Oil Slips After API Reports Strong Build To Crude Inventories

U.S. crude oil inventories increased yet again by 9.94 million barrels, according to this week’s American Petroleum Institute (API) inventory report published on Tuesday afternoon, reminding OPEC that its cuts are but a gaping window of opportunity for U.S. shale producers. Oil prices were on the rise prior to this week’s API inventory data release, with the market sentiment largely one of positivity as all indications are that OPEC is indeed trimming the fat when it comes to oil supply. But as has been the case over recent weeks, the…

Japan’s Tepco To Issue First Bond Since Fukushima Disaster

In its first bond sale since the Fukushima nuclear tragedy in 2011, Tokyo Electric Power Co (Tepco) has filed plans to issue US$612 million (70 billion yen) worth of bonds, and investors who view this as guaranteed by the state may take interest. According to Reuters, Tepco’s power transmission and distribution unit Tepco Power Grid Inc has filed with the Kanto Local Finance Bureau plans to issue a three-year bond worth US$262 million (30 billion yen) and a five-year bond worth US$349.6 million (40 billion yen). The coupons are expected to…

Colorado Sues Boulder Over Oil Ban

Cynthia Coffman, the Attorney General of Colorado, has filed a lawsuit against Boulder County, following weeks of threats over the county’s refusal to remove a moratorium on oil and gas exploration in unincorporated areas. Boulder’s ban stipulates that the local authorities will not accept and process any new oil and gas exploration permit applications. The moratorium was first introduced back in 2012 and since then has been extended eight times, the Denver Channel recalls. The latest extension is until May this year. According to the…

Trump Expects Putin To “Return” Crimea To Ukraine

With every passing day, it appears that many of the anticipated foreign policy changes under the new administration may end up being nothing but smoke and mirrors. First, it was the middle east, where despite campaign promises of pulling back US troops, Trump is instead considering adding to US deployments to reinforce what he plans to be Syrian “safe zones.”

Then, during today’s Sean Spicer press conference, the White House spokesman had that President Trump has been “tough” on Russia and expects Moscow to “return” the Crimea peninsula to Ukraine, the White House spokesman told reporters. Addressing the resignation of National Security Adviser Michael Flynn – hounded by the media over his contacts with Russian diplomats prior to Trump’s inauguration – Spicer pointed out that Russia “seized” Crimea under the Obama administration and that the Trump-appointed ambassador to the UN Nikki Haley has “strongly denounced the Russian occupation.”

President Trump has made it very clear that he expects the Russian government to de-escalate violence in the Ukraine and return Crimea,” Spicer said at a daily news briefing. “At the same time, he fully expects to and wants to get along with Russia.”

That may be problematic if indeed Trump plans to perpetuate the policies of his predecessor. On February, the Nikki Haley said at the UN Security Council that “Crimea is a part of Ukraine. Our Crimea-related sanctions will remain in place until Russia returns control of the peninsula to Ukraine.”

Russian envoy Vitaly Churkin responded by citing the US Constitution and pointing out that Crimeans overwhelmingly voted to join Russia, after the US-backed coup in February 2014 overthrew the elected government in Kiev.

It is in the national and economic interest of the US to have a good relationship with Russia, Spicer explained, but said that Haley “speaks for the president” on the matter of Crimea.

Flynn’s resignation on Monday followed several weeks of media furor over his telephone conversation with the Russian ambassador to the US in December, after the outgoing Obama administration expelled 35 Russian diplomats and seized two properties. Moscow chose not to respond in kind. “There is nothing that General Flynn did that was a violation of any sort,” Spicer said, explaining that the adviser was asked to resign because of Trump’s “eroding trust” after Flynn’s accounts of the conversation to administration officials did not square with what was leaked to the media.

However, with Democrats smelling blood in the water over the sensitive topic of the Trump administration’s alleged proximity to Russia, and even Republicans now calling for an exhaustive probe into Trump-Russia relations, recent events may have well set back any potential thaw in Russia-US relations indefinitely.

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RBC: “This Is The $1 Trillion Question On Our Clients’ Minds”

With Dennis Gartman seemingly correct this time, and the market not only melting up, but in full “blow off top” mode, traders can only sit back and watch in quiet amazement how nothing can lead to even the most nominal of downticks. So in hopes of bringing some daily clarity, here is RBC’s cross-asset head Charlie McElligott with his daily dose of market zen, focusing not only on the key events of the day, namely China’s record credit injection and Yellen’s more hawkish than expected Congressional testimony, but with an observation of what “continues to be the chief concern of clients on recent marketing swings”, namely “The TRILLION dollar question: when does all of this “inflation as a good thing” tip over into “inflation with no growth”—aka STAGFLATION?

From McElligott’s “Big Picture”:


Today’s newest pain-trade?  Very popular Yuan shorts, who bet on the currency’s depreciation (long CNY, CNH, or SGD as ‘cheap’ proxy) and are being squeezed sharply today off the back of some big overnight Chinese inflation and financing data.  In the larger-sense though, the real takeaway here is that a stronger Yuan could very much alter the current macro regime landscape, as it could represent further tailwind to the +++ “global reflation” story.

It all starts with the Chinese economy–already YTD we’ve seen very firm Mainland data (manu and service PMIs for example), but last night’s data dump took it a step further.  China inflation data went ‘full mongo,’ with PPI YoY printing at 5.5 year highs (6.9% YoY), and it was driven by record PBoC credit pumping—with new monthly loans coming in at the second highest reading on record, and china all-system financing aggregate data coming in at the highest ever recorded (see chart below). 


So with Chinese data surprising even the most bullish of folks to the upside; with inflation running hot; with record credit cram-down; all against a PBoC which has actually been incrementally tightening in short-term rates markets—you’ve really set the stage for a “(Yuan) short gone bad.”

Frankly too, you could separately ‘add-in’ fixed-asset investing (FAI) as a another China ‘stimulus driver’ that has ‘surprised to the upside’ and boosted the economy, as many had expected a slowdown of -1 to -2% YoY following last year’s record CNY59.6T print.  Instead, with approx. 2/3 of Chinese provinces having reports their plans, FAI investment is already north of CNY40T YTD, run-rating at another new record ~64T.

The ‘knock-ons’ are potentially quite significant:

  • In a larger macro-sense, Chinese inflation is set to ripple through the global supply chain—i.e. CHINA IS EXPORTING INFLATION…and not ‘deflation’ as many anticipated in ’17 with further Yuan depreciation bets.
  • In the micro, a stronger Yuan should inherently sees a weaker Dollar on the other side.   For this reason, along with significant trade relationship btwn China and Japan, a lower CNH (cleaner read than onshore CNY) too is highly correlated with lower JPY (correlation btwn CNH and JPY ~57%), with lower US 10Y rates (40% corr) and higher gold (-40% corr).



This final point on correlation with US rates may seem incoherent, as we’re saying ‘stronger Yuan’ is REFLATIONARY…so why could US rates then potentially head near-term lower?  Well, I have two potential thoughts here:

  1. The current macro regime is currently one where a ‘higher USD’ has been an expression of the “US reflation trade,” as it’s been representative of US domestic growth expectations (better data) and with it, higher nominal rates.   As noted yesterday though when discussing the near-term resumption of the “USD / crude” traditional negative correlation, it seems we could be transitioning in the regime to where a stronger USD will NOT help further the “GLOBAL reflation” theme, especially with regards to global trade and negative impact on commodities.  As a stronger Yuan is an input (marginal, but directional) to a weaker Dollar, this could of course drag rates lower…until the negative correlation with commodities and USD again ‘kicks in’ which eventually will drive rates higher (fits with my final long-term point on ‘higher inflation, higher rates’).
  2. The other very rational thought on “how a stronger Yuan could drive lower US rates?”  Because a stronger domestic currency in China will help reverse the capital outflows which have been driving the PBoC’s need to sell USTs.  Perhaps this too is why Treasuries haven’t been able to get that ‘flush out sell-off’?!

So I think the takeaway here is that in the near-term, the correlations between stronger Yuan / weaker USD / lower US rates can persist for awhile.  In the long-term though, this Chinese credit pumping trickle-down into better data–which is sending the Yuan appreciating–will eventually flow-through the global supply chain and ‘bleed’ inflation into the R.O.W., and as such help keep pressuring US rates higher.

The TRILLION dollar question is then reiterated: when does all of this “inflation as a good thing” tip over into “inflation with no growth”—aka STAGFLATION?  This continues to be the chief concern of clients on recent marketing swings.

So perhaps THIS point is why we are seeing so much “reflation joy” within equities (cyclicals, banks, value)…but still seeing very little follow-through within the fixed-income complex.

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Fossil Shares Plunge On Poor Results, Ugly Guidance; Strong Dollar Blamed

Nine months after FOSL stock plunged by 25%, after reporting abysmal Q1 results and even worse guidance, moments ago the watchmaker behind brands such as Skagen and Burberry reported another ugly quarter, which confirmed that the prevailing retail weakness continues.

As we await a bevy of retail companies to report in the next few days, Fossil’s report may be a harbinger of pain for consumer-facing retail companies, not to mention “fashion accessory”, but really watch company Fossil, which has cratered after hours after reporting not only a miss in Q4 EPS of $1.03 (Est. $1.17) which tumbled from $1.46 a year ago, and revenue (which at $959.2 million was 3% lower than a year ago and missed expectations of $977.2 million), but also missed comp store expectations which crashed 7% on expectations of a modest -0.4% decline.

The topline weakness was broad-based in US and Europe, although a modest rebound in Asia provided a faint silver lining:

  • Net sales in the Americas decreased $35.3 million or 7% and $31.8 million in constant currency (a 6% decline) compared to the fourth quarter of fiscal 2015, with a decline in watches, leathers and jewelry compared to last fiscal year.  A sales decline in the U.S. drove the decrease in the region. 
  • Net sales in Europe decreased $14.4 million or 4% and increased $2.1 million in constant currency (a 1% increase) compared to the fourth quarter of fiscal 2015, with constant currency growth in watches partially offset by a decline in jewelry and leathers compared to last fiscal year.  Within the region, growth in travel retail and Spain was partially offset by a decline in the U.K. and Germany. 
  • Net sales in Asia increased $16.4 million or 13% and $14.7 million in constant currency (a 12% increase) compared to the fourth quarter of fiscal 2015, with an increase in watches, jewelry and leathers compared to last fiscal year.  Within the region, an increase in India, China and Australia was partially offset by a decline in Taiwan. 

Among the various reasons the company gave to justify the weakness in demand was the “stronger dollar” in Q1, an excuse we will be hearing a lot of in the coming quarters:

  • In the fourth quarter of fiscal 2016, the stronger U.S. dollar negatively impacted net sales by $18.3 million.  Fourth quarter fiscal 2016 net sales decreased 3% (2% on a constant currency basis) as compared to the fourth quarter of fiscal 2015. For fiscal year 2016, the impact from the strong U.S. dollar negatively impacted net sales by $45.4 million.

Earnings were impacted by a restructuring charge and purchase accounting costs tied to Misfit, the wearable activity tracker it purchased in 2015. In addition to restructuring charges and the strong dollar, FOSL also cited higher interest expenses (what already) as hitting the bottom line. In 4Q, FOSL noted declines in multi-brand licensed watch portfolio as well as leathers and jewelry, but it was all mostly the dollar’s fault.

Finally, the cherry on top was the guidance: the Texas-based company forecast fiscal 2017 earnings in the range of $1.00 -$1.70 a share, as much as 58% below consensus estimates of $1.78. Worse, for the current quarter the company expects to post a loss of between 10 and 25 cents a share, relative to consensus estimates of $0.07.

Fossil and other traditional watchmakers have seen their stocks pressured from the rise of activity trackers and smartwatches like the FitBit and the Apple Watch. Fossil bought Misfit more than a year ago as it began to push into the wearables sphere. It has not been a profitable transaction. Furthermore, the company has been also pressured as a result of broad, ongoing weakness in consumer spending, something which analysts remain puzzled by in light of the so-called ongoing economic recovery.

The company previously said it plans to double its wearables production to 300 new products and add new brands this year as it tries to entice consumers looking for fashionable connectivity. 

“The fourth quarter of 2016 was pivotal for Fossil Group with our wearable launches demonstrating they could be the catalyst to drive growth in the watch category,” said chief executive Kosta Kartsotis. “Delivering some stability in the watch category during the quarter reinforces our belief that with our technology capabilities, we can turn what was once a headwind into a tailwind.”

Fossil shares had dropped 11% YTD and have crashed nearly 80% over the past three years. The company’s stock has briefly halted after reporting earnings, after which it has since rebounded modestly to “only” down 12%.

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