A 'Gathering Storm'

A 'gathering storm' can percolate for quite some time before striking (like an el Nina condition building for months before the effects are experienced). Or, it can be a sudden-onset event; quite common when violent weather boils-up from normal storming conditions, such as during tornado season. What we're seeing now is a buildup to the next 'storm front', which is not terribly hard to define, as relates to underlying fundamental challenges; but tougher given seasonality as well as Oil strength, which (as expected) allows this to 'percolate' even longer.

Further stimulus from EU's central bank is 'desired' by markets (we aren't for it; we're saying institutions are), and that's because inflation across the 19-country euro-zone has fallen back below zero (deflation is what it is; not really inflation; and in some member-states like Spain and Italy (not just Greece) it's more of a 'stagflation' (stagnant economic activity but without price-decline citizens need during times of wage suppression). That ECB move could include a further cut into negative deposit rate ranges, from their current minus 0.3 percent, and an expansion of its bond-buying program, should make investors jittery. Investors should be wary about this week's ECB Meeting; plus the ensuing FOMC meet.

We think governments (and central bankers) really won't address 'why' they've got the hubris to think negative rates will work. That reason is an attempt to get rates so low that they basically pay no interest to service sovereign principle; a way to punish investors in government paper for the folly of excess stimulus by those very central bankers over the last several years.

This has been put simply by The Bank for International Settlements. They warn central banks are running out of room to stimulate their economies. BIS, often viewed as 'central banks central bank', says investor confidence is "faltering."

Keep in mind this is a market coming-off a 3-week move higher; refilling all the vacuum from the Fall lows to the edge of the 'no-mans-land'; triggered by what we called an intentionally-injected oil rumor at the time; but with realization that these mechanically or manufactured moves can be self-fulfilling given time. In this case it was the 'real' oil rumors that subsequently appeared; most notably the (purported) gathering of oil ministers in Russia (unusual) on March 20.

So far I've not heard others concur with my view that Putin pushed-this meeting at the barrel of a gun essentially; but I think that's what's occurred. Russia has lots more boots on the ground in Syria than is reported; and they are scurrying around cutting deals with various groups to get them to withdraw rebel support in-exchange for agreed-to peace deals with Syria's central government, and a pledge of security not from a coalition, but from Russia. Even ISIS is said now a bit weaker in Syria, while it gets stronger (not for long from what we hear) over in Libya. That matters too; because Oil from Libya is 'sweeter' (gravity) than the Saudi export, and thus works better for European consumption (proximity too).

So; Russia needs higher Oil more so than any other country, to cover costs and to maintain its 'security' pledges I just mentioned, in the future. Libya is a threat directly to Europe if ISIS makes more progress; so it will be pacified, and soon. This week, the French nuclear aircraft carrier Charles de Gaulle is transiting the Suez Canal from the Red Sea (support for Persian Gulf efforts most recently in the wake of initial forays against ISIS when it first arrived in the Med post-attack on Paris). I believe the 'carrier and it's battle group', will support a US Marine amphibious assault force, along with Italian and even German forces, in what is likely to be a retaking of the coastal towns and ports that ship oil to Europe. The odds are that will be done both for security of non-occupied ports, plus freeing ISIS controlled areas from the terrorist control. Egypt may be involved too; as it has a new high-end Frigate planning exercises with the French this week.

Not only that; but 'coincidentally' annual U.S./Israeli military exercises are now ongoing, and the U.S. contingent is larger than usual. This 'may' be related, as (although Israel would not likely be involved) forces would be regionally close, should a later March or April liberation of occupied portions of Libya occur. (It's also the best time of year coming-up not to be 'too' hot nor stormy for landing a large force by sea. I suspect U.S. and British SAS commandos are there now.

In sum: the market has dug into resistance; lots of monetary and tactical talk; but all that really matters here is Oil prices for the moment. 'Distribution' under the cover of strong Oil is not something often seen; but that's what it looks like as a number of non-energy sectors are sloppy to actually softer.