David Fuller and Eoin Treacy's Comment of the Day
Category - General

    Email of the day 2

    On a clear majority of UK citizens now favouring Brexit:

    You were right David when you said that the majority favouring Brexit has grown. According to this YouGov poll,  "A total of 68 per cent of respondents would like to see Britain withdraw from the EU, the latest YouGov figures "A total of 23 per cent described as Re-Leavers“ said that they voted Remain last year, but now believe the government has a duty to carry out the will of the British people."

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    Despite Emmanuel Macron's Election, the Eurozone Isn't Out of the Woods

    As things stand, Merkel’s hands are tied unless and until she wins re-election in September. But even after that she is unlikely to give much ground to Macron. The thing about the German establishment, which is so easy to under-estimate, is that they really believe the guff they espouse about the need for fiscal restraint and the virtue of current account surpluses. Macron may be set for a honeymoon period over the summer. But things will not look so good come the autumn if his domestic reform agenda has hit difficulties and Merkel is refusing to make concessions.

    Meanwhile, thanks to higher inflation, the European economic environment will become more testing later this year, and perhaps more so next year and beyond, if and when the current global upswing starts to stall. Plenty of observers think that the next US downturn may not be far away.

    Admittedly, some European commentators think that the eurozone economy will receive a boost from Brexit as foreign investors shift money from the UK to the continent, and various businesses, including financial ones, leave London for Frankfurt or Paris. But I think this view is misguided. The exodus of businesses, people and capital from London will probably be minor.

    Indeed, Brexit may pose a threat to the eurozone if and when it becomes clear that the UK has managed Brexit well and is continuing to outperform its continental neighbours. Of course, this is not an immediate prospect. First the UK has to leave and then it will be some time before it becomes clear how well the country is faring.

    All along, though, I have thought that the weakest link in the euro chain was Italy, where elections are due by May next year at the latest. It is striking that all of Italy’s opposition parties are now eurosceptic. The Five Star Movement, led by Beppe Grillo, leads in the opinion polls. Grillo’s party, although quirky, is not like Marine Le Pen’s National Front. It does not have the same protectionist agenda and does not have to fend off accusations that it is tinged with racism and anti-semitism. Moreover, despite the current slight upturn in its economy, Italy remains deeply depressed. Grillo could easily deliver the shock that Marine Le Pen did not.

    So do not be fooled by the appearance of calm. There is an almighty task facing the governments of Germany and France to forge the necessary institutions to make the euro system sustainable. What recent political and economic developments have done is to provide a reprieve, but no more than that. Failure by Macron to introduce radical reform, a major row with Germany over the course of its policy and reform to the eurozone, or the election of a eurosceptic government in Rome could all deal the euro a fatal blow.

    One way or another, the euro does not make sense. It is only a matter of time.

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    Third Well to Help Meet Demand for Geothermal Heating in Boise, Idaho

    This article by Parker O’Halloran for thinkgeoenergy.com may be of interest to subscribers. Here is a section

    According to Colin Hickman, a spokesman for Boise Public Works, “We’re getting to a place where the amount of space downtown that we’re heating we felt it was the right time to bring on the third well to ensure that we have redundancy, in case something happens during the winter months, during our peak season so we have some back up for the customers on geothermal heating,”

    Interestingly, a third well was dug in 1982, however, it has been not in use. Hickman says this third well is needed. These particular wells in Boise have geothermal water that is approximately 177 F (80 C) degrees when it comes out of the ground and is then pumped in insulated pipes to the downtown locations where the water heats the buildings.

    “The buildings will basically take the heat out of that water, use it for their heating purposes in their building, and then that water goes back to Julia Davis Park, and there’s an injection well there that puts that water back into the earth,” Hickman said.

    Hickman adds that Boise should be proud of its geothermal system as it eliminates the use of fossil fuels, it’s renewable and it’s an economic driver that will bring businesses in that are interested in this type of renewable energies to the Boise area.

    Geothermal energy use in Boise dates back to the 1890s.

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    Inflation, El Nino, and Fishmeal

    Thanks to a subscriber for this report from Jeffrey D.Saut for Raymond James. Here is a section:

    Some inflation numbers were reported last week. They read: April PPI jumped 0.5% month/month, +2.5% year/year; +2.2% year/year was expected. Meanwhile, core PPI increased by 0.4% month/month, +1.9% year/year; +0.2% month/month and +1.6% year/year were expected. The inflation report reminded us of something Pippa Malmgren (a policy consultant to numerous presidents) said to us at a recent national conference. She opined that when inflation goes from 1% to 2.5%, or maybe even 3.0%, it’s a really big deal; and we agree. Shortly after parsing those inflation figures I read something about the El Niño that is expected to “hit” in the back half of 2017. As paraphrased from the eagle-eyed David Lutz’s blog “What Traders Are Watching,” (Jones Trading):

    The headline read, “Full-Fledged El Niño Increasingly Likely in Second Half 2017.” The U.S. government’s Climate Prediction Center (CPC) last month forecast El Niño conditions would prevail by the end of the northern hemisphere summer, but put the probability at only 50 percent. Most El Niño indicators have strengthened since then so the probability is likely to be revised higher when the CPC issues its next forecast later in May. Aussie’s wheat crop could see further drought damage. Sugar cane will also be impacted. Dryness in Southeast Asia could depress harvest levels of crops including rice and sugar in Thailand, Robusta coffee in Vietnam, and will add stress to rubber and palm oil trees in Indonesia and Malaysia. El Niño has also been linked to a weaker Indian monsoon and lower than average rainfall could affect crops including rice, wheat, cotton, and sugar. Indian farmers are large buyers of gold, and analysts at UBS last year raised concerns that a potential weak monsoon could hit purchases of the precious metal. El Niño has tended to impact cocoa production in West Africa. Meanwhile, Peru’s anchovy catch is almost always affected by the weather event, and is the main ingredient for fishmeal. Interestingly, this “fishmeal” inference made me recall that a severe El Niño was responsible for the term "core inflation," which excludes food and energy prices in its inflation figures for those of you who don't eat or drive.

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    Email of the day on the yield curve spread and Plato:

    I tried to find in the chart library the last chart you should on Friday's Video. That is the difference between the US 10 & 2 year. This Friday's long term outlook was different but I liked it; even got myself a copy of Plato to read

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    Oil Price Indicators Flash Buy as OPEC Expectations Grow Bigger

    Price curve? Check. Technical markers? Check. The oil market just got bullish and that’s left OPEC with little room for maneuver when it meets in Vienna next week.

    After the energy ministers of Saudi Arabia and Russia talked up the potential for the Organization of Petroleum Exporting Countries and other nations to extend output cuts into early 2018, the crude market took off. OPEC’s preferred market structure returned, with nearer contracts at a premium further along the curve, with Brent and West Texas Intermediate crude rising above their key 200-day moving averages in intraday trading.

    “Now they have to deliver,” said Ole Hansen, head of commodities strategy at Saxo Bank A/S in Copenhagen. “You could argue that an awful lot of positive news has been priced in and they need to deliver for that to be sustainable.”

    coalition of OPEC nations and allies including Russia last year agreed to cut output by about 1.8 million barrels a day, starting in January. After the move initially boosted prices, concerns that it wouldn’t be sufficient to counter-act surging U.S. production pushed WTI below $44 a barrel. Producer nations, acknowledging they won’t achieve their target of returning global inventories to their five-year average by the time the original deal expires at the end of June, look likely to agree an extension at a meeting in Vienna on May 25.

    As traders in Europe hit their desks on Monday morning, Brent crude jumped above its 200-day moving average. Early in May, a break below that marker sparked a sell-off with prices at their lowest since the last OPEC meeting at the end of November. The global benchmark also broke on Monday above another key technical marker, the 50-day moving average, for the first time since April 19.

    “If you were short you cover, if you were flat you start acquiring length and if you were long you add to or keep those positions,” said Tamas Varga, an analyst at brokerage PVM Oil Associates Ltd. in London. “If there’s going to be a rollover longer than the second half of this year, I think the market will strengthen even after the meeting.”

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    The End of Petrol and Diesel Cars? All Vehicles Will be Electric by 2025, Says Expert

    No more petrol or diesel cars, buses, or trucks will be sold anywhere in the world within eight years. The entire market for land transport will switch to electrification, leading to a collapse of oil prices and the demise of the petroleum industry as we have known it for a century.

    This is the futuristic forecast by Stanford University economist Tony Seba. His report, with the deceptively bland title Rethinking Transportation 2020-2030, has gone viral in green circles and is causing spasms of anxiety in the established industries.

    Prof Seba’s premise is that people will stop driving altogether. They will switch en masse to self-drive electric vehicles (EVs) that are ten times cheaper to run than fossil-based cars, with a near-zero marginal cost of fuel and an expected lifespan of 1m miles.

    Only nostalgics will cling to the old habit of car ownership. The rest will adapt to vehicles on demand. It will become harder to find a petrol station, spares, or anybody to fix the 2,000 moving parts that bedevil the internal combustion engine. Dealers will disappear by 2024.

    Cities will ban human drivers once the data confirms how dangerous they can be behind a wheel. This will spread to suburbs, and then beyond. There will be a “mass stranding of existing vehicles”. The value of second-hard cars will plunge. You will have to pay to dispose of your old vehicle.

    It is a twin “death spiral” for big oil and big autos, with ugly implications for some big companies on the London Stock Exchange unless they adapt in time.

    The long-term price of crude will fall to $25 a barrel. Most forms of shale and deep-water drilling will no longer be viable. Assets will be stranded. Scotland will forfeit any North Sea bonanza. Russia, Saudi Arabia, Nigeria, and Venezuela will be in trouble.

    It is an existential threat to Ford, General Motors, and the German car industry. They will face a choice between manufacturing EVs in a brutal low-profit market, or reinventing themselves a self-drive service companies, variants of Uber and Lyft.

    They are in the wrong business. The next generation of cars will be “computers on wheels”. Google, Apple, and Foxconn have the disruptive edge, and are going in for the kill. Silicon Valley is where the auto action is, not Detroit, Wolfsburg, or Toyota City.

    The shift, according to Prof Seba, is driven by technology, not climate policies. Market forces are bringing it about with a speed and ferocity that governments could never hope to achieve.

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    How North Korea Managed to Defy Years of Sanctions

    DANDONG, China — As the end of the fashion season approached, and the suits and dresses arrived in her company’s warehouses here in the Chinese border town of Dandong, the accountant crammed about $100,000 into a backpack, then boarded a rickety train with several co-workers.

    She asked to be identified only by her surname, Lang, given the sensitivity of their destination: North Korea.

    After a six-hour journey, she recalled, they arrived at a factory where hundreds of women using high-end European machines sewed clothes with “Made in China” labels. Her boss handed the money to the North Korean manager, all of it in American bills as required.

    Despite seven rounds of United Nations sanctions over the past 11 years, including a ban on “bulk cash” transfers, large avenues of trade remain open to North Korea, allowing it to earn foreign currency to sustain its economy and finance its program to build a nuclear weapon that can strike the United States.

    Fraudulent labeling helps support its garment industry, which generated more than $500 million for the isolated nation last year, according to Chinese trade data.

    North Korea earned an additional $1.1 billion selling coal to China last year using a loophole in the ban on such exports, and researchers say tens of thousands of North Koreans who work overseas as laborers are forced to send back as much as $250 million annually. Diplomats estimate the country makes $70 million more selling rights to harvest seafood from its waters.

    China accounts for more than 80 percent of trade with North Korea, and the Trump administration is counting on Beijing to use that leverage to pressure it into giving up its nuclear arsenal. The Chinese government took a big step in February by announcing that it was suspending imports of coal from the country through the end of the year.

    But China has a long record of shielding North Korea from more painful sanctions, because it is afraid of a regime collapse that could send refugees streaming across the border and leave it with a more hostile neighbor.

    In addition, Beijing now has a sympathetic ear in South Korea, whose newly elected president, Moon Jae-in, echoes its view that sanctions alone will not be enough to persuade Pyongyang to abandon its nuclear program.

    While North Korea remains impoverished and dependent on food aid, its economy appears to be growing, partly because of a limited embrace of market forces since its leader, Kim Jong-un, took power more than five years ago.

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