China factor- 19th November

The Friday morning breaks in with an expectation of a Chinese rate
hike. There is also a word about Hongkong doing something about its
property prices. Chinese tightening can pull the carpets from under
several asset classes that are basking in the glory of an ever
increasing dependence on Chinese ascent.
Chinese ascent has been real but it hasnt been in the right fashion.
It hasn't been a clean organic growth, it is more like a growth on
steroids which have dangerous side effects, not immediately, but
absolutely certainly.
The core of capitalism is free trade and most of the developed world
which grew from shambles to glory after the world wars grew
organically on the healthy diet of free trade. The world would have
certainly continued to do so- falling down and rising up with the
demand supply cycles, losing and gaining business with an edge down
and edge up in competitiveness, killing the competition but only by
getting more skilled and bowing out gracefully when the better guy
takes your business- all in the name of fair game and the spirit of
free trade.
The world has grown superbly on this model- capitalism was definitely
the prescribed remedy.

Then entered the bad player in the game. The bad player which was
playing in the name of capitalism but whose methods were far away from
it. The facade that was created looked very much like capitalism.
Extremely competitive companies emerged in the business scene that
were able to produce everything at less than half the price. The world
loved it and business started flowing in the direction of China. What
the world didnot see, rather did not pay heed to was that these
weren't stand alone companies whose ultimate weapon for
competitiveness could be better skills or better management. It was
one gigantic company and its ultimate weapon for competitiveness was
monetary policy. It was the Chinese government that the world's
companies were pitched against in business.
It wasn't a fair game but the world played it; not because they didn't
see it or didn't understand it but because the companies of the world
were long used to fighting their own battles and the governments of
the world (developed world) had long distance themselves from
business. And the biggest reason was - the going was good.
Companies started outsourcing their businesses to China and they loved
the cost advantage. The nations watched silently as their jobs flew
out to China- all in the name of capitalism- free trade.
This kept on feeding the Chinese giant and no one worried that the
giant was growing abnormally. It was fed on steroids and it had the
potential of inflicting serious self harm too.

The self harm I am talking about is inflation. With a policy of
maintaining a strict peg to the USD, China has to print in and pump
Yuan into its economy every time Yuan tends to surge ahead on growing
exports. Experts are betting on enormous inflation in China for last
so many years. Inflation was the only remedy to get China back on
right track. But China was lucky(or shall I say unlucky) that
inflation did not rise then. It didnot rise because the world was on a
rapid growth track. Whatever extra money that China was pumping into
its own economy was going into creating more manufacturing facilities
to serve the growing world demand. China never had a dearth of cheap
labour and hence wage side inflation also didnt creep in.
But now when the demand has withered away the same pumping in of money
is creating serious inflation. No more new facilities are required
because demand is just not there. Providing work to existing
capacities in itself is a big task.
At such an hour when US prints more Dollars and thus indirectly
devalues its currency what could China do to maintain its peg. It will
have to print more money and that will fuel serious inflation. So its
a double whammy of inflation on China. What would it do if not raise
its rates. But will a rate rise help? Rising rates would boost its
currency and this will make the Chinese companies less competitive.
This will cause unemployment and unrest. Letting things as they are
wouldn't help the rising inflation. So does China has a way out of
this.
What is dangerous is that the world has developed a great dependence
on this abnormal giant. Its fall will not only hurt itself but also
the whole world.
Remedy lies only with China. If China manages a soft landing it will
be a miracle but if the Chinese bubble busts it will be a disaster.

Crude oil 15th november

Oil is falling and so is the entire commodities block; equities are
falling too and and so are the other currencies- everything other than
the mighty Dollar.
Eurozone is the culprit or is China to be blamed? Or is it the stance
taken by Germany and other"safer" European nations against blind usage
of public money that has taken gas out of the easy money bubble.
Is the fall down indicating towards a renewal of crisis? Well fall in
Gold doesn't indicate so.
If we put the recent crisis in a timeline then we can divide it into
two broad parts. The first part- when Dollar became the safe haven and
rose high and the second part- when Gold became the only hope and
climbed up blindly.
Till the time crisis was considered moderate to dangerous the world
showed its faith on Dollar and bought it. Then a point came when
crisis started to look all devastating and all annihilating and looked
like taking the world to an ultimate collapse. That was the time the
world lost its faith on the dollar and sold it. Gold was the asset of
last resort and infinite lifeline.
What I am trying to drive at is that things might be turning for good
here. With renewed efforts having been made to arrest the crisis (read
QEs and the many rescue funds) things might be turning for the less
dooms dayish scenario where in the world starts showing faith on
Dollar once again. This will be one step down on severity scale where
in trust on Gold is counted as most severe and trust on dollar the
less severe.

Another point that I raised little earlier and which can be a driver
for this current setup is the German stance on "easy public money" in
the future. What Germany and other contributing nations are saying
about investors taking the pain is totally logical. Sooner or later
entire world is going to wake up to the fact that public money cant be
used endlessly to safeguard the risk takers. This might be taking the
risk out of the table. This can be the reason for a fall in the asset
classes.

Crude oil 11th november

Over the last 5 days Dollar index has put up a green candle every
day...Oil has done almost the same. Oil is defying its inverse linkage
to the Dollar at the moment. It will be interesting to see how long it
can continue doing this. Bolstered by the almost explosive inventory
figures that have formed a hat-trick of big draw downs in products,
crude prices have moved up 9 Dollars over the last three weeks. No
doubt the QE money has a part to play in this flare up.
Dollar may continue to grind higher on the rapidly dwindling stock of
the European Soverign debt. What will be worth watching is how long
can oil defy its most celebrated linkup. Oil fundamantals are no doubt
looking better but they are still a long way away from being truly
bullish in an environment of "neutral financials". By neutral
financials I mean an absence of the heavy duty Dollars that are
searching for short term relationships.
Many such short term relationships will definitely be built on the
inverse linkups of oil and dollar. These trades will have to unwind,
coz they aren't working and there is a curtailed limit to the pain
that these short term relationship guys can take.

Crude Oil 9th November

Oil touched highs on Friday and Monday but failed to sustain those
gains. But a net net rise in oil prices for the last two days happened
despite decent rallies in Dollar on both days. Equity market also
touched highs on these days. Euro has shown immense weakness over the
last few days owing to a renewal of Debt threats over the Euro-zone
countries. The government papers of the PIIGS nations saw massive
selling over the last few days. Renewed uncertainty has pumped the
yellow metal once again and Gold has made new highs over the weekend.
A continuation of this renewed development might put oil in a confused
state as to which direction to move. A further weakening of Euro will
pump up Dollar, thereby killing oil's financial incentive to go up.
Oil had a massive sell off last time when the Eurozone debt crisis
flared up.
Inventory expectations were released last night.
A 1.4 million barrel build is once again expected in the crude
inventories. Products are once again expected to draw by more than a
million barrels.
Refinery utilization has reached 81 percent utilization; this is a
substantial draw in refinery margins and a further weakening might
impact the crude prices negatively.
Forties had a weaker day monday. It slipped to 25 cents discount to
dated Brent when compared to 15 cents on Friday. Today we will see the
loading programs release one after another. Watch out for the Forties
loading program as it has the potential to move the spreads.

Crude Oil 4th November

After a much weaker than expected inventory figures and a little
stronger than expected QE2 figures it seems like Bulls have taken a
good control over the oil proceedings.
A more than 10 million draws in products over the last two weeks have
kind of cleared the 'Fundamentally Weak' sentiment that was dampening
every upside surge in the oil prices. With all three members of the
crude clan having higher than '5 year average' inventory let there be
no doubt that the fundamentals are still weak. What has changed is the
sentiment and the recent history of oil prices tell us that sentiments
are good enough reason to see a surge in prices.
Fed announced that it will put in 600 Billion Dollars into the economy
over the next 8 months along with the reinvestment of interest and
maturity proceeds of already existing securities. After a choppy
session last night the market is currently pricing the Dollar lower
and hence oil is stronger. Equities too continue to rise as I write.
Having broken the earlier high oil looks set for a decent surge in the
near future.
Talking about Brent spreads, they are once again stronger on North sea
maintenance. We will get the loading program figures by 9th of the
month and they will decide the further course of Brent spreads. Over
the last few months we have witnessed a front running over the
expectations of loading program and then a move on more informed
guesses a few days before the loading schedule is announced. We might
see a similar scenario unfolding this month too.
Watch out for the Forties Brent differentials in the spot market as
Brent spreads are closely following in its direction.

Crude Oil- 29th october

Dollar-Oil link might not hold good in one direction till the picture
of QE gets clearer. Till then we might see oil selling down on a
Dollar surge but we might find it a little reluctant to go up on a
Dollar decline. Reason is clear- Risk postponement. The risky money
might want to wait a little longer before jumping on to a commodity
whose fundamentals don't properly justify its belligerence.
It happened yesterday; Dollar fell more then it rose the day before.
Aussie Dollar rose in accordance but oil had a tiny red candle. But
look at today's performance. Oil is weak on a strengthening Dollar.
We are just a very few days from the time when the picture will get
clearer on how much more money the Fed is going to put in the economy.
As it happened earlier, the money is bound to find short term
investment opportunities in the market and oil is a favorite
destination of such money.

Crude oil- 27th October

An article in the wall Street Journal suggesting that the Fed might go
easy on QE2 has buoyed the Dollar higher since morning. The suggestion
that Fed might take a more measured approach in the imminent bond
buying exercise affected the markets which had more or less priced in
a larger figure from the Fed. The Dollar which has weakened for weeks
on the expectation of a much higher amount of buying by the Fed
climbed up on this news. The equities and commodities are coming down
as a result.

Analysts at Bank of America-Merrill Lynch wrote in a client note the
prevailing market belief was that QE was now close to being fully
priced in and anything short of $500 billion in announced purchases
over a six-month horizon could disappoint and cause yields to rise and
hence the Dollar to rise as well.

November 2-3, we have the FOMC meeting where the committee will decide
on the extent and manner of easing. This whole week can be pretty
choppy because even the slightest of rumours has the potential of
disturbing the equilibrium that the market is trying to seek before
the meeting. Every time we feel the expectation is fully priced in, we
might see more rumours trickling in. Knowledgeable but opinionated
parties, with huge weight in their words, are on either side of the
debate. Promoters of a larger QE talk about the very weak unemployment
rate and the dire necessity of a stronger demand to push it down.
There are others who suggest that Fed should watch more keenly and
much longer before committing itself to a larger than required effort.
They warn of the harms of money not finding its right course and
feeding asset bubbles. The problem with the market is that when it is
uncertain it follows everybody.

Elsewhere API built a whooping 6.5 million barrels in crude against an
expectation of 1 million barrels. Distillate stocks also built against
an expectation of drawdown while gasoline drew close to 2 million bbls
against an expectation of a built.

The French strike has shown signs of easing down and few refiners have
already opened up their units. Brent spreads showed strength in the
last two days. The products prices are expected to come down and hence
the cracks can be weak