Let’s make a Deal!
Debt dealing is dominating the global commodity markets. Do we default or do we trade for the big shiny box where our lovely Carol Merrill is standing? A seven hour meeting between Nicholas Sarkozy and Angela Merkel, with a special guest appearance from Euro Chief Jean Claude Trichet, has apparently created a new deal to save Greece from default. No word on whether Greece had to trade them a tie clip or any other concessions but one can only wonder. The Financial Times says that Sarkozy agreed to drop the idea of a bank tax to help fund the bailout, a significant step to get Germany to go along with it. The FT says that, “The deal paves the way for a German-backed initiative for more direct measures to get private holders of Greek bonds to help pay for the bail-out. According to a version of the plan circulated by the European Commission on Wednesday evening, all owners of Greek bonds that come due in the next eight years will be urged to swap their holdings for new bonds that do not mature for another 30 years. Other plans, however, including a French-backed bond rollover plan, are believed to still be on the table. The Commission plan, which would include credit sweeteners to encourage broad participation, is expected to lead to a temporary default on Greek bonds, something that is fiercely resisted by the European Central Bank.”
Meanwhile oil inventories tell different stories about the state of oil demand. Demand is lousy here but flourishing elsewhere. Refinery runs hit the highest level of the year as exports fly! The Energy Information Agency reported that U.S. crude oil refinery inputs averaged 15.6 million barrels per day operating at 90.3% of their operable capacity last week. That explained why oil inventories fell by 3.7 million barrels. Yet gasoline inventories rose only 800,000 despite the fact that gas production increased 9.3 million barrels and demand is 2.2% below a year ago. It seems that gas exports are becoming a big business. The EIA says that distillate fuel inventories increased by 3.4 million barrels last week and are in the upper limit of the average range for this time of year. Weak demand in the US may not be that bearish with the specter of QE3D hanging around us. That threat should mean that oil has a floor and the outlook, overtime, is once again bullish.
The Wall Street Journal reports that inflation, real-estate bubbles and weak monetary controls pose, "significant risks to financial and macroeconomic stability" in China, and Beijing should boost the value of its currency to combat those threats, the International Monetary Fund said. The IMF used its annual review of China's economy to lay out a broad agenda of change for China, including a stronger currency, higher interest rates, reduced advantages for big state-owned enterprises and a liberalized financial sector. Such changes were necessary, the IMF argued to improve Chinese living standards and reduce conflict with its trading partners.
The IMF declared the yuan to be "substantially" undervalued. An IMF panel estimated the yuan is undervalued between 3% and 23%, depending on the methodology used. Over the past year, the Fund estimated that the value of China's currency against all its trading partners actually fell by about 2% adjusted for inflation. Against the dollar, though, it gained about 8% after inflation over the past year. The IMF review was aimed at boosting those inside China, including at the People's Bank of China, who have been arguing for change, although perhaps not on as sweeping a scale. The report, though, could be used by China's many opponents in Congress and elsewhere who want the U.S. government to take a much harder line on the currency and other issues. China's representative to the IMF, He Jianxiong, sharply disagreed with a number of IMF's conclusions, including its assessment of the currency. He said that one reason that China's reserves have grown to more than $3 trillion is that central banks in the U.S. and Europe have kept interest rates so low that capital has surged into emerging markets” A must read in the Journal.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at firstname.lastname@example.org.