Oil edges higher on stronger demand & Syria uncertainty

The price of crude oil continued to rise on Monday, heading for its longest run of gains this year. Market support comes from strong demand and heightened tension over the conflict in Syria.

Brent crude futures for June gained for a fifth day in London, up 0.74 percent, at $55.65 per barrel at 10:53am GMT.

US West Texas Intermediate (WTI) crude futures were up 0.63 percent, at $52.57 a barrel.

Prices advanced more than three percent last week, following a US military strike on Syria.

Higher oil demand and “an unsettled global backdrop (is) leaving the market very finely balanced,” ANZ bank said as cited by Reuters.

Experts say the crude market’s strength came partly as a result of the OPEC-led supply cuts. The cartel is expected to announce at the end of May whether it will continue output reductions aimed at propping up prices.

Last week’s gains were due to “the relatively high OPEC adherence to the supply cut agreement and the general belief that the deal will be extended and, secondly, because of geopolitical developments,” Tamas Varga of oil broker PVM said.

Analysts also say the run-up in US output kept markets from breaking last week’s one-month highs of over $56 per barrel.

Statistics showed oil companies in the US increased the rig count to 672; the highest since August 2015.

According to Goldman Sachs, year-on-year US oil production “would rise by 215,000 barrels per day in 2017” once a backlog of production waiting to be brought back online is taken into account.

“The US rig count continues to soar, and we are close to a two-year high on that. Judging by the relative success of the OPEC agreement keeping prices propped up, I don’t see a reason for that to decline in the near future,” said Matt Stanley, a fuel broker at Freight Services International (FIS) in Dubai.

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Clif Droke: What will finally break the market’s lethargy?

By Clif Droke, Apr 8, 2017

To most individual traders, there is no bigger buzz kill than a narrow trading range.  It takes the wind out of the sails of breakout and momentum traders, and even expert stock pickers have a tough time finding the stocks which are bucking the sideways trend.

Wall Street would much rather see a lively bull market when stocks are roaring and participation is widespread among all classes of investors.  But sometimes even a trading range-type market is good enough for the Street , provided stock prices are near all-time highs.  For even when prices are making no headway, the aggregate yield on stocks pays enough in dividends to make the lack of action worthwhile.

There are indeed enough listed companies which pay a high enough dividend to make buying and holding in a lackadaisical stock market an attractive proposition.  This is one reason for the torpor which currently infuses not only the financial market, but the rest of the country as well.  Why worry when you can sit back and live off the interest?  Widespread lethargy breeds a range-bound stock market, but it also contributes to a sluggish economy.  As we’ll discuss here, there is a reason for the public’s lethargy and within that reason lies the solution to the problem.

If you needed proof of the trading range-induced complacency out there right now, the public’s response to the U.S. airstrike on Syria is a good example.  While there was a modicum of shock and anger, the response to the military action was mostly lethargic.  Even the stock market seemed unimpressed enough to rally, which underscores the extent of the public’s complacency.

Even Congress is infected with the conservation bug.  Even as President Trump touts his ambitious plan to cut taxes, the U.S. House majority leader is pouring water all over that plan by saying Congress will balance any proposed tax cuts by finding ways to increase revenues (read more taxes, but in different areas).  Thus the old “paying Peter by robbing Paul” syndrome has infused America’s elected leaders, who seem to afraid to risk anything like general prosperity.

One certainly can’t fault the President for trying to break the lethargy that has dominated the economy in the last two years.  His attempt at lifting the huge burdens imposed on the middle class by reforming Obamacare were spurned by Congress.  His latest move appears  aimed at stimulating the economy via military conflagration, a tried-and-true (short-term) economic palliative to be sure.

The subdued mood of the market can only be understood in terms of the long-term economic cycle, or K-wave.  This cycle is divided into four “seasons” of economic activity over a period encompassing roughly 60 years.  Each season approximates to 15 years.  The winter season of the cycle was between 2000-2014/15, with the last 60-year cycle bottoming at the end of 2014.  We’re now in the early stages of K-wave spring, which should last until about 2029/30.

So if economic spring has sprung, what is keeping the economy from flourishing?  The answer to that is best seen in a timely analogy.  Even as the Northern hemisphere experiences the early phase of spring in April, there are still lingering signs of the previous winter.  While most days are fairly warm, temperatures can still be sometimes chilly and even winter-like.  It takes a while for a new season to fully establish itself while the vestiges of the preceding season gradually fade away.  In like manner, it will probably take a few years for K-wave spring to become established — especially given the severity of the K-wave winter season a few years ago.

The question everyone is concerned with is what will it take to finally break the psychological shackles which have held back profligate spending and retail-level investing?  The answer to that question can be found in the previous paragraph: the immutable laws of the economic K-wave will eventually lay the foundation for a fundamental change in mass psychology.

At some point in the current K-wave spring season the zeitgeist of contraction and fiscal restraint will give way to expansion and liberality.  Until then, expect to see occasional flare-ups of the winter mentality that predominated in the last decade.  These flare-ups should become more and more infrequent, however, as the K-wave spring season gradually warms the blood and increases the animal spirits.

When K-wave spring finally hits full bloom, it will bring many economic benefits.  There will be a few signs to watch for to let us know that spring has fully arrived.  First and foremost, watch for higher yields on U.S. Treasury bonds.  There is no surer sign that the long-term economic cycle is accelerating than rising bond yields.

As the new K-wave upward phase progresses we’ll also see increasing real estate activity as prospective homebuyers and commercial builders alike look to lock in still-attractive mortgage rates before they get too high.  As real estate timer Robert Campbell addressed in his latest newsletter (www.RealEstateTiming.com), U.S. home prices have broken out of a two-year doldrums phase and are rising at their fastest pace since 2014. The momentum of real estate activity is on the upswing.

Finally, look for speculative interest in both stocks and commodities to increase on a large scale.  Risk aversion is a lingering symptom of the contractionist psychology of the K-wave winter season.  When K-wave spring blooms in full, however, investment activity will pick up as participants shed their anxieties and trade them in for a more optimistic outlook.

This article is written by Clif Droke and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about clifdroke.com, please visit:

 


H&M Tries on Multiple Personalities to Keep Growing

At the H&M store on Boulevard Haussmann in Paris, teens comb racks packed with velour tank tops as tourists load up on cheap jeans to a soundtrack of bouncy pop music. While the bustle and bargains once appealed to Pierrick Beringer, at age 35 he prefers quality to quantity, so these days he’s more likely to turn the corner to a store called COS, where the pace is far calmer. “I like the shape,” the hairstylist says, pulling a thick-cotton T-shirt from a display. “And it’s less well-known, so you don’t see it everywhere.”

For H&M, that’s not a problem, because both establishments are creations of Hennes & Mauritz AB. Faced with falling profit amid competition from rivals such as Zara and Primark Stores Ltd., as well as online players like Amazon.com Inc., the Swedish retailing juggernaut is beefing up its portfolio of niche brands. H&M is betting outlets such as COS can help expand its appeal beyond budget-conscious young shoppers. The plan is to add 80 stores from the company’s half-dozen smaller brands this year, vs. 350 more H&M outlets. That includes a new concept called Arket, a higher-end shop with clothing, home goods, and a cafe serving Scandinavian-inspired dishes. The first Arket store—the name means “sheet of paper” in Swedish, a reference to starting with a blank slate—is scheduled to open this fall on London’s Regent Street, followed by branches in Brussels, Copenhagen, and Munich. “This isn’t like anything else we have,” says H&M Chief Executive Officer Karl-Johan Persson. “It’s a completely different expression.”

The push beyond the flagship brand comes as H&M’s margins have been narrowing. Goods from Asian suppliers, priced in the strengthening U.S. dollar, have become more expensive, pushing net profit down to 9.5 percent of sales today, vs. almost 26 percent in 2007. And with increasing competition, H&M has had to resort to deeper discounts to clear its shelves. The company’s shares in March fell to their lowest level in four years after H&M reported inventory levels were up 30 percent year-on-year. “When you’ve got a very mature brand, you reach a point where it becomes challenging to keep up growth,” says Maureen Hinton, an analyst at GlobalData Plc in London. “You’ve got to find new markets and new customers.”

That has spurred the multibrand effort, which largely emulates a strategy the world’s No. 1 fashion retailer, Inditex SA, has pursued since 1991. The Spanish company owns Zara and seven other brands including the Italian-themed Massimo Dutti, teen-focused Bershka, and Oysho lingerie stores. While Zara continues to account for two-thirds of Inditex revenue, it comprises just one-third of the company’s 7,300 stores. H&M, by contrast, only started diversifying in 2007, when it created COS—or Collection of Style. It added three more youth-oriented concepts in 2008 with the purchase of a Scandinavian retail group, then introduced the premium women’s wear line & Other Stories in 2013. Those brands today make up less than 10 percent of the company’s almost 4,400 stores. While H&M doesn’t break out its revenue, Bryan, Garnier & Co. analyst Cédric Rossi says sales from the smaller brands account for about 5 percent of the total.

The new concepts aren’t a bad idea, Rossi says, but it’s more important to fix the flagship brand. He says Zara is more fashion-focused, and with factories in or near Europe, Inditex can respond faster to runway trends than H&M, which ships most of its goods from Asia. “What’s absolutely necessary is to return to growth in existing locations at H&M,” Rossi says. “Without this, the business isn’t sustainable.”

H&M says it’s working to reduce lead times so fresh products get to stores more quickly. And it says it’s automating warehouses and improving data collection so shortages and overruns can be addressed more quickly—reducing the need for margin-busting markdowns. “We haven’t been as precise, exact, and flexible as we could have been” in logistics, says CEO Persson. “We see big improvement potential.”

Longer-term, though, it’s smart to also find a broader customer base, says Anne Critchlow, an analyst at Société Générale SA in London. With COS, & Other Stories, and now Arket, the company can target different niches at the top end—where customers have more resources and prices are higher, she says. Dresses at COS start at €55 ($59), compared with €10 at H&M, while the cheapest jeans at COS are €69, vs. €20 at H&M. “Young value fashion has become extremely crowded,” Critchlow says. “Lifestyle retailers have less competition.”

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Gold Rallies on Haven Demand as U.S. Missiles Hit Syrian Targets

Gold rallied to the highest in almost five months, breaking through a key technical level, after the U.S. launched a missile strike against Bashar al-Assad’s regime in Syria after his government was said to have used poison gas to kill civilians.

As part of a rush to haven assets such as oil and the yen, gold climbed as much as 1.4 percent to $1,269.46 an ounce by 10:45 a.m. in London, the highest since Nov. 10. It broke through the 200-day moving price average, indicating upwards momentum. The metal is heading for a fourth consecutive weekly rise and has climbed 10 percent this year.

 

The decision to strike Syria marks a reversal for U.S. President Donald Trump, who during his campaign faulted past leaders for getting embroiled in conflicts in the Middle East. Secretary Rex Tillerson told reporters that “steps are under way” to mobilize a coalition to remove Assad, a Russian ally. The American attack was condemned as an“act of aggression against a sovereign state” by Russian President Vladimir Putin.

“There’s clearly an element of risk aversion in the market, so you have buying of gold,” said Georgette Boele, a currency strategist at ABN Amro Bank NV in Amsterdam. The metal has been close to the 200-day moving average for some time and “needed something like this to break through. This could be the beginning of a new positive phase for gold.”

 

Miners were boosted by the rise in gold with Randgold Resources Ltd. leading the U.K.’s benchmark FTSE 100 Index today with a 2 percent rise by 10:16 a.m. in London. AngloGold Ashanti Ltd., the world’s third-largest miner of the metal, climbed 2.4 percent to 168.37 rand a share in Johannesburg. Melbourne-based Newcrest Mining Ltd. closed up 2.8 percent in Sydney.

The U.S. action — with the Shayrat Airfield struck by 59 Raytheon Co. Tomahawk cruise missiles — followed the gas attack in Idlib province earlier this week. Announcing the strike, Trump said: “There can be no dispute that Syria used banned chemical weapons.” Syria has denied responsibility.

Haven Role

Bullion acts as a haven during times of geopolitical conflict. Prices have also risen this week amid signs of escalating tension on the Korean peninsula, with North Korea conducting a ballistic missile test in the run-up to a summit between Trump and Chinese President Xi Jinping.

Other precious metals also rallied in the wake of the strike. Silver jumped as much as 1.2 percent to $18.479 an ounce, the highest level since Feb. 27. Platinum rose as much as 1 percent, while palladium gained as much 0.5 percent.

“The situation in Syria continues to deteriorate, with news of a U.S. missile strike,” Jordan Eliseo, chief economist at Australian Bullion Co., said in an email. “It’s no surprise for gold to catch an immediate safe-haven bid.”

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German Factory Orders Recover as Economic Momentum Strong

 

German factory orders rebounded from their steepest decline in eight years in a sign the recovery in Europe’s largest economy remains intact.

Orders, adjusted for seasonal swings and inflation, rose 3.4 percent in February, after slumping a revised 6.8 percent in January, data from the Economy Ministry in Berlin showed on Thursday. The typically volatile reading compares with a median estimate for a 4 percent gain in a Bloomberg survey. Orders were up 4.6 percent from a year earlier, when adjusted for working days.

Germany’s economy expanded at the fastest pace in five years in 2016 and recent data show that trend is set to continue with private-sector output accelerating, unemployment falling to a record low and business confidence at the highest since 2011. Even so, risks including September’s federal elections, Brexit and uncertainty over U.S. trade policies continue to hang over the outlook for spending and investment.

The rebound was led by a 8.1 percent jump in domestic demand, while export orders were unchanged from January. Intermediate-goods orders surged 8.5 percent in February, while demand for investment goods rose 0.3 percent and that for consumer goods increased 2.7 percent, the ministry said.

“Manufacturing orders recovered after a sharp decline at the start of the year,” the ministry said in an e-mailed statement. “Order intake was lower than in the very strong fourth quarter, which was characterized by bulk orders. However, the volume of orders as well as the business climate in the manufacturing sector rose” and “a slight upturn in manufacturing is to be expected,” the ministry said.

The ministry will publish industrial-production data for February on Friday.

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