Last week I pointed out that the proposed structure of Western sanctions on Iran’s oil — via surcharges on its exports — gave that country an incentive to increase political tension. This is for two reasons:

1. In order to convince the West that it could disrupt the supply of oil.
2. In order to add a risk premium to the price of oil to offset the surcharges.

Today there are reports that Iran’s First Vice President has said that the country would blockade the Strait of Hormuz if sanctions were imposed, although it is not clear whether he had the backing of more senior figures or of the Revolutionary Guard. A blockade of the strait could provoke further retaliation from the West and perhaps a vicious cycle. However, this kind of posturing is exactly what one would expect for the two reasons above. Perhaps the key question is: is Iran bonkers, or bluffing? If it is the former, it might actually meet economic sanctions with military action; if it is the latter, a vicious cycle could be avoided but the risk premium on oil could remain high and thus offset the sanctions. The reality is probably a combination of the two, which makes the outcome hard to predict.

In response to the vulnerability of the Strait of Hormuz, the UAE is building the Habshan-Fujairah pipeline, which will allow oil to bypass the strait. The relatively poor emirate of Fujariah will be a major beneficiary of the pipeline. It would be interesting to hear if anyone knows of an investment angle here.

What happened to the EUR 489bn that the ECB lent to banks in its latest LTRO? Some of it must be part of the EUR 412bn that has been put on deposit at the ECB for the Christmas period. But that does not tell us that it is sitting idle — an increase in the liabilities of the ECB (deposits) is a necessary result of an increase in its liabilities (loans to banks). The question is, will banks use the liquidity to increase the size of their own balance sheets, i.e. to lever up? Or will they use it to replace less secure or more expensive sources of funding? With the Eurozone heading for a recession and banks needing to increase their capital ratios, the second case seems more likely. The ECB has headed off the risk of a credit/collateral crunch in the Eurozone, and that has reduced the risk premium on peripheral sovereign bonds; but it has done nothing to address the underlying problems of the Eurozone periphery.

It seems that sanity is impinging on the cossetted lives of players in America’s corn ethanol industry. The FT reports that the Republican presidential candidates have not felt the need to support farm subsidies, which is unusual given the importance of the Iowa caucus. A 30-year-old ethanol subsidy will come to an end this week, after Congress declined to renew it, as will a tariff on imports of Brazilian ethanol. The FT says that the industry is concerned that Congress will also end a “mandate” aimed at boosting production, and I presume that this refers to the requirement that petrol should have an ethanol component. I wonder if there are some potential short positions among ethanol producers or in corn itself, although I may be late to this particular party.

My latest prediction for US PCE on durable goods was a little on the high side — the number came in at 1.1% MOM, compared to 1.29% for my model. However, as I expected this was another strong number. The strength of durable goods spending suggest that the US economy will continue to grow in the coming months.


UK mortgage approvals d.e. but remain at the upper end of their post-crisis range.
Durable goods orders 3.8% vs. 2.2%e. Nov. Core DGO 0.3% MOM d.e. Upward trend in both remains intact.
Personal spending 0.1% d.e. Nov.
Personal income 0.1% d.e. Nov.
Personal saving rate fell again, from 3.6% to 3.5%, Nov.
New home sales 315k a.e. Nov. Still flatlining.
Case-Shiller -3.4% d.e.
Richmond Fed survey 3, d.e. but up on last month.
CB consumer confidence 64.5 rose, b.e. Like Michigan sentiment, this series has returned to its pre-August levels.
Japan had a disappointing set of numbers:
Household spending -3.2% YOY d.e. Nov.
Core CPI remains negative.
Unemployment 4.5% Nov.
Prelim. IP -2.6% MOM d.e. Nov.
Retail sales -2.3% YOY d.e. Nov.

This Week:

Thu: Eurozone M3; US initial claims, Chicago PMI, pending home sales.
Fri: HSBC China PMI; UK Nationwide house price index.
Sun: China PMI.