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17/11/2016

Weekly News Bites: Slipping through the net

Our top picks from this week's Morning Chat

Slipping through the net: Now that investors have somewhat digested the shock from the US election, the tide of attention may begin flowing back to monetary policy, by far a more dominant and enduring influence on asset returns. Eurozone inflation, and minutes from the ECB’s latest policy meeting, will be released today; both will add colour to the big question of what happens to continental quantitative easing post-March. There will also be US inflation data. If the net outcome is tighter US monetary policy but a looser variant in Europe, €1 should get closer to buying just $1. (17/11)

A leopard can’t change its pipes: Markets are vacillating over the fluctuating dynamics for oil suppliers – with shale proving more disruptive to OPEC than many expected – but oil demand appears more stable. In its annual World Energy Outlook, the International Energy Agency forecast that humanity will consume 104 million barrels of oil per day in 2040, about 11% more than in 2015. While wind and solar technology may well prove highly disruptive to coal, there are no easy alternatives to oil for road freight, aviation and petrochemicals. (17/11)

Working assumption: That Britain's unemployment rate has fallen to 4.8% will be another feather in the cap for Brexiteers. However, what received markedly less attention was that productivity – which measures labour efficiency – rose by just 0.2% in the third quarter, one-third the rate in the second quarter. In the long-run, politics may well meld with this structural reality as follows: less productivity + fewer workers [poor demographics + less immigration] = less GDP [feathers and caps inclusive]. (17/11)

This too shall pass: Consumer prices in the UK were 0.9% higher in October versus a year ago. This is strange considering factory-gate prices – the actual cost of producing goods – jumped 2.1% in the same period. Have these cost pressures not fed through to the retail prices because companies are being altruistic and absorbing them? Of course not. The real answer probably lies with increased efficiencies and fierce competition. Eventually, though, higher factory-gate prices find a way to be “passed through”. (16/11)

Alternating current: The election of Donald Trump – which in theory will galvanise infrastructure spending in the US – has sent quite a jolt through the copper market. The industrial metal, a crucial building component, is up about 10% since the US election (though it fell this morning in Asian trading). Nonetheless, the US consumed just 1.8 million tonnes in the last twelve months compared to almost 12 million by China. Therefore, even if US demand was to increase by 10% – a surge not seen in decades – it still would only be a drop in the Chinese bucket. (15/11)

When pigs fly: Two decades after a disastrous investment in the US aviation sector, Warren Buffett's Berkshire Hathaway has re-entered the sector, purchasing shares in the four biggest US airlines. The investments are a huge reversal considering Mr. Buffet once said "a farsighted capitalist" would have done investors "a huge favour by shooting Orville [Wright] down.” Clearly, views evolve. Airlines have been huge beneficiaries of lower fuel costs; and have rejigged operating models by charging for once free services. The four dominant US airlines had an aggregate profit of $21.7 billion in 2015. (15/11)

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