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Daily Agenda: No Relief for Oil Prices

Japanese industrial production weaker than initially believed; Athens and Berlin trade barbs in public as negotiations stall.

Representatives from the United Steelworkers union and oil companies operating facilities on the Gulf Coast reached an agreement to end a strike that led to the greatest labor disruption at U.S. refineries in more than three decades. The parties have tentatively agreed to a four year contract covering roughly 30,000 workers including a wage increase on a rising, low single-digit scale. The strike shut down roughly 20 percent of the total U.S. capacity for gasoline production and was among a series of reactions to the structural shifts in the U.S. economy being driven by low oil prices. Despite recent moves by producers to cull drilling, the International Energy Agency this week moved to boost its 2015 projection for total inventories in the U.S. to nearly 500 million barrels, with a surplus of more than 79 million, as daily production surpasses 12.5 million barrels. A combination of increasingly scarce storage space and sustained OPEC production rates have led many analysts to conclude that oil prices may drop lower in the near term, exacerbating deflationary pressures in some regions. For investors, a consensus view that the Federal Reserve will begin lifting interest rates in early summer is being tested by the impact of oil prices on some sectors, with the most recent Beige Book released by the central bank specifically noting concerns over a slowdown in manufacturing and energy exploration. Ultimately market participants may decide that low fuel costs will do more to boost consumption than it will hurt demand, as fewer high-paying energy-related jobs are created.

Tension mounts between Athens and Berlin. Officials confirmed today that earlier in the week, the Greek ambassador to Germany filed a formal protest with the government there over comments made by German Finance minister Wolfgang Schäuble. For his part, Schäuble publicly dismissed the notion that any comments he made regarding Greek Finance minister Yanis Varoufakis were inappropriate. Tensions between German leaders and Greece’s Syriza-led government have risen in recent days, as members of Prime Minister Alexis Tsipras’ cabinet have repeatedly discussed the possibility of war reparations from Germany as negotiations over a Eurogroup loan package in Brussels drag on.

Federal investigators scrutinize Herbalife trades. Reports surfaced yesterday that federal prosecutors have begun reviewing the timing of trades in shares of Herbalife, a multilevel dietary supplement marketing company that has been a focus for activist investors. A high-profile battle in 2014 saw Pershing Square Capital Management, a hedge fund firm led by William Ackman, pitted against legendary investor Carl Icahn before the latter withdrew profits. Investigators are reportedly looking specifically the timing of public statements made about the company’s business model by third parties, which led to price swings.

Production slows in Japan. January final industrial production contracted by 2.8 percent compared to December numbers, according to a report released today from Japan’s Ministry of Economy. This weaker than initially estimated figure casts a shadow over recent signals that external demand was spurring greater activity in export-centric sectors.

U.S. shoppers apparently hibernating for winter. The U.S. Commerce Department yesterday released February retail spending data that was weaker than expected, weighed down by a hefty drop in auto sales partially ascribed to weather. Initial March University of Michigan sentiment data, scheduled for release today, will lend a clue to investors watching the mood at the cash register.

Portfolio Perspective: Draghi Seizes Crown from Alan Greenspan, That Bubble Blower ExtraordinaireAlbert Edwards, Société Générale

We have long fulminated against strategists who are unwilling to predict sharp market moves. The violent downward move in the euro over the past few weeks is a case in point. Mario Draghi and the European Central Bank’s manipulation of asset prices makes Alan Greenspan’s Federal Reserve look like a rank amateur. More shocking than the plunge in the euro — and more shocking even that 25 percent of sovereign euro zone bonds now trade in negative territory — though, is what has happened to euro zone equity valuations. As we approach the sixth anniversary of the U.S. cyclical bull market — a postwar record — the price-to-equity expansion of euro zone equities is simply off the scale. History suggests this will end very badly indeed. Ask Alan!

Albert Edwards is co-head of global strategy for Société Générale in London.

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