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

    The House View

    Thanks to a subscriber for this report from Deutsche Bank which may be of interest to subscribers. Here is a section:

    As markets enter into the summer lull, it is useful to take a step back. The global economy is in better shape than it has been in several years. This has allowed other central banks to follow the Fed and gradually start their exit journey, a process that is a historic challenge given the unprecedented level of monetary accommodation. But with inflation still below target, a key part of the normalisation puzzle is still missing. 

    Although labour market tightness has not yet fed to wages, and hence to inflation, we expect it will. Core inflation should move higher over the medium-term in the US and Europe, supporting further monetary tightening and a normalisation of yield curves. While no policy change is expected by the Fed on 26-July, an announcement to begin phasing out its balance sheet reinvestment is likely in September and we expect another rate hike in December. As for the ECB, rate hikes are still far off, and we expect the central bank to announce another QE extension and tapering in October. 

    Our global macro outlook is little changed this year. We expect growth to rebound from the slowest pace post-crisis in 2016, though relative to consensus we are more positive on the US and more bearish on Japan. In China, we continue to expect a gradual deceleration, but see upside risks to growth in the second half of the year. 

    We are generally constructive on risk assets, expecting material upside to US equities in the next 18 months and positive but more balanced performance in EM. There are signs the dollar has peaked, but we do not expect a material devaluation yet. We are more positive on the euro, seeing upside versus the dollar and sterling. We expect yield curves to normalise gradually, but there is risk of a more sudden upward shift, depending on the path of core inflation.

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    Venezuelans Stockpile Food and Water Ahead of Maduro Power Grab

    This article by Nathan Crooks  and Fabiola Zerpa for Bloomberg may be of interest to subscribers. Here is a section:

    Maduro -- who’s presided over an increasingly autocratic regime that has imperiled the country’s six-decade democracy and left the economy and society in shambles -- is showing few signs of backing down despite growing pressure. He’s broadcast a deluge of propaganda supporting the assembly even as outraged opposition leaders called a general strike Wednesday to forestall it. And opposition is international: The Trump administration sanctioned 13 senior Venezuela officials Wednesday, including the interior minister and the national oil company’s vice president for finance. The head of the Organization of American States has called for elections and Spain’s former prime minister is trying to broker a deal.

    The Venezuelan president has been vague about goals for the so-called constituyente, although he’s said the body will convene Aug. 3 and sit atop all other branches of government. It alone will determine how long it should stay in power. While some analysts speculated that Maduro called the convention as a negotiating tactic to quell opposition protests and violence that has claimed more than 100 lives, others say Maduro will use the body to delay indefinitely elections he can’t win.

    On Wednesday evening, Maduro said in a national address that he rejected the “illegal” U.S. sanctions and that the constituyente would be the country’s “revenge.” He reiterated that the vote would proceed as planned.


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    There They Go Again...Again

    Thanks to a subscriber for Howard Marks recent memo. Here is a section on Softbank;s Vision Fund: 

    Fourth, and perhaps more importantly for my purposes here, I want to spend some time on the fund’s structure. For each 38 cents they put into the fund’s equity, outside investors are required to put 62 cents into preferred units of the fund. On the other hand, Softbank itself invested $28 billion in equity but nothing in preferred. 

    That means when the fund reaches $100 billion, Softbank will have put up only 28% of the capital but will own 50% of the equity. Adding in management fees and carried interest, its 28% of the capital may give it 60-70% of the gains. 

    Even the private equity industry – with its willingness to take risk – has traditionally shied awa from piling debt on technology companies (although less so lately). Softbank doesn’t hesitate to lever its tech investments. 

    The preferred units will pay a 7% annual coupon. Lending money to a tech fund at thata modest rate apparently is part of the price demanded of the LPs for an opportunity to invest in the fund’s equity. I can imagine the sales pitch about how lucky the LPs are to get a chance to provide leverage for this own investment, but doubt I’d be convinced. 


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    Copper Posts Two-Year High, Miners Surge as China Brightens

    This article by Mark Burton and Susanne Barton for Bloomberg may be of interest to subscribers. Here it is in full:

    Copper posted its highest close in more than two years and shares in producers of the metal rallied amid a weaker dollar and expectations demand will increase in China, the world’s top user of industrial metals.

    Copper surged as much as 4.2 percent, leading gains on the London Metal Exchange. Freeport-McMoRan Inc. paced gains by mining stocks as Jefferies LLC recommended buying the biggest publicly traded producer. Caterpillar Inc. is strengthening its forecast for a first annual sales increase in five years after construction demand surged last quarter in China.

    Base metals have rallied in the past month as a gauge of the dollar trades around a one-year low, making materials priced in greenbacks more attractive. In addition, economists have become more upbeat about China’s economy and concerns about a tightening of liquidity in the nation have eased.

    All main industrial metals climbed Tuesday, while steel and iron ore contracts also advanced as the People’s Bank of China said it will pursue stable monetary policies. The announcement came after economists raised their forecasts for China’s economic output after first-half growth beat estimates.
    “The weaker dollar has had quite a positive effect on base metals markets, but we’re seeing some sector-specific elements helping too,” Casper Burgering, senior sector economist at ABN Amro Bank NV, said by phone from Amsterdam. Freer credit availability in China should boost demand in key end-use industries like construction, he said.

    Copper for three-month delivery rose 3.3 percent to settle at $6,225 a metric ton by 6:15 p.m. on the LME. That’s the highest since May 2015. Lead, nickel and zinc all gained more than 1.7 percent.

    A rebound in China’s construction sector will be particularly beneficial for zinc, which is used to galvanize steel, while nickel has also benefited from signs of a rebound in stainless-steel demand, Burgering said.

    Nickel reached the highest in three months after Philippine President Rodrigo Duterte on Monday threatened to impose higher taxes on mining firms unless they take steps to protect the environment, renewing concerns about supply from the world’s top producer of mined nickel.


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    As VIX Plumbs Depths of Torpor, Betting on Its Future Gets Brisk

    This article by Elena Popina and Lu Wang for Bloomberg may be of interest to subscribers. Here is a section:

    “The market is being overly optimistic, and the doldrums of summer could have driven the volatility to current levels,”
    Katie Stockton, managing director and chief technical strategist at BTIG LLC, said by phone.

    Yet a low VIX also means cheap options prices, leading to more bets. More than 551,000 VIX calls changed hands each day on average this month, almost three times more than puts. The last time options volume was close to being this busy in July was just before a market rout that sent the index to an almost four- year high in August 2015 on concerns that China’s economic growth was slowing. It took the VIX about a year to erase its gains.
    On the S&P 500, hedging costs appear particularly low. One- month implied volatility on the measure has been below realized price swings for most of the time since mid-May. In July, it reached its lowest level since October relative to historical volatility.

    “When options prices are low, options traders will step in to own them,” Amy Wu Silverman, managing director and equity derivatives strategist at RBC Capital Markets LLC, said by phone from New York. “The risk-reward is so attractive, they can’t miss it. It’s like you go to Las Vegas and you play the odds. Now that the options are so cheap you have even better odds.”


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