Energy and Natural Resources Market Radar (August 6, 2012)

Sunday, August 5th, 2012

Energy and Natural Resources Market Radar (August 6, 2012)

Strengths

• Crude oil prices gained again this week to reach nearly $109 per barrel (Brent) on supply concerns in the North Sea and rising geopolitical premiums as the conflict in Syria intensifies.
• Copper slipped 7 cents this week to $3.35 per pound but it has been one of the better-performing commodities in 2012, despite global growth slowing. The price has been supported by a combination of global inventory draw down, now back to 2009 levels and global producers struggling to meet near-term expectations.  Analysts at Nomura note that in the short term, prices appear fundamentally supported and are likely to be range bound. On average, current producers are generating cash margins of about 50 percent, yet cost inflation sees new projects have a hurdle rate closer to $3 per pound.

Weaknesses

• U.S. natural gas prices fell back under $3 per mmbtu after the Department of Energy reported that weekly inventories of natural gas built larger than expected.
• Rio Tinto PLC is cutting some jobs at its regional headquarters in Melbourne and will close an office in Sydney as the Anglo-Australian mining giant moves to contain costs amid falling prices for key commodities such as iron ore, two people familiar with the matter said Tuesday.
• The latest round of PMI data released on Wednesday paints a weak picture for global growth, and suggests that Asian economies are starting to feel stronger headwinds from the eurozone crisis. China and India also recorded slower manufacturing growth for July, while Japan’s PMI fell to the weakest level since last year’s tsunami.

Opportunities

• Reuters reported that the Ecuador government is preparing mining reforms to attract investments, according to a top mining official. The proposed new bill would delay a windfall tax until miners recover their investments and set a ceiling on mining royalties, bringing more certainty.
• The Indonesian Coal Mining Association (ICMA) estimates the country’s coal production is now likely to be flat in 2012, compared with a 10-12 percent increase previously. Coal analysts with Macquarie Capital think this highlights that the falling thermal coal price has put pressure on producers, particularly at the smaller, low-energy end of the spectrum which should ultimately tighten seaborne coal supply and provide price support for falling coal prices.
• The Wall Street Journal reported that China has quietly increased its budget for railway investment this year by 16 percent, data from the Ministry of Railways showed. In its latest bond prospectus published on Chinabond, an official website for debt issues, the railway ministry said Monday it plans to spend 470 billion yuan ($73 billion) on infrastructure investment this year, up from the 406 billion yuan stated in a prospectus earlier this month. Spending on railway infrastructure in the second quarter slipped to 7.6 percent year-on-year, down from 8.1 percent in the first quarter, for its slowest pace in more than three years. Data from the railway ministry showed that it spent 148.7 billion yuan on infrastructure investment in the first half of 2012, down 39 percent from a year earlier.

Threats

• Reuters reported that Indian coal markets are seeing scattered defaults among end users and trade buyers in part because of a 20 percent slide in coal prices this year, though a vast majority are still honoring contracts.
• The Argentine government is moving to exercise further control over the country’s oil sector with a new initiative that will require companies to submit annual investment plans for approval. Dow Jones Newswires reported that the government is making it mandatory for oil companies to submit their yearly investment plans to Deputy Minister of Economy Axel Kicillof by September 30 of each year, according to new rules published July 27 in the Official Bulletin. The new rules are likely to further exacerbate the tension between the Argentine government and the private companies operating in the country’s hydrocarbon sector.

Tags: Asian Economies, Coal Mining, Crude Oil Prices, Ecuador Government, Global Growth, Global Inventory, Global Producers, Headwinds, Hurdle Rate, Indonesian Coal, Iron Ore, Market Radar, Mmbtu, Natural Gas Prices, New Projects, Nomura, Regional Headquarters, Reuters, Rio Tinto Plc, Supply Concerns, Windfall Tax
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Energy and Natural Resources Markets Radar (July 2, 2012)

Monday, July 2nd, 2012

Energy and Natural Resources Market Radar (July 2, 2012)

Strengths

• In reaction to an insurance embargo on Iranian oil vessels, effective this Sunday, South Korea will halt all oil imports from Iran. These vessels rely on insurance to protect them against any accidents they may encounter, and most companies that provide this type of insurance are based in the EU. South Korea, Iran’s fourth largest oil consumer, is currently in talks with countries such as Iraq, Kuwait, Qatar, and the United Arab Emirates to find a new route to meet their demand.
• Strikes in Norway regarding pensions and retirement age led to the closing of three more oil fields, restricting more than 15 percent of the country’s oil supply and 7 percent of its natural gas supply. Last month, Norway produced 1.63 million barrels of oil per day, and Statoil has already reported losses of up to 250,000 barrels per day. Brent Crude Oil prices saw a slight increase as a result.
• Vale received an environmental license to expand the biggest iron-ore mine in the world, estimating that about $1 trillion worth of reserves are to be found. They hope to double their iron-ore capacity at Carajas in Northern Brazil, and by 2017 hope to increase their output to 230,000 tons per year.
• Crude oil futures (West Texas Intermediate) gained nearly 6 percent this week with most of the gain on Friday following news that European leaders had agreed to allow struggling European banks to borrow directly from bailout funds.

Weaknesses

• Aluminum has dropped in value to $1,845 per ton, its lowest price since June 7, 2010. Because of these deteriorating prices, Rusal plans to curtail 8 percent of its smelting capacity by 2013. Furthermore, provincial governments in China have granted subsidies to smelters to increase aluminum production. This comes after the government faced a loss in tax revenue and higher unemployment from the reduction of output in Henan, a province that contributes 20 percent to China’s total aluminum capacity. After the news let out, aluminum prices dropped 3 percent on the Shanghai Futures Exchange.
• Arch Coal, in the midst of low natural gas prices and slowing electricity consumption, temporarily suspended mining operations across the country, resulting in 750 layoffs. SouthGobi Resources also has plans to halt its coal mining operations in Mongolia because of weak demand and an unpredictable future.

Opportunities

• Lennar Corp. is in talks and has signed a memorandum of understanding with China Development Bank Corp. regarding an approximate $1.7 billion loan. This loan would help transform two former naval bases into a $13 billion housing project and greatly benefit the timber industry.
• Within a year, Bangladesh is planning on boosting domestic natural gas supply by 63.25 percent to meet a demand that has been increasing by about 14 percent a year since 2003. Chevron and many state-owned companies have already prepared to increase supply to the country.
• In a slow diamond market, Botswana’s Minerals Minister believes the country can turn towards copper and silver, in addition to coal mining, to provide a more prominent source of revenue. This transition of focus may diminish the weight the diamond industry has on Botswana’s economy.

Threats

• Iraq’s oil output has reached a 20-year high, passing 3.07 million barrels per day for the month of June, as it seeks to overtake Iran in becoming OPEC’s second largest producer. Iraq plans on producing 70,000 barrels a day at Halfaya field during the first week of July and hopes to more than double its output by 2015. This increase in output will weigh heavily on global oil prices.
• Guatemala’s President, Otto Perez Molina, has proposed reforms to the constitution, essentially giving the government up to 40 percent ownership in mining and exploration companies in the area. Molina campaigned on increasing foreign investment, but there may be unintended consequences should these proposals be ratified.

Tags: Aluminum Production, Bailout, Brent Crude Oil, Brent Crude Oil Prices, Carajas, Crude Oil Futures, Crude Oil Prices, European Banks, European Leaders, Iranian Oil, Iron Ore, Market Radar, Northern Brazil, Oil Imports, Oil Supply, Provincial Governments, Retirement Age, Statoil, United Arab Emirates, West Texas Intermediate
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Oil and Natural Gas Ratio Explodes to 52:1

Thursday, April 12th, 2012

By EconMatters

The ink on our last article is barely dry when its dire prediction actually came true 48 hours later–natural gas price dropping below $2, a level not seen in over a decade. Henry Hub natural gas front month futures declined to $1.982 per 1,000 cubic feet (mcf) on Wed. April 11, its lowest level since January 28, 2002, when the price hit $1.91. Meanwhile, WTI crude oil rose by $1.68 to finish at $102.70 per barrel; Brent rude increased by 30 cents to finish at $120.18.

The confluence of these price movements also brought the ratio between WTI and Henry Hub to a historical record high of 52:1 (see chart below) while the ratio of Brent to Henry Hub is a jaw-dropping 60:1 ! (And we thought the 25:1 ratio reached back in August 2009, also a historical high at the time, was parabolic.)

Chart Source: ICIS.com

Crude oil and natural gas are both energy commodities and should logically have a high degree of correlation. Theoretically, based on an energy equivalent basis, crude oil and natural gas prices should have a 6 to 1 ratio. However, due to various market characteristics, the price of oil typically had traded 8-12x that of natural gas in the past 25 years or so (see chart above). That historical pattern has started to deteriorate since 2009 primarily due to the combination of rising domestic production from unconventional shale gas depressing price levels, while geopolitical events in the MENA region (Middle East & North Africa) adding fear premium to the global crude oil prices.

Natural gas lacks the global market structure like crude oil, and tends to be regionally based thus less impacted by external sources. Oil, on the other hand, is a commodity with global demand drivers; and along with gold, trades as an inflation hedge against a weakening US Dollar.

In most of Europe and Asia, the price of natural gas/LNG is typically linked to crude oil under multiyear contracts. So while the spike in Brent helped to boost natural gas markers elsewhere, with practically zero LNG export capacity in the U.S., not even Fed’s two rounds of quantitative easing could lift the languishing Henry Hub.

The chart below illustrates just how disconnected U.S. natural gas price is vs. price levels in Asia, Europe and Brent crude oil.

Chart Source: Valero Corp. conference presentation, March 2012

LNG (liquefied natural gas) is a relatively new technology that some believe has the potential to transform natural gas into a true global commodity. Unfortunately, as discussed before:

Realistically, U.S. gas cargos may have a hard time competing with other exporters such as Russia, Qatar and the up-and-comer—Australia–in the Asian and European markets due to logistic disadvantage.

For U.S. LNG exports to make economic sense, domestic gas price would need to stay low, with high enough international LNG prices, and if the LNG prices are still tied to crude oil (which could change depending on market development), then crude oil prices would have to remain elevated.

While low prices are killing some of the natural gas producers, consumers will get a break via lower electricity costs. Meanwhile, U.S. natural gas trading at an 87% discount to Brent crude oil price is something even the oil industry appreciates. Valero (VLO), the world’s largest independent refiner, said in a presentation this January that its refinery operations use up to 600,000 mmBtus/day of natural gas at full utilization. Betting on “low U.S. natural Gas prices for many years to come”, Valero has several hydrogen and hydrocraker projects scheduled to complete by the end of 2012 to take full advantage of the low natural gas prices.

With the prospect of domestic natural gas prices remaining low and disconnected from global oil and gas prices for foreseeable future, U.S-based manufacturers of plastics, fertilizers and other products that use natural gas as a feedstock such as Dow Chemicals (DOW), Westlake Chemical Corp. (WLK), Potash (POT) and CF Industries (CF) are set to benefit from cheap U.S. natural gas as opposed to European and Asian competitors who do not.

©EconMattersAll Rights Reserved

Tags: Chart Source, Crude Oil Prices, Demand Drivers, Energy Commodities, Energy Equivalent, External Sources, Gas Lng, Geopolitical Events, Global Demand, Henry Hub, Inflation Hedge, Market Characteristics, Market Structure, Mena Region, Multiyear Contracts, Natural Gas Price, Natural Gas Prices, Price Of Natural Gas, Price Of Oil, Wti Crude Oil
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Frontrunning: March 27, 2012

Tuesday, March 27th, 2012

• 6.0+ Magnitude quake strikes near Tokyo (USGS)
• Ireland Faces Legal Challenge on Bank Bailout (Reuters)
• Bernanke says U.S. needs faster growth (Reuters)
• Spain Promises Austere Budget Despite Poll Blow (Reuters)
• Orban Punished by Investors as Hungary Retreats From IMF Talks (Bloomberg)
• Obama vows to pursue further nuclear cuts with Russia (Reuters)
• Japan’s Azumi Wants Tax Issue Decided Tuesday (WSJ)
• Australia Losing Competitive Edge, Says Dow Chemicals CEO (Australian)
• OECD Urges ‘Ambitious’ Eurozone Reform (FT)
• Yields Less Than Italy’s Signal Indonesia Exiting Junk (Bloomberg)

Overnight News Digest

Canada

THE GLOBE AND MAIL

- Public-sector employees in Ontario will have to make higher contributions to their pension plans, have their benefits cut or work longer before they can collect retirement pay, as part of new austerity measures to be unveiled in Tuesday’s provincial budget. r.reuters.com/hys37s

- Natural Resources Minister Joe Oliver confirmed Monday that the budget will spell out the government’s intention to reduce regulatory delays faced by energy and mining companies when they propose major projects in Canada. r.reuters.com/gys37s

- It was officially billed as a nuclear security summit, but trade and the economy trumped terrorism in Stephen Harper’s backroom chats with other world leaders. r.reuters.com/fys37s

Reports in the business section:

- As North American crude oil prices continue to languish, pipeline builder Enbridge Inc is launching a major new round of construction to push more barrels down the centre of the continent, in hopes of easing supply gluts that have kept prices low. r.reuters.com/dys37s

NATIONAL POST

- Department of National Defence officials charged with selecting Canada’s next fighter jet met with Lockheed Martin – maker of the F-35 – more times than with all other bidders combined before their billion-dollar decision to select it. r.reuters.com/cys37s

- The federal government’s once-feared bad-news budget is being transformed into a plan that will combine spending cuts with new measures designed to spur the economy, RBC Economics says in a research report Monday. r.reuters.com/bys37s

- The government of Alberta is expected to pocket $1.2 trillion in royalties from the oil sands in the next 35 years, as oil production rises to 5.4 million barrels a day from today’s 1.6 million bpd, according to a new study by the Canadian Energy Research Institute made public Monday. r.reuters.com/xus37s

Reports in the business section:

- Engineering firm SNC-Lavalin Group Inc could face a regulatory or police probe into the US$56 million that went missing under Chief Executive Officer Pierre Duhaime and into the company’s business in Libya. r.reuters.com/zus37s

WSJ

* Ben Bernanke said that the Federal Reserve’s easy money policies are still needed to confront deep problems in the nation’s labor market.

* After years of touting the superiority of online ads, Google is taking a different approach to promote itself against rivals.

* The Chief Executive of BATS Global Markets has reached out to directors about his future and said the company likely will cancel bonuses related its stock floatation, which was pulled Friday.

* Abu Dhabi’s sovereign-wealth fund said it would invest $2 billion to buy into the sprawling business empire of Brazil’s richest man, Eike Batista.

* A House subcommittee said a top lawyer at J.P. Morgan Chase will testify at a highly anticipated hearing Wednesday into the collapse of MF Global Holdings Ltd

FT

GOLDMAN EYES ELECTRONIC BOND TRADING

Goldman Sachs is considering how to roll out electronic trading technology to its fixed income business – one of its biggest revenue generators – as it prepares for new regulation.

BUMI BOARD DISPUTE NEARS RESOLUTION

London-listed Bumi is expected to announce changes to the board and management that will see financier Nat Rothschild step down as co-chairman of the Indonesian coal miner he created in 2010.

CAMERON BOWS IN CASH FOR ACCESS ROW

British Prime Minister David Cameron has been forced to reveal the names of Conservative party donors invited to dinners at his official residences as pressure grows for an independent inquiry into the “cash for access” affair.

JEFFERIES TO SET UP EUROPE FINANCING ARM

Jefferies is looking to set up a corporate lending business in Europe as the fast-growing U.S. investment bank seeks to grab market share from retrenching rivals.

FED DOUBTS BIG US JOBLESS FALLS WILL LAST

Rapid recent falls in U.S. unemployment may prove to be a one-off unless economic growth picks up, Ben Bernanke, chairman of the U.S. Federal Reserve, warned on Monday.

HUEWEI SEEKS TO OVERTURN AUSTRALIAN BAN

Huawei, the world’s second-largest network equipment vendor by sales, aims to convince the Australian government with generous security measures to revert a ban on the Chinese company from a large broadband project.

EMBRAER AIMS FOR SECOND SHOT AT US JET CONTRACT

Embraer said it expects a cancelled U.S. Air Force contract for light attack aircraft to be re-tendered “within weeks” in a deal seen as crucial to the defence ambitions of the Brazilian aircraft producer.

EASYJET OFFERS EXIT-ROW SEATS FOR 12 STG

Seats in the exit rows of some EasyJet flights will cost 12 pounds from April as the no-frills airline seeks to attract customers reluctant to take part in the boarding-time melee of budget flying.

NYT

* State officials and insurance executives are devising possible alternatives to the coming federal requirement that most Americans buy health insurance, even as the Supreme Court hears arguments about the constitutionality of the mandate.

* The U.S. government’s chief consumer protection agency said on Monday that it intended to take direct aim at the vast industry that has grown up around the buying and selling of information about American consumers.

www.nytimes.com/2012/03/27/business/ftc-seeks-privacy-legislatio .html?ref=business

* The European Union took a big step on Monday toward building a financial firewall strong enough to prevent the spread of fiscal contagion to major economies like Spain. The move came after Germany dropped its opposition to bringing the Continent’s total bailout capacity to more than 690 billion euros ($916 billion).

* As growing numbers of baby boomers face retirement with inadequate savings, some state officials are considering a novel proposal to rebuild America’s ailing retirement system – having state pension funds run retirement plans for companies.

* The Supreme Court on Monday ordered an appeals court to reconsider its decision to uphold patents held by Myriad Genetics on two genes associated with a high risk of breast and ovarian cancer.

* FX, a basic cable channel that is part of News Corporation’s powerful cable division, has consciously carved a niche in the new television landscape, following a blueprint to lure younger viewers whom marketers pay a premium to reach.

* In a speech that sought by turns to deflate optimism and pessimism about the labor market, the Federal Reserve chairman, Ben Bernanke, said Monday that the Fed’s efforts to stimulate growth were gradually reducing unemployment, but that the scale and duration of the problem could leave lasting scars on the economy.

* The chief executive of SNC-Lavalin, a major Canadian engineering and construction firm that had extensive business operations in Libya, left the company on Monday after the release of a report indicating that he had authorized 56 million Canadian dollars in improperly documented payments to unidentified agents, the company’s chairman said Monday.

* MF Global’s top lawyer will break her five-month silence on Wednesday to tell Congress that she was unaware of a gaping shortfall in customer money until hours before the brokerage firm filed for bankruptcy on Oct. 31.

* Michaels Stores, the arts and crafts retailer owned by the Blackstone Group and Bain Capital, plans to file to go public as soon as next week, in what could be one of the biggest initial public offerings of the year.

* Mega Maldives Airlines is going after a growing niche, linking the increasingly affluent China with the tiny island nation of the Maldives. The company’s chief executive says his start-up is poised for expansion.

European Economic Update

• Germany GfK Consumer Confidence Survey 5.9 – lower than expected. Consensus 6.0. Previous 6.0.
• Germany Import Price Index 1.0% m/m 3.5% y/y – higher than expected. Consensus 0.9% m/m 3.5% y/y. Previous 1.3% m/m 3.7% y/y.
• Switzerland UBS Consumption Indicator 0.87. Previous 0.92. Revised 0.93.
• Sweden Household Lending 5.0% y/y – in line with expectations. Consensus 5.0%. Previous 5.1%.
• Sweden PPI 0.4% m/m 0.5% y/y – lower than expected. Consensus 0.5% m/m 0.3% y/y. Previous 0.5% m/m 0.1%. y/y.
• Sweden Trade Balance (Kronor) 5.9B – lower than expected. Consensus 8.0B. Previous 11.3B. Revised 10.8B.
• UK CBI Reported Sales 0 – higher than expected. Consensus -5. Previous -2.

Tags: Austerity Measures, Bank Bailout, Brazil, Canadian, Canadian Market, Crude Oil Prices, Department Of National Defence, Dollar Decision, Dow Chemicals, Enbridge Inc, Globe And Mail, Gluts, Imf Talks, Joe Oliver, Lockheed Martin, Magnitude Quake, Mail Public, Mining, Natural Resources Minister, Nuclear Cuts, Overnight News, Public Sector Employees, Quake Strikes, Retirement Pay, Russia
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Will Oil Continue Higher?

Sunday, March 4th, 2012

Will Oil Continue Heading Higher?

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

Does it feel like it costs an arm and a leg to fill your car these days? While consumers may continue to feel the bite from higher gasoline prices, investors can use these rising prices to their advantage.

Beginning in March, crude oil has a seasonal wind at its back. For nearly 30 years, the third month of the year has been the best month for crude oil. As you can see in the chart below, over the past 5-, 15- and 30-year cycles, West Texas Intermediate crude oil prices head higher in March, and have generally continued to climb through September.

On Yahoo! Finance earlier this week, Daily Ticker host Aaron Task and I discussed the many factors that should continue to drive oil higher over the next year. While many would like to attribute the rise in oil to the geopolitical developments in Iran, there are more global supply and demand fundamentals to consider. Credit Suisse points to the world’s dwindling inventories of oil as an example. Currently, the number of days of oil demand cover is at a low of about 57, the same level we saw in 2004 and late 2007. This low supply to cover demand means that any disruption in supply will likely drive prices higher.

We expect inventories to be further depleted, as demand continues, especially from emerging markets. Inventories for February and March should show a further reduction, as “oil demand growth was building positive momentum in the fourth quarter in all our regions except Europe,” says Credit Suisse.

According to Bloomberg News today, China plans on stockpiling more oil to reduce its local price fluctuations. Countries such as the U.S. generally store emergency oil to ensure its residents, businesses and manufacturers have plenty of stock at a price that’s not too high. As part of a three-phase program to increase its strategic petroleum reserves, China is building four emergency oil-storage facilities across western China, in the east and in the south. By the end of this year, its oil facilities are “expected to bring national crude-storage capacity to 270 million barrels” when construction is complete, says Bloomberg.

By comparison, the U.S. currently has the largest emergency petroleum supply in the world, stockpiling about 570 million barrels of crude oil at four sites located along the Gulf of Mexico.

China is not the only emerging market expected to consume more oil. When I was in Bogata, Colombia a few weeks ago, I saw gas stations posting prices around $5 a gallon. And its citizens can only fill up their gas tanks a few times a week. Yet the economy is booming and the streets are jammed with cars. There’s still tremendous demand in this country, as well as many other growing emerging markets, even with higher gasoline prices.

One question I’m asked when oil jumps in price is, will it hurt the U.S. economy? I don’t believe so. Many analysts believe the economy is in a better position to adjust to higher prices, especially when you compare last year’s oil spike to this year’s.

In 2011, fuel prices rose more than 50 percent in a matter of only a few months, says BCA Research. This “very quick and forceful advance” occurred at the same time that U.S. consumers were driving more miles, the number of unemployed workers was at a high, and job creation was nonexistent, says BCA.

This year, the rise in fuel costs has been more gradual, says BCA. What’s more important to BCA is that “consumers are in better shape than they were last year,” with job creation, unemployment, and income expectations all posting improved numbers. In addition, the U.S. has experienced an unseasonably mild winter, giving furnaces a welcome respite and their owners lower heating bills, making the higher payment at the pumps a little more palatable.

In addition, central banks around the world are in “full-on expansion mode,” says BCA. This needed liquidity and support for growth provides an injection of confidence directly into the global consumers’ veins.

Beware of biases by oil analysts: Deutsche Bank research going back to 1999 found that analysts “consistently underestimate” the Brent oil price by an average of 27 percent. The chart below shows the forecasted price made by analysts compared to the actual Brent oil price outturn. Every year, analysts have underestimated how strong Brent will be, ranging from as little as 2 percent to as high as 54 percent. Using the average forecasting error, Brent could be as high as $135 a barrel.

We expect there to be corrections in the price of oil throughout 2012, just like the ups and downs commodities experience from year to year. While the world is hungry for energy, there’s no free lunch on the Periodic Table of Commodities, and historically, from year to year, commodities fluctuate. Crude oil, for example, has seen its share of ups and downs: In 2008, oil lost 53 percent; in 2009, it increased a substantial 78 percent.

On our interactive version of the Periodic Table of Commodity Returns, you can see this for yourself. Click on a particular commodity and see how it has performed each year over the past 10 years.

See the interactive table now.

While oil may remain elevated, use these higher prices to your advantage by owning natural resources companies that benefit from higher prices. The Global Resources Fund (PSPFX), which invests in global materials and energy stocks, gives investors a way to potentially offset those higher gasoline bills.

Tags: Chief Investment Officer, Credit Suisse, Crude Oil Prices, Disruption, Emergency Oil, Emerging Markets, Fourth Quarter, Frank Holmes, Gasoline Prices, Global Supply, Inventories, Month Of The Year, News Today, Oil Demand, Oil Storage Facilities, Phase Program, Price Fluctuations, Strategic Petroleum Reserves, Supply And Demand, U S Global Investors
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Energy and Natural Resources Market Radar (March 5, 2012)

Sunday, March 4th, 2012

Energy and Natural Resources Market Radar (March 4, 2012)

Strengths

• The Global Resources Fund had a relatively good week, driven by strong performance in Colombian oil and gas exploration companies, silver mining stocks, and U.S. midstream master limited partnerships.
• Crude oil prices hit a 43-month high after reports that a pipeline exploded in Saudi Arabia, the world’s biggest oil producer.  Brent crude jumped $5.74 to $128.40 per barrel in New York on Thursday, the highest since July 2008.  Crude was higher also because sanctions on Iran are disrupting its oil exports and further restrictions could tighten global oil markets already hit by a rash of outages in other countries, according to a report required by a recent U.S. sanctions law.
• Aluminum producers supplying the Japanese market have secured an increase in premiums to $115-117/t CIF in the second quarter, from $112-113 per ton in the first quarter of 2012, supported by rising demand from automotive manufacturers and construction activity that is contributing to a tighter balance in the local market.  Elsewhere in the world, aluminum spot premiums have been rising strongly since the start of this year as a result of ongoing warehousing activities.
• Copper traders are bullish for a fourth consecutive week, the longest streak since October, as manufacturing strengthens from China to the U.S. and stockpiles declined to the lowest in more than two years. Thirteen of 29 analysts surveyed by Bloomberg expect the metal to gain next week and six were neutral. Inventories tracked by the London Metal Exchange fell to 292,250 metric tons yesterday, the lowest since August 2009, and orders to withdraw more metal are close to an eight-year high, bourse data show.
• According to an official in the U.S. Department of Energy, the department will not attempt to control natural gas prices by revoking approvals granted for gas export terminals, as lawmakers and environmental groups stepped up their attacks on attempts to send U.S. gas abroad.

Weaknesses

• Mozambique’s government has rejected an environmental plan submitted by Riversdale (now Rio Tinto owned) to barge 2 million tons per annum of coal down the Zambezi River to Beira port, citing potential flooding issues as a result of dredging. This makes development of alternative rail routes (such as to Nacala port) crucial in expanding export tonnages by the middle of the decade.
• Mexico oil production is seen stagnating at approximately 2.8 mm barrels per day over the next 14 years unless the state oil company Pemex significantly boosts investment, according to the energy ministry.
• Bloomberg reported that Libya’s oil minister said that oil refineries are operating at 43 percent of their capacity, or about 172,000 barrels a day, after an armed conflict last year halted operations.  Refinery utilization, however, will rise in the North African nation when the Ras Lanuf plant comes back online in early April.  The country, which holds Africa’s biggest crude reserves, is boosting oil production and restoring its refineries after months of fighting last year to oust the nation’s former leader.
• With his re-election fate increasingly tied to the price Americans are paying at the gas pump, President Obama asked Congress on Thursday to end $4 billion in subsidies for oil and gas companies and vowed to tackle the country’s long-term energy issues while shunning “phony election-year promises about lower gas prices.”
• The effect of the shale gas boom has again been highlighted in U.S. coal data, with the EIA inventory report showing utility holdings up year-over-year for the first time since early 2010. Inventory levels were 175.1 million short tons, up 6.75 million short tons month-over-month, reflecting the 21 percent year-over-year decline in coal generation over the month.
• The current daily crude steel production rate is 1.7 million tons, implying annualized production of 620 million tons, far below the 683 million tons production realized in 2011. January China total steel production was 52.1mt, -13 percent year-over-year.  January global steel production was 117mt, -7.8 percent year-over-year. If demand remains weak for the rest of the year, steel production volume may be under great pressure.

Opportunities

• In the latest edition of Scotiabank’s Commodity Price Index, economist Patricia Mohr observed, “Significant industry growth in potash, coking coal, gold and nickel – as well as the inclusion of iron ore – has boosted the weight of metals and minerals within the index.”  The trade weight of metals and mineral in the index has risen slightly from 26.8 percent to 30.1 percent, “partly due to the inclusion of the rapidly expanding iron ore trade from Labrador/northern Quebec to China as well as Europe,” Mohr said.
• Macquarie Research highlighted that PMI data for February released on Thursday reinforced the recent macro pattern; key economies are getting better at the margin, though in tentative steps rather than leaps. In particular, the Chinese economy showed further signs of stability and expectation of increased orders, very much in line with the results of the Macquarie China Steel Sector survey. Macquarie analysts see the second quarter likely to exhibit both China and ex-Chinese demand improving, a more positive environment for pricing once accessible inventory levels are reduced from those seen presently.
• One of the key developments causing consternation on the supply-side of base metal markets early in 2012 has been the evolving threat of a ban by the Indonesian government on unprocessed ores. While originally signaled back in the 2009 mining law, widespread skepticism in the intervening period concerning the likelihood of its application was filliped by the announcement in early February that the 2014 ban had officially been signed into law. While important for both copper and bauxite, nickel offers the most intriguing potential effect; Indonesian ore makes up 15 percent of global mine output versus domestic refined output representing just 1 percent. The implication is that unless processing capacity increases, there will potentially be significant amounts of ore “trapped” in the country. Moreover, Indonesian ore provides more than 50 percent of Chinese nickel pig iron sector feed, meaning genuine production constraints there would significantly impact domestic austenitic stainless steel producers nickel input choices.
• The world’s top copper exporter, Chile, mined 396,341 tonnes of copper in January, down 7.6 percent year-over-year, the INE statistics agency said on Wednesday. January’s copper output was also 22 percent below December’s 509,407 tonnes of copper production reported last month by the government. The drop in monthly production is the lowest level since July last year, when Chile’s output was impacted by strike action at Escondida, and comes alongside an expected drop in Grasberg output due to strike action this quarter. We may see upward pressure on the cost of copper because of this decrease in production.
• Reuters reported that India needs about 140 million tons of coal imports in 2012-13. This is about 25 percent higher than the country’s expected coal imports for the year ending March 31. Coking coal is expected to constitute 15 percent of the total coal imports for the period.
• Lithuania is planning a tender in March to issue its first license to explore for shale gas with exploration results seen from 2014, according to the head of the State Geological Service.

Threats

• Operation costs are becoming increasingly difficult to manage for precious and base metal producers, with the FTSE 100 copper miner, Kazakhmys, posting a flat core profit for 2011, offset by an 18 percent increase in production costs.  Companies seem to be using dividends as a means to attract investors, and with the company following suit, it issued a 27 percent dividend rise.
• Bloomberg reports China Mining Association (CMA) estimates that China iron ore imports may decline up to 14 percent. Total import volume may range between 590 million tons to 650 million tons, lower than the 686 million imported in 2011.
• E&P companies are seeing service (i.e., pressure pumping) prices down about 20 percent since early 2011 fourth quarter in East Texas.  There is some discussion that West Texas has too many frac companies and will see price weakness in 2012.

Tags: Aluminum Producers, Automotive Manufacturers, Bourse Data, Brent Crude, Colombian Oil, Construction Activity, Crude Oil Prices, Export Terminals, Gas Exploration Companies, Global Oil, London Metal Exchange, Market Radar, Master Limited Partnerships, Natural Gas Prices, Oil And Gas Exploration, Oil Markets, Oil Producer, Resources Fund, Silver Mining, Spot Premiums
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Energy and Natural Resources Market Radar (February 20, 2012)

Monday, February 20th, 2012

Energy and Natural Resources Market Radar (February 20, 2012)

Strengths

• Brent crude oil prices hit a six-month high of $119.28 per barrel this week on reports that Iran might cut crude exports to six European countries.
• The Global Resources Fund’s holdings of pipeline MLP stocks posted solid gains this week as the Alerian MLP Infrastructure Index climbed to record levels.
• Grain prices edged higher this week with soybean futures climbing to the highest level in almost five months after Chinese buyers purchased a record amount of the oilseed from the U.S.

Weaknesses

• The global steel market remains soft as Swedish specialty steel maker SSAB said it is postponing the restart of an idle blast furnace due to weak demand conditions in Europe.
• Rusal, the largest global aluminum producer, said it believes shutdowns in global aluminum capacity will reach 3-4 million tons per year in 2012. The company stated that “as a result of aluminum price decline at the end of 2011, a significant share of the world and European primary aluminum capacity has become unprofitable, resulting in partial or total closing of some smelters . . . a further 6-8 percent of global capacity curtailments are to be expected in the first half of 2012.”
• Preliminary U.S. gasoline consumption statistics for January appear to have diverged from relatively strong macroeconomic statistics.

Opportunities

• Deutsche Bank reported that traders are once again focusing on the Brent-WTI spread within the oil markets. WTI gained almost $2 per barrel to close over $100 per barrel for the first time in February, while Brent remained flat around $117.50 a barrel. With the first phase of the Seaway pipeline reversal due before summer, the differential between Brent and WTI is expected to narrow.
• China’s Ministry of Land and Resources will likely offer more than 20 blocks in its second shale-gas auction, compared to its original plan of more than 10. China is estimated to hold more gas trapped in shale than the U.S.
• Not only did BHP Billiton and Rio Tinto approve a $4.5 billion expansion to their Escondida copper mine in Chile, which is planned to increase the mine’s reserve by 25 percent, but BHP also made plans to reopen its Pinto Valley mine in Arizona, which was closed three years ago.  The substantial capital commitments by both companies demonstrates optimism about longer term demand for the metal; analysts have said that tight global supplies for a metal used for everything from power transmission to plumbing have left them with a positive outlook for the metal and its cost structure as well.

Threats

• Peru’s copper producers face the risk of blackouts next year because of power line delays in the southern Andes. Spain’s Abengoa and Colombia’s Interconexion Electrica may cancel new transmission projects unless the government clarifies a law that has delayed three lines by at least a year. Delayed power lines will set back projects including Xstrata’s $5.67 billion investment in the Las Bambas and Antapaccay copper mines and Luz del Sur’s $160 million Santa Teresa hydroelectric plant.
• Low demand and higher costs are expected to further erode profits in the Chinese steel sector in 2012. Also, many big steel enterprises suffered losses in the second half of the year, and the situation was unlikely to improve in 2012.

Tags: Alerian Mlp, Aluminum Price, Aluminum Producer, Blast Furnace, Brent Crude Oil, Brent Crude Oil Prices, Company Stated That, Consumption Statistics, Crude Exports, Crude Oil Prices, Gasoline Consumption, Global Capacity, Global Steel Market, Macroeconomic Statistics, Market Radar, Price Decline, Rusal, Seaway Pipeline, Soybean Futures, Steel Maker
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Energy and Natural Resources Market Radar (November 21, 2011)

Saturday, November 19th, 2011

Energy and Natural Resources Market Radar (November 21, 2011)

Strengths

• The Global Resources Fund’s exposure to paper & forest stocks helped performance this week and was one of the better performing industry groups in our natural resources universe.
• The China Iron and Steel Association reported that crude steel output has continued to decline over the start of November, falling to an annualized rate of 607 million tons per annum from 627 million at the end of October. Accordingly, Chinese mills have responded quickly to weaker pricing and reduced production by more than 50 million tons per annum over September-October. This has helped bring the physical market back into balance, allowing steel prices to stabilize and market inventory to fall.
• Royal Dutch Shell said that it has achieved the world’s deepest well completion on record in the Perdido development in the Gulf of Mexico. Shell said the Tobago field well was drilled in water depths to 9,627 feet and has started production.

Weaknesses

• Both precious and industrial metals stocks underperformed our benchmark this week, which negatively impacted fund performance.
• The price of natural gas fell to a 52-week low of $3.32 per million british thermal units, as inventory levels reached 3,850 billion cubic feet, or 6 percent above the 5-year average.
• Despite breaking the $100 per barrel level, crude oil prices fell week-over-week to approximately $97 per barrel.
• According to industry analysts, aluminum prices have dampened because of high inventories and weak growth prospects. Aluminum prices have tumbled nearly 20 percent in the past three months to around $2,165 per ton.

Opportunities

• Mineweb highlighted that Peru’s regional government said that progress was being made in wage talks between Freeport McMoRan’s Cerro Verde and striking miners, who have just recently extended the strike to the third month. The regional government now believes the dispute at the mine that produces 2 percent of the world’s copper can be solved without government intervention, a possible sign President Ollanta Humala wants to stay out of the conflict.
• Minter Ellison, a legal firm, has stated that the removal of the ban on uranium exports to India will present new opportunities and have huge implications to Australia. President Barack Obama visited Australia this week, leaving Australian Prime Minister Julia Gillard to put some hard lobbying into place to overturn a ban on supplying uranium to India.

Threats

• Mineweb reported that BHP Billiton was wary on the commodity market outlook. The world’s biggest miner warned that some customers are starting to face tighter access to trade finance and some are cutting production. “The heightened volatility and uncertain economic outlook are expected to continue to weigh on sentiment in the markets” for commodities.

Tags: Aluminum Prices, Cerro Verde, Crude Oil Prices, Crude Steel, Cubic Feet, Freeport Mcmoran, Fund Performance, Growth Prospects, Industrial Metals, Industry Groups, Inventory Levels, Market Pulse, Market Radar, Price Of Natural Gas, Resources Fund, Royal Dutch Shell, Steel Association, Steel Output, Steel Prices, Striking Miners, Water Depths, Well Completion
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The Many Factors Fueling a Return to $100 Oil (Holmes)

Sunday, November 13th, 2011

The Many Factors Fueling a Return to $100 Oil

By Frank Holmes, CEO and Chief Investment Officer
U.S. Global Investors

Oil prices rose about 5 percent this week to finish only a dollar short of regaining triple-digit status. Since dipping below $80 per barrel on October 3, West Texas Intermediate (WTI) prices have increased almost 28 percent. This increase is nearly twice that of the S&P 500 Index, up 15 percent since October 3, but reinforces a recent trend for oil prices—as equities go, so goes oil.

This chart put together by the U.S. Energy Information Administration (EIA), illustrates how WTI crude oil prices and equities have moved nearly in tandem over the past few months.

The EIA says “the recent strong relationship between oil and equity prices resembles that seen during the economic downturn and recovery in 2008-2010.” According to EIA data, crude oil and the S&P 500 Index have had a positive correlation in 12 of the past 13 quarters. A positive correlation had not occurred once in the previous 35 quarters. In fact, crude oil and equities experienced a negative correlation during five quarters over that time period.

This recent strong correlation implies that equities have the potential to move higher if oil prices continue along their current trajectory. Given oil’s current supply/demand fundamentals, there’s a good chance of that happening.

Demand Holds Strong Despite Global Uncertainty

One of the key drivers for rising oil prices is demand, which has held steady despite the turmoil in Europe, sluggish economic growth in the United States and a slowdown in China. In fact, Citigroup says there is “no indication of a demand collapse unfolding as in 2008.”

While year-over-year comparisons show global demand growth is slowing, Citigroup points out that this year’s data compares with a 2010 period propped up by government policies encouraging consumption, such as the Fed’s QE2 program. Citigroup says these comparisons are “obscuring the fact that demand continues to grow and, barring a sharp derailment of the global economy, is on course to make a record high in 4Q11 and on an annual basis in 2012.”

By the end of 2012, the EIA forecasts world crude oil and liquid fuel consumption will total nearly 90 million barrels per day. This chart from PIRA carries the demand curve further into the future, forecasting demand to surpass 110 million barrels per day by 2025.

What is driving this increase? The emerging market transportation sector.

In its World Energy Outlook released this week, the Paris-based International Energy Agency (IEA) says crude oil consumption will be driven by developing countries over the next 20 years. These countries will account for 90 percent of the world’s population growth, 70 percent of the increase in economic output and 90 percent of global energy demand growth over the period from 2010 to 2035.

The agency predicts global crude oil demand will rise to 99 million barrels per day by 2035 “as the total number of passenger cars doubles to almost 1.7 billion in 2035.” If this prediction holds true, it means that there will roughly be as many cars in the world as there were people 100 years ago.

Long-term, Short-term Constraints Threaten Supply

WTI prices have remained in backwardation since shifting from three years of contango in late October. Contango means that the price of commodity contracts expiring in the near term is lower than the forward, future price of crude contracts. Backwardation is the opposite: The price of a commodity today is higher than the future purchase price.

While everyday investors may get tripped up by the contango/backwardation jargon of oil markets, the most important thing to recognize is that this significant shift signals there are short-term constraints in supply pushing prices higher. In fact, crude oil inventories in the United States are now at the lowest seasonal level in seven years, according to Bank of America Merrill Lynch. When the shift occurred, BofA analysts wrote this “is a major development for the crude oil market” and “signals $105 oil.”

Backwardation is a short-term signal; a long-term signal is the growing amount of geopolitical unrest bubbling up to the surface in the world’s largest oil-producing region.

This week, the International Atomic Energy Agency (IAEA) released a detailed report that verified many suspicions of nuclear proliferation in Iran. The IAEA noted it was concerned about Iran’s “activities related to the development of a nuclear payload for a missile.”

This news does not sit well with others in the region, such as Israel, who have threatened military action should the country deem Iran a security threat. A research note from Barclays articulates the combustible situation with a quote from Amos Harel and Avi Issacharoff, writers for Haaretz: “A few more weeks of tension and one party or another might make a fatal mistake and drag the region into war.”

War and/or unrest in the region have the potential to have a tremendous effect on oil prices because of its proximity to the majority of global oil production. PIRA says that the Middle East accounts for over 70 percent of OPEC oil production and account for over 95 percent of the cartel’s capacity growth along with North Africa.

It’s not only production that is threatened. One of the largest chokepoints along the global oil supply chain is the Strait of Hormuz, which roughly 90 percent of all Persian Gulf oil tankers—some 18 million barrels per day—pass through, according to Barclays. With Iran controlling the entire northern border of the strait, there is a significant chance for disruptions should the country fall into conflict or war.

This is just one example of oil’s geopolitical DNA. With more than 40 percent of the world’s oil controlled under autocratic rule, oil supply in democratic nations likely depends on the state of autocratic nations.

Following the death of Moammar Gaddafi, The Wall Street Journal reports that oil companies are eager to begin pumping oil in Libya again but the new regime is still battling Gaddafi supporters and the country is a long way from being unified. Barclays notes several concerns: oil fields need to be repaired, Interim Transitional National Council has experienced growing factions, and there’s been a proliferation of weapons.

There’s also sanctions and persistent violence in Syria. In Yemen, an oil export pipeline was blown up a couple of weeks ago, making it the fifth attack in just a month. Barclays indicated that “almost half of Yemen’s 260,000 barrels per day of oil output has been offline since March” and it doesn’t look like the situation will improve any time in the near future.

Trends in Demand and Supply Maintain Pressure on Prices

While BofA analysts think that oil prices could be headed toward $105 per barrel in the short term, the IEA offered a longer-term view that should give natural resources investors calm for many years to come.

The IEA says “trends on both the oil demand and supply sides maintain pressure on prices. We assume the average IEA crude oil import price remains high, approaching $120 per barrel (in 2010 dollars) in 2035 (over $210 per barrel in nominal terms).”

That’s a distant projection but it certainly illustrates why you should consider investing a portion of your wealth in oil.

Tags: Chief Investment Officer, Citigroup, Collapse, Crude Oil Prices, Current Supply, Economic Downturn, Eia, Energy Information Administration, Frank Holmes, Global Demand, Government Policies, Negative Correlation, Positive Correlation, Qe2, Rising Oil Prices, U S Energy, U S Global Investors, West Texas Intermediate, Wti Crude Oil, Wti Prices
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Eurozone Anxiety Continues to Reign

Wednesday, September 7th, 2011

Eurozone Anxiety Continues to Reign
Heightened worries over the eurozone sovereign debt crisis overshadowed an unexpected gain in US service sector activity, pushing stocks below the flatline in the first day of trading after the holiday weekend. Treasuries moved higher in a flight to safety, and crude oil prices were lower. Meanwhile, the US dollar gained ground as the Swiss franc moved sharply lower after the Swiss National Bank capped the franc’s rise compared to the euro. On the equity front, International Paper inked a deal to acquire Temple-Inland for $4.3 billion, including debt, Walgreen Co saw an increase in August same-store sales, but AutoNation posted a decline in August vehicle sales, and Sunoco announced its departure from the refining business.

The Dow Jones Industrial Average fell 101 points (0.9%) to 11,139, the S&P 500 Index lost 9 points (0.7%) to 1,165, and the Nasdaq Composite declined by 7 points (0.3%) to 2,474. In moderate volume, 1.1 billion shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil fell by $0.43 to $86.02 per barrel, wholesale gasoline lost $0.02 to $2.82 per gallon, and the Bloomberg gold spot price was $21.00 lower to $1,879.20 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 1.0% higher at 75.93.

In M&A news, International Paper Co. (IP $28) announced that it has entered into a definitive agreement to acquire Temple-Inland Inc. (TIN $31) for $32 per share in cash, or about $4.3 billion, including the assumption of $600 million in debt. On the heels of the announcement, IP said it will terminate its existing tender offer to acquire all of the outstanding common shares of TIN for $30.60 per share. TIN was sharply higher, while IP also gained solid ground.

Walgreen Co. (WAG $35) reported that its August same-store sales—sales at stores open at least a year—rose 5.6% year-over-year (y/y). The retailer reported that customer traffic increased 2.5% and “basket size” rose 2.3%. Separately, WAG noted that it has begun informing patients that it will not be part of the Express Scripts Inc. (ESRX $45) pharmacy benefits network as of January 1, 2012, as negotiations “remain at an impasse.” Shares were higher after overcoming early weakness.

AutoNation Inc. (AN $39) announced that its retail new vehicle unit sales in August declined 3% y/y to 18,121, as a 10% drop in import vehicle sales offset gains in domestic and premium luxury sales. AN traded lower.

US oil refiner Sunoco Inc. (SUN $38) announced that it will put its two Pennsylvania refiners up for sale and exit the refining business in order to focus on its retail and logistics enterprises. In a conference call, SUN’s CEO said the company’s performance in the refining segment was “unacceptable” and that the move was in the best interest of its shareholders. SUN said it will book a $1.9-2.2 billion impairment charge during the 3Q related to the refineries. SUN traded higher on the news.

Service sector activity surprisingly accelerates

The ISM Non-Manufacturing Index (chart) unexpectedly improved in August to 53.3 from 52.7 in July—the lowest level for the year—while the forecast of economists surveyed by Bloomberg was for a decrease to 51.0. A reading of 50 separates expansion from contraction. The report is generally considered a measure of economic strength in the service sector and is the companion to the ISM Manufacturing Index, which last week surprisingly remained in expansion for August. The favorable read on service sector activity came as new orders increased 1.1 points to 51.7, while new export orders rose 7.5 points to 56.5. Elsewhere, although the non-manufacturing employment component declined 0.9 points, the gauge remained in expansion at a level of 51.6. Meanwhile, prices paid gained 7.6 points to 64.2. On inventories, the change component fell from 56.5 to 53.5 and the sentiment component declined 3.5 points to 56.0. Finally, accompanying a 0.5 point decrease in business activity/production to 55.6, the ISM indicated that survey respondent comments were mixed and that “There is a degree of uncertainty concerning business conditions for the balance of the year.”

Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her article, 1/2 Full: Not Throwing in Towel on Recession Probability, that risks that there will be a recession have risen markedly. A good deal of that risk relates to the breakdown in confidence triggered by the debt ceiling-related political antics, the subsequent downgrade of US debt by Standard & Poor’s, the ongoing debt crisis in the eurozone and a highly volatile stock market. Also, as we’ve noted countless times, the ability of the economy to grow at anything resembling a healthy pace is severely limited by massive debt as a percentage of US gross domestic product (GDP), exacerbated by many structural impediments to jobs growth. However, Liz Ann notes that there are several bright spots complimenting the August reads from the ISM, including a surge in July consumer spending, a tumble in oil prices, a stronger-than-expected report durable goods orders in July, and continued extremely accommodative monetary policy. Read more of Liz Ann’s analysis as well as other timely commentary from Schwab experts at www.schwab.com/marketinsight.

Treasuries were mostly higher despite paring gains on the favorable service-sector data, as eurozone concerns continued to hamper sentiment and foster some flight-to-safety buying. The yields on the 2-year and 10-year notes were down 1 bp to 0.20% and 1.98%, respectively, and the 30-year bond rate fell 5 bps to 3.25%.

Swiss National Bank caps franc

Sentiment was mixed overseas as a move by the Swiss National Bank was tempered by the continued anxiety over the euro-area debt crisis. The Swiss National Bank (SNB) announced it will institute a ceiling on the Swiss franc against the euro, saying it is “aiming for a substantial and sustained weakening of the franc,” per Bloomberg, and “With immediate effect, it will no longer tolerate a euro-franc exchanged rate below the minimum rate of 1.20 francs.” The SNB added that it is “prepared to buy foreign currency in unlimited quantities.” The Swiss franc traded solidly lower in the currency markets following the announcement. However, worries over the sovereign debt contagion grew as Italy held talks about its austerity plans and balancing its budget, while political uncertainty in Germany exacerbated the concerns about the debt crisis across the pond. German Chancellor Angela Merkel’s party was handed a loss in a regional election over the weekend, and Germany is set to hold a constitutional vote tomorrow regarding the participation of Europe’s largest economy in the recent eurozone bailouts.

Meanwhile, today’s European economic calendar did little to help sentiment, as UK retail sales unexpectedly dropped in August, and German factory orders fell more than expected in July, while eurozone 2Q GDP was left unrevised at a 0.2% quarter-over-quarter (q/q) rate of growth.

The reemergence of the euro-area sovereign debt concerns dampened the mood in Asia as well with Japan’s Nikkei 225 Index closing at a 2-1/2 year low. Meanwhile, the Reserve Bank of Australia (RBA) kept its benchmark interest rate unchanged at 4.75%. The RBA has kept rates unchanged since November, noting today that conditions in global financial markets “have been very unsettled over recent weeks, as participants have confronted uncertainty about both the resolution of sovereign debt problems and the prospects for economic growth in Europe and the United States.” The central bank added that “the outlook for the global economy is less clear than it was earlier in the year.” Economic releases out of the region were minimal with a report showing South Korea’s 2Q GDP was revised slightly higher, while Australia’s net exports unexpectedly declined in 2Q.

Fed measures state of the States

The main event on tomorrow’s US economic calendar will be the midday release of the Federal Reserve Beige Book, wherein Fed staffers summarize anecdotal economic data from all twelve Federal Reserve districts in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for September 20-21. The Beige Book measures what businesses and consumers are saying about actual current conditions, particularly the state of order books, demand for loans, and sales.

Market participants are struggling to discern whether the current slowdown is a temporary factor or a more lasting change in trend. As Schwab’s Chief Investment Strategist Liz Ann Sonders, Director of Market and Sector Analysis, Brad Sorensen, CFA and Senior Market Analyst, Michelle Gibley, CFA note in their latest Schwab Market Perspective: Confidence Counts that most measures that typically give cues about recessions suggest the US will avoid a renewed recession, but risks are clearly heightened. While the Obama Administration and Congress continue to scramble to be seen as doing something, fiscal policy options are limited amid a drive to lower deficits, driven home by the US credit rating downgrade. Meanwhile, the Fed still has several possible actions, but remains divided, and may need economic data that is more definitive before acting. We remain opposed to a new round of QE and question if any efforts will have the desired impact. As Liz Ann concludes in 1/2 Full: Not Throwing in Towel on Recession Probability, the bottom line is that the ability of the economy to grow at anything resembling a healthy pace is severely limited by massive debt, lack of confidence and structural impediments to job growth. Read more at www.schwab.com/marketinsight.

The only other item on the economic docket is MBA Mortgage Applications.

Tomorrow’s international economic calendar will have more to offer, including: UK industrial and manufacturing production, as well as home prices, and German industrial production, while Australia will report 2Q GDP, Japan will release its Leading Index, and Canada will report its Ivey Purchasing Managers Index. Elsewhere, Sweden’s Central Bank, the Bank of Canada and the Bank of Japan are expected to keep rates steady following the conclusions of their respective monetary policy meetings.

Schwab Center for Financial Research – Market Analysis Group

©2011 Charles Schwab & Co., Inc., Member SIPC. All rights reserved.

Schwab Center for Financial Research (“SCFR”) is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

1 – IB1
Schwab or its affiliates has managed or co-managed a public offering of securities for this company in the past 12 months.

2 – SO2
Schwab and/or its officers own options, rights or warrants to purchase the securities of this
company.

Tags: Autonation, Canadian Market, Crude Oil, Crude Oil Prices, Debt Crisis, Dollar Index, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Gold, Gold Spot Price, International Paper Co, Moderate Volume, Nasdaq Composite, Outlook, Service Sector Activity, Swiss Franc, Swiss National Bank, Temple Inland, Temple Inland Inc, Walgreen Co, Wholesale Gasoline, World Currencies, Wti Crude Oil
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