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

    The Days of Low Treasury Yields Are Numbered

    This article by Bill Dudley may be of interest to subscribers. Here is a section:

    Today, there’s ample reason to expect a positive term premium to return. For one, the Fed has a new, more patient monetary policy stance. As a result, inflation will be higher and more variable — a risk that must be compensated with higher long-term yields. Also, keeping inflation in check will require a higher peak fed funds rate, reducing the risk that the Fed will again get pinned at the zero lower bound. Beyond that, deficit financing is expanding the supply of government bonds: Treasury debt outstanding has quadrupled since 2007, and the Biden administration is seeking to add several trillion dollars more. Meanwhile, one big source of demand for the bonds is set to dwindle as the Fed phases out its asset purchases, most likely next year.

    Putting the pieces together, one can expect a 10-year Treasury yield of at least 3%: The 2.5% floor set by the federal funds rate, plus a term premium of 0.5% or more. But that’s not all. The Fed says it wants inflation to exceed its 2% target for some time, to make up for previous shortfalls. This, in turn, could stoke inflationary fears and lead markets to expect a higher path for future short-term rates. As a result, the 10-year Treasury yield could more than double from the current 1.6%. And if persistent deficit financing prompts concern about growing U.S. debt, the yield could go to 4% or higher.

    Anyone who has been in finance for less than a decade has rarely seen 10-year Treasury note yields above 3%. So what’s coming could, for many, be quite a shock. The secular bond bull market that began nearly 40 years ago is finally ending.

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    No Relief in Sight for World's Soy Supply Crunch, U.S. Says

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    “Something has to give,” Scott Irwin, a professor at the University of Illinois said by phone. “Either we have to find more planted acres, we have to get lucky with summer weather, or the price has to go high enough to ration usage lower than projected.”

    Crop markets have skyrocketed amid record Chinese demand and rising consumption as economies recover from the pandemic. More evidence of China’s strong appetite for farm commodities emerged this week with further purchases of U.S. corn. Weather concerns persisting in major producers like Brazil also risk further straining global supplies.

    The relentless rally across crop markets has stoked worries over rising food bills at a time when many consumers are still struggling from the fallout of the Covid-19 pandemic. The United Nation’s monthly gauge of global food prices has climbed for 11 straight months.

    There is a scenario in which the supply crunch could see some relief.

    “If we don’t see a major weather problem from September all the way through June of next year, then we should see maybe new crop prices remain below the average that we’ll probably realize for the current marketing year,” said Terry Reilly, senior commodities analyst at Futures International LLC in Chicago.

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    Romania Holds EU's Highest Rates as Economy Trumps Inflation

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    The central bank is switching to a “wait-and-see mode,” Commerzbank analyst Alexandra Bechtel said. “The rate-cut cycle is complete.”

    The jump in inflation has brought to an end a run of four reductions in the benchmark during the pandemic.

    That easing helped fuel an economic revival: Economic growth outshone the rest of the EU in the last quarter of 2020. The expansion has added to upward price pressures that are mainly being driven by higher global energy costs and the liberalization of the domestic electricity market.

    With borrowing costs stable, central bank Governor Mugur Isarescu has said he may make the national currency’s exchange rate more flexible to keep inflation in check without choking the nascent economic recovery.

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    China's Surging Factory Prices Add to Global Inflation Risks

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    The widening gap between CPI and PPI “suggests an uneven recovery of the economy,” said Raymond Yeung, chief China economist at Australia & New Zealand Banking Group Ltd. “Despite the commodity boom, the service sector has yet to catch up.” 

    Wages are lagging and the central bank will likely keep its policy stance “largely neutral,” he said. The People’s Bank of China is seeking to scale back the stimulus it pumped into the economy during the pandemic last year, worried by the build up of debt. Economists expect policy makers to slow the pace of credit expansion rather than raise interest rates. The Communist Party’s Politburo, China’s top decision-making body, said last month there won’t be any sharp reversal of macroeconomic policies. China aims to keep consumer inflation at around 3% this year, but an NBS official said in a recent interview that the headline index is expected to be “significantly lower” than the official target in 2021.

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    Agronomics to raise GBP50 million to invest in "cultivated meat"

    Thanks to a subscriber for this article which may be of interest. Here is a section:

    The net proceeds of the fundraising will be used to finance further investment into current portfolio companies and projects, investment in new opportunities within the "cultivated meat" sector and development and commercialisation of intellectual property where Agronomics holds an interest.

    "Agronomics has expanded rapidly over the past two years, and this financing will further accelerate its growth," said Non-Executive Chair Richard Reed.

    "We anticipate it will provide the full funding to support our existing portfolio companies through their next financing rounds, while also giving us sufficient capital to pursue acquisitions of new investments in this exciting field as it enters into what we expect will be a multi-decade growth phase," added Reed.

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    Coinbase Global

    Thanks to a subscriber for this report from Oppenheimer. Here is a section: 

    We want to make it clear upfront that our recommendation heavily rests on our long-term positive view toward the disruptive nature of crypto, particularly on cross-border money transfers, payments infrastructure and tokenization. That said we do recognize, based on the limited trading history of COIN on the public exchange, the stock could be quite volatile driven by bitcoin price and newsflow. In the near term, we don’t foresee this high volatility would disappear even though it could abate. Therefore, we believe COIN is well suited for long-term-oriented investors who could tolerate near-term volatility.

    Based on our experience covering this space and talking to investors, some investors sell crypto stocks after, say a miserable five-day bear run. This is partly driven by the generally accepted notion that it is difficult to: 1) predict the revenue/earnings trajectory; and 2) estimate the valuation of the stock with high confidence, at least at this early stage of the crypto development. Note, we are not asking investors to hold crypto stocks after a bad run, rather we urge investors to exercise additional caution before investing in crypto names. Again, we reiterate that COIN is not a stock for everyone, in our view. Another observation dug from its limited trading history is COIN tends to slide along with a rapid drop in bitcoin price. While there is merit to question COIN’s long-term revenue outlook if bitcoin price continues to go down for a long time, we think it is more reasonable to assume that volatility of bitcoin and other crypto actually spurs trading volume, and in turn revenue growth for COIN.  

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