The risk of oil supply disruptions from around the world has diminished, and rising non-OPEC production provides a “solid base from which to react to any escalation in geopolitical tension.”

In its January Oil Market Report, the International Energy Agency (IEA) said that there is plenty of oil sloshing around, despite the U.S. and Iran nearly going to war.

“We cannot know how the geopolitical situation will play out over time, but for now the risk of a major threat to oil supplies appears to have receded,” the IEA said.

“As was the case following the attacks on Saudi Arabia in September, once the initial fears of a sustained supply shock subsided, the Brent price rapidly gave up its $4/bbl spike.”

Oil inventories held in OECD countries is 9 million barrels above the five-year average, and there are also plenty of strategic stockpiles to call upon in the event of an outage, the agency said.

Still, while geopolitical risk has “faded,” it has not gone away entirely. The Trump administration may have refrained from all-out war against Iran, but the assassination of General Soleimani took the confrontation to new heights.

While Trump’s speech earlier this month was widely interpreted as one of “de-escalation,” he also prefaced his comments by saying Iran would never have a nuclear weapon. But, sanctions, “maximum pressure,” and the assassination of one of its top leaders will obviously provoke a response. With little left to lose, Tehran is backing out of most of its commitments under the 2015 nuclear agreement, a deal that the U.S. already exited nearly two years ago.

All of which is to say the countries are seemingly locked on a collision course. The world breathed a sigh of relief when the two countries backed away from the brink, but there are decent odds that the conflict flares up again in the not-so-distant future. There are few pathways for actual de-escalation, absent an overhaul of U.S. policy.

At the same time, Iran has already lost much of its oil supply due to sanctions. So, the additional supply risk is concentrated in Iraq,

Things are starting to get surprisingly heated at the Fed, now that not only Wall Street strategists, and traders but also Fed presidents are starting to tell the truth about how the Fed's "NOT QE", which sorry but we will call it by its real name QE 4, is pushing stocks to ridiculous nosebleed record levels (as one can see by the relentless meltup in the S&P over the past four months), at valuations that are now higher the dot com days.

It all started when, in a moment of bizarre honesty, Dallas Fed president and former Goldmanite Robert Kaplan admitted in a Bloomberg interview that the expansion of its balance sheet was helping to lift asset prices. Commenting on the Fed's massive liquidity response to the JPMorgan-precipitated repo-market crisis (it's not just our view that Jamie Dimon caused the repo crisis), which triggered not only the first Fed use of repos since the financial crisis, but also $60 billion in monthly T-Bill QE, Kaplan said that "my own view is it’s having some effect on risk assets", adding that "It’s a derivative of QE when we buy bills and we inject more liquidity; it affects risk assets. This is why I say growth in the balance sheet is not free. There is a cost to it."

This interview followed just days after one of Wall Street's most closely followed strategists, Morgan Stanley's Michael Wilson wrote a report in which he said that "as the Fed has expanded the size of its balance sheet, we have been of the view that the resultant excess liquidity has been beneficial for stock prices and multiples. The potential impact of the Fed on equities has been a central feature of almost all our client conversations the last few months. Most clients suspect that there is some positive impact, though the transmission mechanism and quantification of that impact are hard to pin down, limiting confidence in its durability now that asset prices appear ahead of the fundamentals (Exhibit 1). Since the Fed has rarely expanded its balance sheet at the pace it has been on since October there is limited

Less than a week after Taiwan President Tsai Ing-wen won re-election and days after the U.S. and China signed a Phase 1 trade agreement, a U.S. guided-missile cruiser transited the Taiwan Strait on Thursday. Joe Keiley, a spokesman for the U.S. 7th Fleet, on Friday said the U.S.S. Shiloh (CG-67), a Ticonderoga-class guided-missile cruiser, conducted a "routine Taiwan Strait transit" freedom of navigation mission and demonstrated its "commitment to a free and open Indo-Pacific."

US #cruiser #SHILOH CG67 made a northbound #Taiwan Strait transit Thurs 16 Jan, 1st US #Navy or allied transit of 2020. A US or allied warship makes the passage roughly once a month. Photo shows SHI in E #China Sea in Nov 19 w/ Chinese destroyer shadow https://t.co/CQVn03p4WJ pic.twitter.com/Dh5rCF3ot4

— Chris Cavas (@CavasShips) January 17, 2020

"The U.S. Navy will continue to fly, sail and operate anywhere international law allows," Keiley said, quoted by Reuters. 

Naturally, China wasn't pleased about a U.S. warship sailing through the strait. Chinese Foreign Ministry spokesman Geng Shuang said the warship was being tracked and asked the U.S. to respect China's territorial integrity.

"The issue of Taiwan is about China's territorial integrity, and the most important and sensitive issue for China-US relations," Geng said, adding that the Trump administration must respect the one-China principle.

A statement from Taiwan's defense ministry said the U.S. warship was on routine freedom of navigation mission when it sailed north, through the strait, a region that separates the island from China. The narrow strait has been a hotbed of tension between Beijing and Washington. 

President Trump has given support to Taipei, especially with the re-election of President Tsai Ing-wen, who leads the pro-independence Democratic Progressive Party and is against China's "one country, two systems" policy. In recent years, Washington has ramped up arms sales to Taiwan, including the sale of 108 Abrams main battle tanks, 66 F-16 fight jets, dozens of radar systems, and hundreds of missiles and torpedoes, to a nation that has emerged as one of Uncle Sam's most reliable arms clients.

But instead of reviving his conservative People's Party's alliance with the ultra-conservative Freedom Party, Kurz has bounced back from a bribery scandal perpetrated by his former coalition partner and decided to try forming a new coalition with the center-left Green Party.

The marriage of conservative and liberal has led to some interesting policy priorities.

For example, in his first interview with the international press since officially taking office last week, Kurz told the FT that his new government's top priorities will be fighting climate change and curbing immigration.

As Kurz explained, while protecting the environment is an important priority, fighting immigration is just as important. Because Austria's Judeo-Christian identity will continue to be eroded if Europe doesn't get its arms around illegal migration.

"It is important to protect our environment but it is also important to decide who will live in our country…if we do not fight against illegal migration, Europe will not be the same in five, 10 or 20 years," he told the Financial Times. "If we do not control who is allowed to come we will not be able to live in security…and we will not be able to keep our identity."

Kurz promised to continue pushing in Europe for tougher policing of illegal immigration in the Mediterranean. He criticized the current system as a "ticket to the European Union" that incentivized crossings and smugglers.

Sebastian Kurz

His government's program also calls to make Austria carbon-neutral by 2040, along with a ban on women under the age of 14 wearing headscarves in schools.

Finally, Kurz is also calling for preventive detention of migrants suspected of extremism.

It was the government’s duty to "protect young girls," he said, decrying "influence…from immigrants from different parts of the world which I think dangerous in many areas." He said he was proud that Austria was a "Christian-dominated country" marked by its shared Judeo-Christian heritage.

Many

However, the data was extreme to say the least with Housing Starts soaring 16.9% MoM (highest since Oct 2016) and Building Permits shrank 3.9% MoM (worse than the -1.5% exp).

Source: Bloomberg

This pushed Starts to their highest since Dec 2006, but permits declined to weakest since September.

Source: Bloomberg

All four regions posted a gain in starts, with the Midwest, South and West showing the best pace since 2006. Starts in the Northeast were the highest since August.

Under the hood, Starts were dominated by a 32% surge in multi-family units (though single-family starts rose 11.2% MoM)…

Multi-family Starts soared 75% YoY…

But, the more forward-looking permits disappointed…

Source: Bloomberg

…as multi-family permits plunged 11.1% (single-family -0.5% MoM)…

Even so, the strong overall reading on starts corroborates a jump in developers' confidence. U.S. homebuilder sentiment posted the highest back-to-back readings since 1999 in December and January amid a jump in prospective buyers and a bump in the sales outlook.

Bloomberg notes that the data indicate residential construction added to fourth-quarter growth after contributing in the previous quarter for the first time since the end of 2017. While weather may have played a role in the month's data, demand has been fueled by mortgage rates near a three-year low as the job market remains resilient and wage gains help put money into the pockets of potential homebuyers.

One day after the US stock market exploded higher in the last hour of trading, melting up before our eyes on no news, world shares followed apace rising to record highs on Friday, with markets across the globe a sea of green…

…supported by Chinese data that showed GDP slumping to just 6.1%, a fresh 29 year low, suggested the world’s second-biggest economy was stabilizing. As reported last night, China’s economy grew 6% between October and December last year. Anemic domestic demand and the trade war with the United States led to growth of 6.1% in 2019, the slowest in 29 years. However, the data also reinforced recent signs of an improvement in Chinese business confidence as trade tensions eased after Beijing and Washington signed an initial deal on Wednesday to defuse their tariff war.

China’s industrial production “is quite telling, because more broadly it speaks to the bottoming out in the global industrial-production cycle, which we’ve been looking for and the market’s been looking for for the last six to nine months,” John Woods, chief investment officer for the Asia Pacific at Credit Suisse, told Bloomberg TV in Hong Kong. This suggests “the global economy is on a recovering path.”

The continuing rebound in Chinese data, along with easing trade tensions with the United States, sent the MSCI world equity index up 0.2% and further into record territory. The Chinese data fueled a rise in the Chinese yuan, which touch a six-month high of 6.8660 to the dollar.

And with China stable for now, investors turned their attention to improved growth prospects across the world. European shares gained 0.7% in early trade, with Frankfurt, Paris and London indexes up 0.5% to 0.7%. Emini S&P futures were also pointing up, continuing a virtually straight line levitation since the Iran escalation faded away, while upbeat earnings from Morgan Stanley,

Overnight saw the big one from China disappoint with economic growth the weakest in 29 years. But, as Bloomberg's Richard Breslow notes, if you want to feel good about the equity market today, there is no need to look further than today’s U.K. retail sales report. It was a stinker. Following close on the heels of Wednesday’s CPI miss.

The market pricing of the chances of a cut in rates as soon as this month are now showing an expectation that it is just about baked in the cake. And this at a time when surveys show that most economists think it is too early for a move. When have we seen that before? The U.K. economy may not be as influential as it once was on global matters, but it is still of material consequence.

And every stock index loves it when a major central bank moves to the left.

Progress on trade matters between the U.S. and China is a positive development. It doesn’t matter if it isn’t as good as it gets.

Increasing talk of election year fiscal stimulus in the U.S. has stock investors rubbing their hands together. But nothing gets them more stoked than rate cuts and the possibility of more QE.

Yesterday, two of Germany’s leading industry groups, the BDI and BGA, urged the government to do more to stimulate the economy. Yes there have been green shoots trying to poke their heads out of the ground. But, as the BDI’s managing director said, “Better-than-expected still doesn’t mean good.”

As one of ECB President Christine Lagarde’s biggest fans, I continue to maintain confidence that, ultimately, she will be able to wring some action out of the German government. But all of the European and euro bulls need to accept the reality that it doesn’t count until they show us the money. And it remains true that the global economy won’t