David Fuller and Eoin Treacy's Comment of the Day
Category - General

    China opens its borders to billions of dollars of gold imports

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    About 150 tonnes of gold worth $8.5 billion at current prices is likely to be shipped following the green light from Beijing, four sources said. Two said the gold would be shipped in April and two said it would arrive over April and May.

    The bulk of China's gold imports typically comes from Australia, South Africa and Switzerland.

    The People's Bank of China (PBOC), the country's central bank, controls how much gold enters China through a system of quotas given to commercial banks. It usually allows metal in but sometimes restricts flows.

    "We had no quotas for a while. Now we are getting them ... the most since 2019," said a source at one of the banks moving gold into China.

    The size of the shipments signals China's dramatic return to the global bullion market. Since February 2020, the country has on average imported gold worth about $600 million a month, or roughly 10 tonnes, Chinese customs data show.

    And
     
    India's demand for bullion has also rebounded from a pandemic-induced slump, with record-breaking imports in March of 160 tonnes of gold, an Indian government source told Reuters this month.

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    Porsche's Electric Taycan Sales on Course to Eclipse Iconic 911

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    “Established models have supported this excellent result along with the latest additions to our product range, above all the new model variants of the all-electric Taycan,” Porsche sales chief Detlev von Platen said of the brand’s 36% first-quarter surge. “We can look back on a very positive start to the year.”

    The Taycan, which Porsche recently flanked with a more spacious version, is a litmus test for the carmaker’s costly shift to electric vehicles. Boosting EV sales with Porsche will be key to maintaining healthy margins as the division is VW group’s biggest profit contributor by far.

    Porsche’s total global deliveries rose to 71,986 vehicles in the first quarter, driven mainly by demand in China, its largest market. The compact Macan SUV was the brand’s best-selling model, ahead of the larger Cayenne. Porsche will launch a battery-powered version of the Macan next year that’s underpinned by a new platform for upscale electric cars co-developed with sister brand Audi.

    Porsche remains optimistic about business prospects this year even as a global shortage of semiconductor parts disrupts production plans across the industry. Order books “continue to develop very well,” Von Platen said.

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    U.S. Infrastructure Plan May Lift These Three Brazilian Stocks

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    Two weeks ago, Biden unveiled a $2.25 trillion plan to overhaul the country’s physical and technological infrastructure. He has said the plan needs to go far beyond bridges and roads and has called for investment in electric vehicles, renewable power and the electric grid.

    Shares of Gerdau and Tupy are up 27% and 15% this year, respectively, while the benchmark Ibovespa index is down 0.6% and Weg is little changed.

    “Limited geographical diversification puts a cap on Brazilian companies seizing this moment, but we can see some clear winners,” the analysts said. “Although we believe they have not gone unnoticed by the market, recent performance indicates that the impact is likely larger than what is currently priced in.”

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    A Mystery in 10-Year Treasuries Has Links to Carry Trade Blowup

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    Hedge funds are snapping up 10-year Treasury futures, and no other maturity, presenting a puzzle. The answer may lie in the collapse of a popular carry trade last year.

    The highly-leveraged basis trade involved going long cash bonds and selling futures, to profit from the difference between the two, but came asunder in March 2020 when investors stampeded to buy the latter at the peak of coronavirus fears and upended the spread. Now the gap -- the so-called gross basis -- has reversed and favors shorting cash bonds and buying futures.

    Of course, it’s not quite that simple. In futures markets, the counterparty who is short determines which specific cash bond traders have to deliver, adding another element of risk to the transaction. But with so-called ultra 10-year Treasury futures, there are only two bonds in the delivery pool, limiting that risk compared to other contracts.

    That could be one reason why leveraged funds have built up net-long positions of almost 230,000 ultra 10-year futures, despite this year’s Treasury market slump, according to the latest data from the Commodity Futures Trading Commission. As for the original strategy -- there are no signs of it returning anytime soon.

    While returns from this year’s trade are much lighter, a play based on 10-year ultra futures is most attractive, according to one trader who asked not to be identified as he isn’t authorized to speak publicly.

    Cash Bond Pressure
    A sense of how the cheapest-to-deliver 10-year Treasury bond has performed against futures can be seen in the implied repurchase rate for the note. It flipped from positive to negative in the first quarter, indicative of greater selling pressure on cash bonds than futures.

    “With the sudden and significant rates selloff in late February, Treasuries came under pressure, underperforming futures quite noticeably,” wrote Morgan Stanley’s Kelcie Gerson in a note this week. “On an outright level, futures/cheapest-to-deliver bases reached the widest levels seen since last March/April.”

    Across the rest of the Treasuries curve, hedge funds hold net short positions, though well below last year’s levels after the collapse of the original basis trade.

    Market
    A gauge of aggregate leveraged fund short futures positions -- which would likely be mirrored by long cash bonds in a basis trade -- has dropped by over $300 billion since last year’s February peak, according to calculations by Bloomberg.

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    JAPAN VALUE An Island of Potential in a Sea of Expensive Assets

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    Successful cost cutting, rising profits and free cash flows, and a corporate culture of risk aversion stemming from the bursting of the Japanese bubble led to an ironic side effect: over-capitalized balance sheets. As Exhibit 4 indicates, over 50% of listed nonfinancial companies are “net cash” today.3 In the U.S., that figure is less than 15%.

    Carrying large amounts of cash, especially in a negative interest rate environment like today, is troublesome for shareholders. Equity investors expect companies either to reinvest surplus capital in projects that generate returns above the cost of capital or return it to shareholders so they can reallocate to value-creating investments.

    These “lazy” balance sheets have drawn the attention of Japanese regulators and government, two groups that are trying desperately to spark economic growth to help address the pension burden in a country with a declining population and negative yield on government bonds. Furthermore, the Japanese equity market is filled with inefficiencies that offer upside opportunities for patient investors. The number of analysts and investors covering the Japanese market has declined following decades of disappointing returns after the bursting of the 1980s Japanese bubble. Cultural and language differences also have diminished foreign investor interest in Japanese equities.

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    S. Africa Central Bank Governor Sees Room to Keep Rates Low

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    South Africa’s central bank is likely to maintain its accommodative monetary policy stance to support the economy for as long as it has room to do so, according to Governor Lesetja Kganyago.

    “As long as inflation is remaining contained, the central bank would have no reason to remove the accommodation that we are currently providing,” Kganyago said Thursday in an interview with Bloomberg TV.

    The monetary policy committee has cut the benchmark interest rate by three percentage points since the start of 2020, of which 275 basis points of easing was in response to the impact of Covid-19 on the economy. That’s taken the rate to a record-low 3.5%. Last month’s decision was the first time since the 2020 rate cuts in which no member voted for a reduction and expectations have now shifted to when the first hike will come.

    While the implied policy rate of the central bank’s quarterly projection model, which the MPC uses as a guide, indicates two rate increases this year of 25 basis points each -- next month and in the fourth quarter -- policy makers see risks to the inflation outlook as balanced and feel that they can continue to offer support to the economy, Kganyago said.

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