italy tomorrow. Sooner or later, default is coming,” says Italy’s Beppe Grillo
Eurozone Industrial Output Stalls
The European Union’s statistics agency said Thursday that production by factories, mines and utilities during December was unchanged from November, and down 0.2% from the same month in 2013.
The stagnation in output occurred despite a revival in energy production, which rose 1.0% after two months of large declines. However, that was more than offset by a 1.8% drop in the manufacture of nondurable consumer goods.
Digging some more: Q3 and Q4 annualized reveal a reviving consumer goods sector following stronger retail sales (see CONSUMERS TO DRIVE ACCELERATING GROWTH):
- Total: +0.4%, +1.6%
- Energy: +1.6%, –3.6%
- Capital Goods: +3.2%, –0.4%
- Non-Durable Goods: +2.0%, +0.4%
- Intermediate Goods: –1.6%, +5.7%
- Durable Goods: –11.7%, +20.6%
Brazil Retail Sales Post Worst Decline in 14 Years Brazilian retail sales posted their worst December in at least 14 years and fell short of even the most dire predictions as consumers buckled down amid a deteriorating economy.
Retail-sales volume tumbled 2.6% in December from November in seasonally adjusted terms, the Brazilian Institute of Geography and Statistics, or IBGE, said Wednesday.
Once a powerful motor for the Brazilian economy, retail sales ended last year with a 12-month gain of just 2.2%—the smallest advance in 11 years—after growing at 7.5% annual pace from 2004 to 2013.
Sales from November to December may have been further stymied by retailers’ Black Friday promotions, which likely created a high base for comparison, the IBGE’s Juliana Vasconcellos said. Declines in sales of white goods, electronics and clothes—often the subjects of discounts—were particularly sharp.
Still, compared with December 2013, retail sales were barely higher, with 0.3% advance. That was the slowest growth in 12 years.
Brazil’s National Confederation of Commerce, or CNC, said retail sales were weakened in the fourth quarter by price increases for goods and services regulated by the government, such as fuel, as authorities seek to curb debt and increase government revenue. The CNC expects the slowdown to continue, with retail sales seen rising by just 1.7% this year.
Emerging-Market Currencies Tumble
Indonesia’s rupiah sank as much as 1% while South Africa’s rand hovered close to its weakest in over a decade and the Malaysian ringgit’s slide gathered steam. (…)
Sweden Cuts Rate, Announces QE Sweden’s central bank cut its main interest rate into negative territory for the first time and announced a bond-buying program as it joined a group of central banks trying to battle low inflation.
The Riksbank, the world’s oldest central bank, lowered its benchmark rate to minus 0.1% from zero and said it would buy government bonds worth 10 billion Swedish kronor ($1.2 billion). The repo rate had stood at zero since October.
“These measures and the readiness to do more at short notice underline that the Riksbank is safeguarding the role of the inflation target as a nominal anchor for price setting and wage formation,” the central bank said in a statement. The Riksbank targets 2% inflation. (…)
In cutting rates, Sweden joins the likes of the European Central Bank and Swiss National Bank who have eased policy recently in an attempt to push inflation closer to target.
Denmark’s central bank doesn’t have an inflation target but has been forced to slash rates to keep its currency peg to the falling euro. (…)
EARNINGS WATCH
Earnings just keep getting better. As of last night, 366 companies (83.4% of the S&P 500’s market cap) have reported. So far, EPS ex-Energy are seen up 9.5% (9.5% last Thursday). Total S&P 500 EPS are seen up 6.5% (6.4%) excluding the likelihood of continued beats. So far, they are beating by 4.7% (5.0%). Strength appears broad based with ~71% of those reported surprising to the upside on EPS. Revenues ex-energy are seen up 4.3%. (RBC)
S&P updated its database as of Feb.10 with 321 companies (75% of mkt cap):
Q4 EPS are expected to total $27.40, down $0.37 (1.3%) from last week. This would bring trailing EPS to $113.66 from $114.03 expected last week. Q1 and Q2’15 EPS are expected at $26.96 and $29.25 respectively, down only pennies from last week. As explained last week, S&P rightly treats pension charges as operating which some other aggregators don’t.
S&P estimates that the large pension and OPEB charges taken by Telecoms reduce Q4’14 EPS by 4%, a significant $1.11 per share. Investors will more than likely normalize Telecom earnings given that these charges will be reversed if and when interest rates rise again.
Excluding these pension charges, S&P EPS would have increased 1% YoY in spite of the 23% drop in Energy earnings. Digging into S&P data, I calculate that Ex-Telecoms and Energy, S&P earnings are up 4.9% YoY in Q4.
OIL
Global Oil Layoffs Exceed 100,000
US shale oil boom masks declining global supply When rig count fall feeds through to output, prices should rally
(…) The rig count is now down by 469 units (29 per cent) since October, and at its lowest level since December 2011. Moreover, of the 469 rigs dropped, more than half (265) are horizontal drilling rigs, the most productive kind. The scale of the drop since early January in particular is spectacular, with 342 of the 469 rigs dropped since October 10 coming off in the past five weeks alone. In all of the historical Baker Hughes data stretching back to July 1987 there is no precedent for a drop of this severity.
The reason this matters is that US shale oil has been the main driver of global supply growth in the past few years. It has increased by 4.1m barrels per day in the past six years to reach 4.7m b/d in 2014 from only 0.6m b/d in 2008. Indeed, without US shale oil, global crude oil output would have been lower in 2014 than it was in 2005.
Based on the preliminary 2014 supply data provided by the US Energy Information Administration in its most recent Short Term Energy Outlook, the total world crude oil supply increased by 3.5m b/d over 2005-14, rising to 77.3m b/d from 73.8m b/d. However, if we strip out the impact of rising production from US shale oil, the global crude oil supply actually declined by around 1m b/d over this period, to 72.6m b/d from 73.5m b/d.
In turn, this means the outlook for continuing growth in global crude oil output in the next few years depends crucially on the outlook for continuing growth in US shale oil production. And that is a problem as the decline rates of shale oil wells are much higher than for conventional oil wells, which means a large number of new wells must be drilled every year simply to offset natural decline. This drilling treadmill gives rise to a capex treadmill, whereby constant infusions of new capital are required to enable the drilling to continue.
The implications of shale oil’s treadmill dynamics have until now been largely overlooked by the market, but are well understood by Saudi Arabia. Ultimately it is the Saudi policy to maintain production in the face of a supply glut estimated at 1.5m-2m b/d that has caused the 50 per cent drop in oil prices in recent months and thereby prompted the sharp drop in the US rig count.
The Saudis and their Gulf Opec allies realise that the high cost nature of shale oil production requires high prices to keep the drilling treadmill in motion. They calculate that a period of much lower prices will expose the fundamental vulnerability of the shale oil model, thereby prompting a reappraisal.
And that is arguably what is now beginning to happen, with Brent, the international benchmark, up 20 per cent since the catalyst provided by the rig-count data of January 30. After such a rapid bounce there is probably not much further price upside in the short term, as the current oversupply remains large and US shale oil production will probably continue to grow for the next three to four months given the price hedges in place and the backlog of wells still waiting to be completed.
However, once the impact of a dramatically lower rig count starts feeding through into shale oil supply from the middle of the year, prices should start to rally on a more sustained basis, with Brent likely to be back at $75 a barrel by year-end. The shale model simply does not work without high prices, and the market is starting to understand that.
(…) for the market overall, the only time we saw double-digit levels of short interest for any sector was back during the Financial crisis. Needless to say, a lot of investors are extremely bearish on Energy right now, and given the plunge in oil prices, the pessimism is understandable. However, if oil prices do start to stabilize, or even rise, there will likely be a major rush to get out of these bearish bets.
Ukraine Truce Deal Reached The leaders of France and Germany brokered a renewed deal to end Ukraine’s conflict with Russia-backed separatists, reviving and amending a failed September cease-fire agreement.
Leaders said the deal calls for a cease-fire starting on Sunday, with each side pulling back heavy weapons, as well as steps to give greater autonomy to the Russia-backed separatist regions in eastern Ukraine. (…)
“Much, much work is still necessary,” Ms. Merkel said after the talks ended. “But there is a real chance that things will turn for the better.” (…)
“President Putin indeed did all he could to achieve the possibility of ending the bloodshed,” Ms. Merkel said. She added: “In the end, President Putin also put pressure on the separatists” to agree to a cease-fire taking effect Saturday night. (…)
ROBERT D. KAPLAN in today’s WSJ:
(…) Even if the meeting (…) produces a cease-fire agreement that holds up—unlike the one signed last fall—the conflict’s underlying reality will remain unchanged: The Russian-backed separatist revolt in eastern Ukraine is part of Moscow’s larger grand strategy.
President Putin, who is consumed by historical humiliations, knows that Russia was invaded not only by Napoleon and Hitler, but before that also by the Swedes, Poles and Lithuanians. And so the Russian president seeks a post-Warsaw Pact buffer zone in Central and Eastern Europe. The Kremlin play book: imperialism by way of forcing energy dependence, intelligence operations, criminal rackets, buying infrastructure and media through third parties, the bribing of local politicians and playing off the insecurities of ethnic minorities.
Mr. Putin may be an autocrat, but he finds weak democracies convenient to his purpose. Their frail institutional and rule-of-law regimes make his favored forms of subversion easier. Thus, Moldova, Bulgaria and Serbia are particularly at risk while Romania, a member of the European Union since 2007 and far more stable than Bulgaria, is less so.
Mr. Putin has a North European Plain strategy in the Baltic states and Poland, which emphasizes dependence on natural gas and the manipulation of Russian minorities in the Baltic states. He also has a Black Sea strategy, as seen in his annexation of Crimea last year, his desire for a land bridge between Crimea and separatist eastern Ukraine, his military pressure on Georgia, and his friendship with Turkey’s President Recep Tayyip Erdogan—it all advances Russian influence in the adjacent Balkans, thus inside Europe.
Western sanctions against Russia and the weakening of the Russian currency (because of the fall in oil prices) may constrain Mr. Putin a bit, but Russian history reveals a strong tendency for hardship at home and adventurism abroad. Dialing up nationalism amid economic turmoil is the default option for autocrats.
Matching Russia’s multifaceted imperialism requires a multifaceted U.S. counterstrategy: the coordinated use of sufficient military aid, intelligence operations, electronic surveillance, economic sanctions, information and cyberwarfare, and legal steps. The Obama administration is already pursuing in part such a strategy, but without the intensity and commitment necessary for success. This isn’t about going to war, but about making Russia respect limits.
The Obama administration should intensify economic sanctions that further squeeze Russia’s ability to do business with U.S. banks; help allies build liquefied natural-gas terminals to reduce dependence on Russian energy; offer more tools to allies to help them defend against Russian cyberattacks; and launch a full-bore effort to get Ukraine to strengthen its military and other institutions—call it nation-building lite.
Other measures might include inviting recently elected Romanian President Klaus Iohannis and other deserving Central and Eastern European leaders on state visits to Washington, an increased tempo of bilateral military exercises with allies bordering Russia, and offering our friends more intelligence against Russian criminal organizations.
Above all, U.S. policy makers should understand that NATO’s Article 5—specifying that an armed attack against one member state will be considered an attack on all members—doesn’t protect members against Russian subversion from within. Thus supporting Ukraine militarily means first getting the Kiev government and its fighting forces to modernize by, among other things, embedding experts from NATO and other organizations inside Ukrainian ministries and army units. Only then will the Ukrainian military be able to absorb the extra arms its allies should want to give it. This is the narrative Washington needs to create. Ukraine’s best defense against Russia is to become more of a viable Westernized state itself.
But there is another problem: Europe. The EU bureaucracy doesn’t want to absorb the troubles of Ukraine’s 45 million people with their corrupt institutions, and neither do most NATO member states. The European appetite for helping Ukraine has not measured up to Russia’s appetite for destabilizing it. (…) The bitter European truth is that not enough individual countries will sacrifice for each other. So why should they sacrifice for Ukraine?
Thus the U.S., in addition to dealing with an assertive yet economically crumbling Russia, must also cope with a spineless Europe. To defeat Russia’s geopolitical ambitions, U.S. strategy should concentrate on protecting and fortifying what the Polish general and patriot of the interwar era, Józef Pilsudsk i, called the Intermarium (Latin for “between the seas,” between the Baltic and Black seas, that is). Pilsudski envisioned a belt of independent states stretching from Estonia south to Bulgaria that could withstand Russian aggression from the east and German aggression from the west.
But because Chancellor Angela Merkel’s Germany is such a benign and conflicted power, even as Mr. Putin seeks to expand influence into the old Soviet Union, the Intermarium must now extend from the Baltics to the Caucasus, where the Russian strongman, in addition to putting military pressure on Georgia, has made Armenia a virtual satellite hosting thousands of Russian troops.
This means oil-rich Azerbaijan, its sorry human-rights record notwithstanding, is a pivot state, along with Poland in northeastern Europe and Romania in southeastern Europe. The recent flare-up in fighting between Armenia and Azerbaijan over the disputed territory of Nagorno-Karabakh provides Russia even greater opportunities for exerting influence, given that Moscow has armed both sides.
Meanwhile, Mr. Putin’s vision of an ever-enlarging separatist Ukraine corresponds with what he has already achieved in Russian-occupied Transnistria, a sliver of land virtually annexed from Moldova in the early 1990s, where he has fashioned a murky smugglers’ paradise; 2,500 Russian troops are stationed there. Transnistria could be the future of Ukraine if Mr. Obama doesn’t act. With Europe weak and distracted, and Mr. Putin stoking nationalism in the midst of an economic crisis at home, only the U.S. can be the organizing principle for strengthening the Intermarium.