Good morning.

First, a clarification

In yesterday’s piece on sovereign debt, I said that Secretary Janet Yellen had announced that the US would hit the debt ceiling in early June and she was implementing special measures to help manage that process.

In fact, Secretary Yellen said that the US will probably hit the ceiling around January 19 (A.K.A tomorrow!) but that the “extraordinary measures [will] prevent the United States from defaulting on its obligations”. These measures can be sustained until early June, after which it is unclear exactly when the US will run out of cash, although many economists believe that this will happen by August. 

Apologies for the confusion.

The World Economic Forum is underway in a snow-less Davos where the tone is said to be “one of cautious optimism”. I’ll review what happens over the week and share anything that seems particularly significant.

On Tuesday, German Chancellor Olaf Scholz said that Germany’s rapid switch away from Russian gas to LNG had mitigated a great deal of the potential economic fallout and will probably help the country avoid a recession.

Several analysts have noted that the winter in Europe has been mild so far (see: snow, lack of), which has given European leaders some breathing room and leeway as they transition away from Russian gas. What is most remarkable is the speed with which Germany made this change which shows that energy projects don’t have to be quite as slow and sclerotic as many would like you to think. (Now, let’s do renewables.)

See Bloomberg for the latest from Davos 

On with the numbers.

(Not sure of how to use these metrics in your risk analysis? Read the white paper here  and look out for a detailed user’s guide coming in the early New Year.)

Relative Values (90-Days)

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Trends (21-days)

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Commentary and Evaluation

Brent Crude

(No change) Brent Crude has crept up slightly into the mid-range for this 90-day interval. Prices ended relatively flat over the last 21 days after moderate fluctuation.

What to Watch

(No change) Market commentary and analysis vary wildly about what oil will do in 2023 and the broad analysis I shared earlier holds for many: ‘prices will peak around $95 with an average of around $90, a drop from previous 2023 estimates which reflects a gloomy outlook for the year’. 

See Reuters for more

However, within that range, the opportunity for significant movements remain and China’s plans for a great economic boom are leading some to forecast oil moving up as high as $110 by Q3. The exact number is less important here than the reinforcement of the idea that China’s reopening will kick in soon and will lead to significant increases in demand for oil as well as other commodities by mid-year.

Iran remains worth watching as their motivation and ability to inflame tension in the Gulf remain. 

Talk of the rise of the petroyuan in 2023 is overblown. See Friday’s update for more.

Iron and Steel

Iron and Steel remain very high for this 90-day interval. Prices increased moderately over the last 21 days after slight fluctuation.

What to watch

(No change) The Chinese construction and manufacturing boom that many expected in 2023 is off to a very unsteady start as COVID spreads rapidly after December’s relaxations. Sectors that had struggled under the strict COVID restrictions are suffering just as much in the current laissez-faire environment. This is temporarily delaying the expected economic boom but many analysts expect things to take off in late Q1 meaning that demand for oil, shipping and commodities will all rise significantly thereafter.

See Bloomberg for more

Market Volatility (VIX-US)

(No change) Volatility (VIX) is very low for this 90-day interval. The index has decreased sharply over the last 21 days after significant fluctuation and spikes around the New Year.

What to Watch

(No change) Messaging from the US Fed and ECB remain consistent and the end-of-year turbulence has faded, meaning that although the news in many sectors isn’t welcome, the general market conditions seem to have been broadly accepted and priced in. Layoffs continue in tech, banking and retail while some large brick-and-mortar stores, like Bed Bath and Beyond, seem to be slipping further into difficulty. So although decision-makers have greater clarity as to what lies ahead, economic conditions are grim for many and look to remain so for short- to mid-term.

However, negotiations around raising the US debt limit re likely to be contentious and cause significant turbulence in late Q2, early Q3. See Tuesday’s piece on debt limits for more. 

Wheat

(No change) Wheat remains low for this 90-day interval. Prices ended relatively flat over the last 21 days after moderate fluctuation.

What to Watch

(No change) Despite agreements brokered by Turkey, Russia could still impose a complete blockade on Ukrainian grain exports to exert pressure on Kyiv and her allies. Meanwhile, even strict controls and inspections for outbound shipments mean that exports remain slowed. Moscow could also conduct military operations to disrupt spring planting meaning that prices could rise again next spring and summer.

Read more in AGWeek  

Ocean Freight (FBX)

(No change) Shipping (FBX) is very low for this 90-day interval. Prices decreased sharply over the last 21 days after the spike we saw in December.

What to watch

(No change) China’s reopening and the effects of recessions on demand in the US and elsewhere remain the biggest issues to track but there are no definitive signs to watch at the moment.

“Lunar New Year starts on January 22, 2023, and with it, manufacturing and shipping from China and the Far East will come to a halt. Disruptions can last for up to a month. Learn more about Lunar New Year and how to avoid shipping delays here. “

From Freightos

Up-to-date shipping data supplied by our partner Freightos

Other coverage and Analysis

EY Under Investigation by the UK’s FRC

Britain’s accounting watchdog, the Financial Reporting Council (FRC), announced an investigation into EY’s audit of Stirling Water Seafield Finance, part of the French firm Veolia. However, the investigation isn’t into the audit itself. Instead, it concerns EY breaching the UK’s rules on engagement periods as it seems that the auditor had continued to audit Stirling Water Seafield Finance beyond the 10-year maximum. 

For a firm tasked with helping companies comply with complex regulations, this is embarrassing for EY but probably doesn’t signify anything more than an oversight, rather than some nefarious action. However, the company is set to spin off its consulting business from the audit and accounting practice this year, so hiccups like this may have an effect on whatever deal is eventually struck.

Of more general relevance is the fact that even a firm that lives and breathes regulations and compliance, can make mistakes when myriad layers of regulation apply. Even if your business is less complex, your governance department is likely a lot smaller, so make sure you are meeting your obligations.

See Reuters for more

Random Stat

1,000 pulses per second, an 8,200 feet experiment site, 1 giant laser

Scientists in Switzerland have successfully tested a laser that can divert lightning away from vulnerable areas. Thousands die each year from lightning strikes, and places like airports and fuel storage are all susceptible to lightning damage, so the system could improve safety significantly where traditional lightning rods are ineffective.

Definitely not the lair of an evil supervillain…. Image: llr-fet.eu

The laser pulses 1,000 times a second forming a plasma ‘corridor’ in the air. The plasma corridor is directed over the top of a 400’ tower creating a pathway that encourages the lightning to follow the laser away from sensitive areas and toward the tower, which acts as a lightning rod. 

Issues remain concerning the safety of the system, particularly for any aircraft flying overhead, but the system is a significant advance over the traditional lighting rod, discovered by Benjamin Franklin in 1752. Plus, it looks amazing!

Read more at the Laser Lighting Rod site (which probably needs a ‘Definitely Not A James Bond Super Villian Project’ disclaimer on it somewhere) 

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