Daily Comment (April 4, 2016)

by Bill O’Grady and Kaisa Stucke

[Posted: 9:30 AM EDT] There wasn’t too much market news overnight as several Asian markets were closed for holiday.  However, there were several major news splashes from WikiLeaks, one of which published a massive database from the offshore law firm Mossack Fonseca.  A German newspaper, Süddeutsche Zeitung, obtained the data from anonymous sources and shared them with the International Consortium of Investigative Journalists (ICIJ).  The firm was involved in creating offshore tax shields; its base of operations is in Panama (which is why you are seeing these referred to as the “Panama Papers”), but it has 600 employees working in 42 countries.  The client list is quite impressive and includes the current president of Argentina, the PM of Iceland (who is facing a no-confidence vote due to the revelations), the King and the Crown Prince of Saudi Arabia, and the president of Ukraine, among others.  The list revealed that family members and friends of various leaders also used the firm’s services.  Azerbaijan’s first family were clients, as were some childhood friends of Vladmir Putin; even U.K. PM Cameron’s dad used the firm.[1]  This leak will cause some consternation in a number of countries and could undermine some governments.  The aforementioned Iceland appears to the first on the list but others are likely.

The other interesting WikiLeaks report is that it appears the IMF is putting strong pressure on Eurozone governments to give debt relief to Greece.  According to several reports, the IMF is pressing for a Greek default and is threatening to withdraw from negotiations.  Germany has insisted on IMF participation in part to offer an international imprimatur for enforcing austerity on Greece.  The negotiations on the last bailout are not complete and this news has raised anger in Athens that the IMF may use brinkmanship to force the EU to give Greece debt concessions.  The risk is that the EU refuses and Greece is faced with another financial crisis.  Given that Greece is the front line for the refugee crisis as well, the country is feeling a bit abandoned by the EU.  This leak won’t help.

With China’s growth peaking, one of the questions we are asked occasionally is, “Who is the next China?”  In the late 1980s, we were asked who the “next Japan” would be; it turned out to be, in fact, China.  Business Insider reports that India is likely the next low cost/high growth manufacturing giant on the horizon.  In terms of oil, India is now the third largest consumer, surpassing Japan recently (trailing the U.S. and China).   India has been frustrating to watch; shackled by the post-WWII British Labor Party socialist model, regulations have slowed development.  There was great hope that PM Modi would be the Thatcher/Reagan of India.  So far, he has been the Modi of India.  However, even without a “big bang” there has been steady improvement.  With India’s oil demand rising, the country is considering the creation of a strategic reserve, which would boost global demand and offer some support for prices.  According to reports, India is considering a 90 mb reserve.  It has also changed foreign investment rules to streamline investment into India’s energy sector.   Given the current low oil price environment, it would make good sense for India to consider building inventory capacity.  Although this decision, by itself, won’t fix the global oversupply problem, it is a good sign that demand is starting to react to low prices.

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