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Daily Agenda: Doves Remain in Control at Jackson Hole

Downbeat sentiment in Germany; political angst in France; CME trading experienced a technical delay.

The tidings from Jackson Hole were good news for the risk-on investment camp of investors, as the tone of the central bankers of the primary developed economies remained dovish. Federal Reserve Chair Janet Yellen’s speech focused on structural weakness in U.S. labor markets. Benjamin Broadbent, an external member of the Bank of England’s Monetary Policy Board, indicated that the lack of wage increases in the U.K. despite job market improvement remains a conundrum for the Bank of England. In his speech, European Central Bank President Mario Draghi vowed to combat deflationary pressure in Europe and hinted at further actions by the bank. Taken in aggregate the message projected from Wyoming was loud and clear: accommodative policies are still the order of the day.

Business sentiment in Germany deteriorates. August IFO business climate index data released today registered a sequential contraction to 106.3 versus consensus forecasts for 107.1 and down from 108 in July. This marks the fourth consecutive decline for the index, which is drawn from a survey of executives at 7,000 firms.

Political turmoil in France. Prime Minister Manuel Valls announced his resignation today, clearing the way for the formation of a new cabinet. In a speech before a Socialist Party gathering and a separate media interview yesterday, French Minister of Industrial Renewal Arnaud Montebourg vehemently decried German-led austerity measures in the European Union. According to Montebourg, France must “put up a just and sane resistance” to present economic policies in order to avoid further contraction of growth. As a member of President François Hollande’s party, Montebourg’s comments mark an internal rift with increasingly loud demands for accommodative measures from the left of the political spectrum.

Data for new U.S. home sales on deck. In the U.S., July new home sales are forecast to rise to an annualized 426,000 from 406,000. June’s unexpectedly soft figures came in tandem with a downward revision for May’s sales data. The Southeast was particularly sluggish in June, with a 9.5 percent drop in transactions for the month. Even if numbers released today show a rebound, analysts note that the national inventory levels will remain higher than recent historical averages.

Burger King in talks to become donut royalty. Reports surfaced this yesterday that unincorporated Miami-Dade County, Florida–headquartered fast-food chain Burger King is in talks to acquire Oakville, Ontario–based Canadian donut chain Tim Hortons. The proposed merger would create a company with roughly $19 billion in market capitalization with a Canadian tax jurisdiction at the corporate level. Initial terms would see each franchise operate independently under a single corporate umbrella.

Chicago Merc suffers technical glitch. The Chicago Mercantile Exchange suffered a technical failure on Sunday evening, causing delays. Contracts for stock index futures as well as U.S. treasuries. Oil and gold were delayed for up to four hours on the Globex electronic trading platform. After trading got underway, Brent crude oil futures traded lower on confirmation that Libyan production levels have not been impacted by factional conflict there.

Barclays sees Brazilian voter shift. In a report released over the weekend, Barclays’s economic research department noted that the untimely death of Brazilian Socialist Party presidential candidate Eduardo Campos, who was a victim of an August 13 plane crash, has helped bolster support for Marina Silva, the party’s vice-presidential candidate. Barclays believes that the strengthened possibility of a Socialist victory will increase chances of a shift in economic policy.

Portfolio Perspective: Taking the Long View on EnergyJonathan Waghorn, Guinness Atkinson Asset Management

The world is fundamentally dependent on energy for economic growth and human progress. This is unlikely to change. Global energy demand is projected by the International Energy Agency (IEA) to grow steadily over the coming years as per-capita energy demand continues to rise. Population growth in emerging markets, together with higher levels of industrialization, urbanization and personal transportation, will likely be the key drivers of this theme. While efficiency measures in developed markets could cap the rate of global energy demand growth, it is unlikely that they will be enough to offset a looming energy supply issue.

Based on IEA projections, traditional sources of energy will still be required to help satisfy this demand, and we think that crude oil, natural gas and coal could deliver most of the expected global demand growth in the coming years. Advances in technology could allow renewable and alternative energy sources to gain market share, and environmental issues will probably cause demand to switch away from hydrocarbon fuels towards these new sources of supply. All this will take time, but it has already started to happen.

The problem is that the oil and natural gas industry is basically unable to satisfy this predicted increase in demand. As it stands today, spare capacity in global oil production is limited to that held by Kuwait, Saudi Arabia and the United Arab Emirates — and we believe it is probably less than 1 million barrels per day. The production from oil fields declines naturally every single day. Oil companies invest hard to offset these natural declines and to maintain steady production. With global production of around 92 million barrels per day, we estimate that the industry needs to replace around 6 million barrels of oil per day every year just to maintain current production levels. This alone is a Herculean task for the oil industry — never mind upping production to slake growing global appetites.

Even if the U.S. adds another 3 million barrels per day of new shale oil production into the market over the next three to five years, we still believe that the global oil supply/demand should be finely balanced and that crude oil prices should remain at the high end of their recent range.

We think that using a diversified, professionally managed portfolio of energy equities is a sensible way of gaining consistent exposure to the sector. Complementing the argument for long term allocation, we note that sentiment has improved towards the energy sector in recent months. But the sector is clearly still out of favor. We believe that the combination of a long-term positive outlook plus near-term poor sentiment might mean now is a particularly attractive entry point.

Jonathan Waghorn is co-portfolio manager of the Guinness Atkinson Global Energy Fund at Guinness Atkinson Asset Management, a London–headquartered asset management firm focused on long-term global energy market trends.

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