Brennaman’s Four
Points for the Week
1.
Ukraine
and the European Union – Do Sanctions Equal a Cold Winter for the EU? – The
latest round of sanctions indeed have more teeth and will strike to the heart
of Russia’s ability to freely trade the number one resource they have that is
high demand at least in the European Union –Natural gas. We saw a hint of things to come as supplies
to Poland were curtailed with no explanation forthcoming from Gazprom, the
Russian gas conglomerate. Poland in turn
was forced to curtail deliveries to Ukraine for short time. The delayed deliveries are a harbinger of
what is to come as the winter months unfold.
The latest sanctions also hit home in the U.S. as Exxon Mobile and BP
Oil are affected directly. The latest
sanctions are aimed at future development of oil production and these two
companies are in long-term agreements with Roseneft and Gazprom to expedite
this production. Both stocks were off
strongly as the week closed. The flow of
natural gas to the EU is critical and the West is walking a fine line between
not affecting current production while trying to nudge Russia “back into line”
with the majority of Europe. Right now
Putin has two tools in his tool box:
Military power and natural gas supplies.
Which does he choose to use? Dare
we wonder?
2.
Ukrainian
– The Quiet of a Ceasefire Does Not Mean All is Well – The ceasefire signed
into effect less than two weeks ago has resulted in a lower level of shooting
and the exchange of artillery fire.
While the majority of Russian troops have departed Ukraine proper it is
believed that upwards of 1000 are still embedded with Russian separatist units
providing aid, support and intelligence back to Mother Russia. Meanwhile the Russian Separatists maintain
gains from five months of fighting with no signs of conceding this control back
to the Ukrainian central government. The
government in Kiev is considering concessions (appeasement?) to ease the
situation and bring relief to Ukrainians caught in the cross-fire. But alas, these attempts have been met with
contempt and derision by the separatists and outright ridicule from
Moscow. Meanwhile Russia is solidifying
gains to yet another seaport on the Black Sea.
How long until annexation is a fait accompli?
3.
The U.S.
Economy – Does the EU Really Matter? – There should be no doubt the
economic progress the U.S. will make in the future is tied to the fortunes of
the European Union. The EU is our fourth
largest trading partner behind, Canada, China and Mexico. Admittedly, we import from all four than we
export to them. The material and goods
we receive are vital to our production of the items our companies in turn
export to them, hopefully at a profit.
Without a strong and fruitful economy in the EU we would face the danger
of a lower level of supply from their factories, depressed market for our
finished goods and a general malaise in the global economy as a the overall
purchasing power in the developed world is lessened as a result of a deeper
recession in the EU. If that is not
enough to concern the casual observer, the EU as a block is the third largest
holder of U.S. Sovereign debt behind China and Japan. Along with significant cultural, economic and
defense connections our historical alignment is strong. Yes, the EU does matter despite the
misgivings we have from time to time.
4.
Market Report
– One Down Week Does Not Make for the Beginning of Correction – The market
last week failed to rise above its opening numbers as the world of finance
attempted to get a handle on a multitude of issues vying for attention. The news out of the Ukraine and the further slowing
of the EU and Chinese economies only added to the daily trauma on the trading
floors. Oil (as measured by West Texas Intermediate)
is down to $92 on lower demand and increased stockpiles, here and abroad; the
difficulties in Iraq/Syria notwithstanding. Lower prices on oil is good for consumers as
this is translating into lower gasoline prices at the pump but energy companies
are taking it on the chin as their near-term profit margins may well be
compressed. Considering the Energy
sector is a significant portion of all of the indices, one should not be
surprised by the lower market results.
Another factor weighing on the investor’s psyche continues to be the upcoming
Federal Reserve Open Market Committee meeting this next week and the enduring anxiety
on when the FED will raise short-term interest rates. With the U.S. economy slowly progressing in
the right direction the debate continues to simmer on the timing of the next
move by the FED. FED watchers will look
to parse the vague language sure to come out of the two day meeting to garner a
hint on the next move. Ironically, the
FED may have some of its work done for it as market trading pushed the yield of
the 10 yr. U.S. up to 2.61% up from 2.46% a week earlier, a 6.1% move. Nonetheless, the FED will move and we will go
on, looking for the next wall of worry to climb.
“Worry never robs tomorrow of its sorrow,
but only saps today of its strength.” A.J. Cronin
Have a good week and take a walk, smell the
roses.
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