Daily Note – All change

Fire IraqSummary

Middle East: All change. Will America cozy up to Iran?

United Kingdom: Governor Carney: First interest rise “could happen sooner than markets currently expect” 

Crude spikes as the region redraws the map

Good morning,

Yesterday I spoke to my old friend, the journalist and Middle East expert Robert Fisk. Robert was in Beirut but had been in Aleppo in Syria last week on the front line between the Syrian Army and Islamist Army the ISIS. The Syrian army has wrestled back much of their country at great cost to both the Syrian army and the people of Syria. The army has behaved abominably and lost 30,000 soldiers. This is a huge amount of casualties.

Robert remarked that from Aleppo, which marks the extent of the Syrian armies’ control of Syria, you can almost drive directly to Bagdad unopposed through hundreds of miles of Isis held territory. This should put the fear of God into all of us.

Figure 1: Areas of control in Syria

Syria-Iraq MapIf this Saudi financed Sunni army wins, who knows where things will end?

On the ground, the situation in Iraq has worsened dramatically over the last 24 hours. Over half a million people have fled from Northern Iraq in what the UN has described as “one of the largest and swiftest mass movements of people in the world in recent memory”.

The Islamic State of Iraq and Syria (Isis), a Sunni jihad group that was deemed too extreme and brutal to be part of al-Qaida, has expanded its strongholds from Aleppo and Ar-Raqqah in war-torn Syria and Fallujah in Iraq by seizing Mosul, Iraq’s second largest city. In one of the Iraqi military’s greatest embarrassments, 30,000 troops adopted civilian clothes and fled through the suburbs as the relatively small band of 800 insurgents stormed the city.

Isis has made their way south, effortlessly capturing Tikrit, birthplace of Saddam Hussein, and Samarra. They have sacked government buildings, robbed millions from the country’s banks and set free incarcerated prisoners as their chaotic drive towards the nation’s capital, Baghdad, picks up momentum.

This wave of terror has been a major blow to the credibility of Prime Minister Nouri al-Maliki, whose call for a state of emergency failed because an insufficient number of MPs in the divided parliament were present to form a quorum.

The international focus has been on the failure of the US to create a unified and competent Iraqi military with much criticism of the Obama administration’s failure to maintain a residual of troops stationed in Iraq in advisory and intelligence roles. There have been calls for American air-support by Republican, John McCain, however Obama’s only statement on the crisis was that “our national security team is looking at all the options”.

The real story is not America. This is a proxy war between the two big powers in the region Saudi Arabia (Sunni) and Iran (Shia). Up to now the Iranians were playing a clever game backing their Shia co-religionists from South Lebanon through Syria and not Iran, the so-called “Shia crescent”.

With the victory of ISIS, this Iranian policy looks to be in tatters. What will happen next? It’s hard to see America being able to effect change. It might try to do this through its ally Turkey, but the Turks mightn’t have the stomach for the fight, despite having the largest military in the region.

Global markets have sold off. Crude oil has spiked through the resistance level we talked about yesterday. (See chart below). Crude oil is rising despite Kurdish forces securing the major oil city of Kirkuk and tribal leaders persuading Isis insurgents not to attack Baiji, the location of an important oil refinery.

But this is just a pause. The big prize is who wins, Saudi or Iran. Don’t be surprised if the American switch sides and start to cozy up to the Iranians – much to the chagrin of Saudi and of course, America’s major mate in the region, Israel.

All change!

Figure 2: WTI Crude Oil $

Chart 1 13 JuneUnited Kingdom: Governor Carney: First interest rise “could happen sooner than markets currently expect” 

In the annual Mansion House speech, Governor Mark Carney provided a distinctly hawkish message, suggesting that while “the MPC has no pre-set course … [the first increase in Bank Rate] could happen sooner than markets currently expect.” Prior to the speech, the first full rate rise was priced in by the end of Q1 2015.

Governor Carney tempered his more hawkish comments by emphasising that a rate hike was not imminent (“there remains scope for spare capacity to be used up before policy is tightened”), that the MPC “has no pre-set course [and] the ultimate decision will be data-driven” and that those “eventual increases in the Bank Rate will be gradual and limited”.

Nevertheless, last night’s speech signals a material change in tone from the previously dovish comments of Governor Carney. We had anticipated the first rate raise in the UK to be in December of this year (ahead of the consensus). We now see this happening even sooner maybe before the end of the Autumn.

China: New Yuan loans pick up as PBOC loosens policy

Table 1 13 JuneIn China May’s loan and M2 growth were above market expectations. Monetary conditions are being actively loosened. We have talked a couple of times in recent days about various measures taken by the PBOC to loosen policy including a targeted RRR interest rate cut. As you can see from the chart below, broad loan growth has, while volatile, been in an uptrend over the last 12 months.

Figure 3: China New Yuan Loans

Chart 2 13 JuneThe looser monetary and fiscal policy stance supports short-term demand growth and we continue to believe economic activity is on a modest upward trajectory.

We continue to like China equities with our preference for large cap over the broader market (see chart below).

Figure 4: China Shanghai Comp vs Large Cap ETF

Chart 3 13 JuneUnited States: Retail sales remain stable

Table 2 13 JuneHeadline retail sales rose 0.3% in May (vs. consensus +0.6%). Headline sales were boosted by the motor vehicles category (+1.4%). Core retail sales were unchanged in May (vs. consensus +0.4%), reflecting generally soft sales growth across a number of categories. Building materials—not included in core retail sales—posted a decent gain for the third consecutive month, rising +1.1%. This suggests life in the housing sector. See our note from a couple of weeks ago highlighting on the pickup in housing activity.

Figure 5: United States Retail Sales Growth YoY % vs Consumer Confidence

Chart 4 13 JulyJobless claims moved up a bit to 317,000 (vs. consensus 310,000) in the week ended June 7, from 313,000 in the previous week. The four-week moving average of continuing claims moved down to 260,000, the lowest level since November 2007.

Figure 6: United States Initial Claims 4 Week MA

Chart 5 13 JulyNothing happening on the inflation front. Import prices rose 0.1% (vs. consensus +0.2%) in May after falling 0.5% in April. Over the past year, import prices have increased 0.4% – in reality nothing!

Eurozone: Spanish bank bailout reached €61.5bn since 2009

The Spanish bank bailout has gone through the €60bn market.

If I recall correctly, back in 2009 the market had extreme estimates that around €100bn would be needed while the Spanish said it would be about €40bn. So that €61bn is round about right.

Table 3 13 JulyDownload a PDF version of the Daily Note here:

Global Macro-Daily note-All Change



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