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

    Dimon Says QE Unwind May Be More Disruptive Than You Think

    This article by Cindy Roberts may be of interest to subscribers. Here is a section: 

    “We’ve never have had QE like this before, we’ve never had unwinding like this before,” Dimon said at a conference in Paris Tuesday. “Obviously that should say something to you about the risk that might mean, because we’ve never lived with it before.”

    Central banks led by the U.S. Federal Reserve are preparing to reverse massive asset purchases made after the financial crisis as their economies recover and interest rates rise. The Fed alone has seen its bond portfolio swell to $4.5 trillion, an amount it wants to reduce without roiling longer-term interest rates. Minutes of the Fed’s June 13-14 meeting indicate policy makers want to begin the balance-sheet process this year.

    “When that happens of size or substance, it could be a little more disruptive than people think,” Dimon said. “We act like we know exactly how it’s going to happen and we don’t.”

    Cumulatively, the Fed, the European Central Bank and the Bank of Japan bulked up their balance sheets to almost $14 trillion. The unwind of such a large amount of assets has the potential to influence a slew of markets, from stocks and bonds to currencies and even real estate.

    “That is a very different world you have to operate in, that’s a big change in the tide,” Dimon said. All the main buyers of sovereign debt over the last 10 years -- financial institutions, central banks, foreign exchange managers -- will become net sellers now, he said.

     

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    We need to talk about Brexit

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

    Consensus among many in the UK, and from both sides of the Brexit argument, is that unwinding British membership has nothing to do with political will but that it might yet be brought its knees by the sheer technical challenge. 

    I lunched yesterday with a former British diplomat who spent much of his embassy time in the trade department. After a career in the Foreign and Commonwealth Office he is not one to make rash and unconsidered statements although he too is part of a growing group of people in this country that believes Brexit might yet founder when the divorce process becomes simply too complicated to be executed. A patch here, a patch there, the odd bridging agreement and a bucket load of postponements and the withdrawal process could find itself spun on indefinitely. 

    Don’t get me wrong; I’m not saying that this is the most probable of outcomes but it is beginning to emerge as a distinct possibility…. not that anybody either close to or actually in government would dare say anything to that effect.

     

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    Canadian Home Buyers Losing Steam, and Cash, as Rate Hike Looms

    This article by Katia Dmitrieva for Bloomberg may be of interest to subscribers. Here is a section:

    The chain of events began in October when the federal government tightened mortgage insurance requirements, and continued into April when the province imposed a 15 percent tax on foreign purchasers. Home sales fell 37 percent in June from a year earlier and prices rose the least since January 2015. Then last week the regulator said it’s considering requiring lenders to stress test uninsured mortgages, which is expected to cool things further.

    On top of all this, Governor Stephen Poloz will lift the benchmark overnight rate on Wednesday to 0.75 percent from 0.5 percent, according to 22 of 31 economists in a Bloomberg survey while the rest see no change. The rate could rise to or past 1 percent in a year, a separate survey shows. In anticipation, Canada’s biggest banks are also tightening. Royal Bank of Canada raised its fixed rates for 2-,3-, and 5-year term mortgages by 20 basis points.

    An increase of 75 basis points to 100 basis points in the Bank of Canada’s key rate by the end of 2018 would remove 6 percent to 8 percent of buyers from the country’s real estate market if banks fully price it into their loans, according to Will Dunning, chief economist at industry group Mortgage Professionals Canada. A slowdown in property deals may pose a risk to Canada’s growth -- the fastest among Group of Seven countries -- just as the economy seems to be overcoming a slump triggered by a drop in global oil prices.

    “Right now people are staying away from buying," Dunning said by phone. "If they stay away over a longer period of time, that could become dangerous, that could become deflationary."

     

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    Lithium-rich countries risk missing the boat on electric batteries boom

    This article by Cecilia Jamasmie for Mining.com may be of interest to subscribers. Here is a section:

    As Tesla Motors begins to build the world’s largest lithium-ion battery in Australia and other vehicle makers such as Volvo get on board the electric vehicles train, concerns are rising over the environmental footprint of mining that and other materials used in car batteries, as well as their eventual disposal.

    According to analysts at UBS, by 2025 the market will need 12 times the battery capacity currently available. At the same time, only 5% of lithium-ion batteries get recycled, versus more than 90% of those used in conventional vehicles, reports Financial Times:

    “One of the challenges of making battery recycling economically viable is the quantity of battery material that is needed to keep utilisation rates of recycling facilities sufficiently high,” say analysts at Morgan Stanley. “The risk, therefore, is there may not be the necessary infrastructure in place in time for the first significant wave of EV batteries to reach end of life.”

    Demand for the commodity has been rising as of late, which in turn has caused prices to more than double in the past 18 months.

    The need for the metal is expected to triple by 2025, but not all the countries rich in lithium are taking advantage of the boom. At the same time, new actors are emerging worldwide.

     

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    US Equities: Unwinding the Yellen Leveraged Buyout

    Thanks to a subscriber for this article by R. Christopher Whalen for theinstitutionalriskanalyst.com which may be of interest. Here is a section: 

    So our message to the folks in Jackson Hole this week is that the end of the Fed’s reckless experiment in social engineering via QE and near-zero interest rates will end in tears.  “Momentum” stocks like TSLA, to paraphrase our friend Dani Hughes on CNBC last week, will adjust and the mother of all rotations into bonds and defensive stocks will ensue.  We must wonder aloud if Chair Yellen and her colleagues on the FOMC fully understand what they have done to the US equity markets.

    The notion that five years of market manipulation by the FOMC (and other central banks, to be fair) can end happily seems rather childish, especially when you consider that the other great accomplishment by the Fed during this period is a massive increase in public and private debt. Once the hopeful souls who’ve driven bellwethers such as TSLA and AMZN into the stratosphere realize that the debt driven game of stock repurchases really is over, then we’ll see a panic rotation back into fixed income and defensive stocks.

    The period from QE 1 in 2012 represents one of the most reckless episodes in the history of the US central bank, a period where the FOMC essentially encouraged a partial LBO of the US equity markets. The key question for the FOMC and investors seems to be this: How much new equity issuance can the markets support if public companies eventually need to reduce debt and rotate out of the LBO trade constructed by Yellen & Co?
     
    Corporate credit spreads are the key indicator to watch, both in terms of the economy and the financial markets.  It’s a game of financial musical chairs. Ray Dalio, Janet Yellen and all of us are dancing.  When does the music stop?    

     

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    A Trader So Secret They're Only Known by a Number Just Made Over $200 Million in One Month

    This article by Tom Metcalf for Bloomberg may be of interest. Here is a section: 

    “One of its more important features is that you don’t have identities tied to this,” said Spencer Bogart, head of research at venture firm Blockchain Capital. “This financial privacy is an important characteristic.”

    Ether, the second-most-popular cryptocurrency after bitcoin, is used to pay for applications or programs that run on the Ethereum blockchain, a secured list of transactions that can be shared. That allows for the use of “smart contracts,” or pieces of computer code that make the terms of such agreements operate automatically. The blockchain has the potential to reshape business and finance by enabling immediate settlements of activities such as bank transfers and securities trades.

    JPMorgan Chase & Co., BP Plc, Microsoft Corp. and ING Groep NV are among those experimenting with it. The current value of all the ether held, $23 billion, means dozens of electronic wallets have accrued nine-figure positions. Many of them could be held by individuals, according to a Bloomberg analysis. Individuals can hold multiple wallets.

     

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    Trading Halts, Confusion From India to Indonesia on Manic Monday

    This article by Santanu Chakraborty, Ameya Karve and Yudith Ho for Bloomberg may be of interest to subscribers. Here is a section: 

    Ashish Shah, head of equities at Mumbai-based A.C. Choksi Share Brokers Pvt., said his firm placed orders for AU Small Finance Bank Ltd. on its first day of trading. As of 3:15 p.m. local time, he was still waiting to find out if his firm owned the stock, which rose 51 percent on its debut.

    “We punched in the trades and they are still pending, and we don’t know whether we got the shares,” said Shah. “Will they be scrapped, reversed or executed? The bourse could have done a better job at communicating as clarity reduces chaos.”

    The NSE handles about twice the stock volume of rival BSE Ltd. and controls about 80 percent of India’s derivatives market, which is among the world’s largest. The exchange company, which has filed for an initial public offering, has been embroiled in a probe into whether it allowed preferential access to some high-frequency traders. BSE saw its volume almost double over previous days, data compiled by Bloomberg show.

    “NSE deeply apologizes for the glitch,” it said in an emailed statement. “The matter is being examined by the internal technical team and external vendors, to analyze and identify the cause which led to the issue and to suggest solutions to prevent recurrence.” A Securities and Exchange Board of India spokesman declined to comment on the developments.

     

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    The Silver Flash Crash: What Might Have Been at Work

    This article by Matthew Ashley for investing.com highlights the surprise at today’s intraday volatility in silver. Here is a section:

    One slightly more plausible suggestion has been a sudden liquidity drain that sparked a bout of panic selling. Indeed, markets have been fairly thin over the 4th of July holiday period which could have compounded fears that silver was becoming illiquid in the wake of JP Morgan’s recent acquisitions. This being said, the extent to which JP Morgan has ‘rigged’ silver markets is constantly challenged and courts seem to be unable to agree on if the institution is breaking antitrust legislation.

    Stop loss orders have also been fingered as a cause for the sudden rout for all the usual reasons. Specifically, the hitting of numerous stop loss orders in rapid succession could have easily amplified the effects of a sell-off – even if they probably didn’t trigger the downtrend in the first place. Moreover, given that many traders may have been out of action due to the holiday’s in the US, it’s quite reasonable to expect more ‘set and forget’ trades to have been placed than is typical. This would have left the metal more exposed to this type of risk than we would usually expect.

     

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