Chicken Clouds

Relatively quiet…
It’s eerily quiet out there. Volumes are off across markets as we near the end-of-June, everyone seems to be talking more about their summer travel plans than their summer investment plans, and more focus on macro-relevant political issues the flavour of the day. There was even talk of trying to focus on Japan’s experience through its “lost decade” and learning from its (dismal) experience to ensure the US and European nations do not fall into the same trap – a little late for this many will think, and possibly a clutching at straws in a quieter news environment. This is related to the awaiting word from the FED, with latest anticipation for a muted reaction to any possible call for a rate-hike this year. Observers are going to be carefully-reading through Bernanke’s words in search of any clue for future policy – truth is that markets have already priced in a stable interest-rate environment for the rest of the year, so only a major deviation from expectation will have any significant impact.

The low volumes seen have not stopped markets from making some decent gains for today, at least across Asia (HK +2%, CSI300 +1.4%, Taiwan +3%), as they corrected slightly through the sell-off in the last few sessions, but Europe initially opened lower and has only now risen to return an avg. of +30bps across the majors - US futures are indicating a lacklustre opening (the FOMC meeting again). Oil and Gold have also corrected a decent amount, with Oil in particular making a renewed dash for $70/brl but stuttering a little this morning as the news broke out of Japan’s continued export drop (-40% in May) and rising US gasoline inventories. Currencies again seeing US$ weaken as both Euro and GBP making 2% gains, but the Yen holding relatively steady after its run-for-quality appreciation.

Dreamy clouds…
They say every cloud has a silver lining, and as much it is a slither of a silver lining in a government-controlling cloud, a number of financial industry employees are waking up today to news that their salaries are to be increased – even though this means they will no longer be smiling come bonus time. Was sad to see poor old Boeing having several (quite major and worrying) structural issues with its latest state-of-the-art airline, the 787 Dreamliner, with a variety of exceptionally witty and name-playing headlines making the rounds – I won’t bore you with the nightmarish collection, but suffice to say there are plenty of sleepless nights, let alone any time for sweet dreams for those Boeing executives responsible. Things in Italy must be slow, as Berlusconi even had to publicly deny recent allegations (it wasn’t only me) that he pays for sex – well of course you don’t Silvio, you get your flunkies to hand the cash over don’t you?

Playing Chicken?
One to watch…The festering frustrations and disagreements over trade and other key “isolation” issues between the US, Europe and China spilled over into the first major shots-across-the-bow in the form of complaints being lodged with the World Trade Organisation. The US has its “Buy American” clause, stealthily introduced into the TARP programme back in February, and China retorted with its own “Buy Chinese” provisions.
Now it seems the US and Europe are unhappy about preferential prices being provided to domestic Chinese firms on certain commodities, such as coking coal, complaining that the tariffs imposed on the raw materials destined for export are disrupting the global market and hurting manufacturers of steel and other products across the US in particular. The Chinese say they are doing nothing wrong (naturally) and are in fact helping to reduce the harmful environmental effects of burning coal (oh come on!) and protecting their natural resources.
Hmmm, judging by this response it does not look like there is going to be a quick fix to this, for now, little problem, especially when the stakes have just been raised in a mightily American way reminiscent of the game of “Chicken”: - the Chinese actually going so far as to launch a request for the WTO to set up a panel to investigate US restrictions on the import of Chinese poultry – who will be the first to drive-off the road to avoid an almighty collision?

Getting tough, but also tougher now…
The Iranian situation has been getting worse and worse, and Obama has now had to take sides without actually taking sides – his declaration that the violence and intimidation across the Iranian people must be stopped as good as warning the clerical rulers to watch themselves, as they are being carefully watched by the US. This raises the stakes for two reasons: the first through the now more aggressive stance towards any further examples of excessive force leading to what must be an inevitable escalation in international outrage and hence eventual (real actionable) reaction. The second creating a very unpredictable and uncomfortable situation for whatever the concluding relationship will be for the US and Iran, as Obama has now directly challenged the sovereignty/viability of the self-declared winner of the election and indirectly the supreme ruler of Iran, and will be faced with the arduous task of having to possibly deal with most likely one (and maybe two) of them when the dust settles.
Alternatively though, the Iranian people could continue to demand change and bravely refuse to back-down, leading to what surely would be the more desirable US outcome of a total overthrow of the current regime – whatever it may be, the short-term chaos that would ensue would only be determined justifiable in what materialises at the end.