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

    UK Inflation at a 40-Year High Engulfs Johnson and BOE in Crisis

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

    The increase is more than double the pace of basic wage growth, squeezing consumer spending power at the sharpest pace on record. The pain is set to intensify, with the Bank of England predicting double-digit inflation by October when energy bills are almost certain to jump again. 

    There was evidence of more generalized inflation, with a 6.7% jump in food and non-alcoholic drink prices. The cost of recreation and culture rose 5.9%, the largest increase since at least 2006, and restaurant and hotel prices were up 8%. Part of that was due to value added tax reverting to the normal rate after the pandemic. Furniture and household equipment rose 10.7%.

    The cost-of-living crisis already has amplified the political debate about how to handle a series of shocks hitting the UK. Prime Minister Boris Johnson’s Conservatives government has targeted relief at those with jobs, while the Labour opposition is calling for an emergency budget to help pensioners and people on benefits. 

    “Countries around the world are dealing with rising inflation,” Chancellor of the Exchequer Rishi Sunak said in a statement. “We cannot protect people completely from these global challenges but are providing significant support where we can, and stand ready to take further action.”

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    A Bull Case Is Forming Around Bearishness at Hedge Funds, Quants

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

    The violent selloff has forced many systematic macro strategies, including trend followers and volatility-targeted funds, to slash equity holdings. Last week, their exposure fell to the bottom of a five-year range that even if stocks resume selling, their unwinding would be relatively subdued, according to Morgan Stanley. 

    For instance, should the S&P 500 drop 5% in one day, the cohort would need to offload less than $20 billion of stocks in the follow week, analysts including Christopher Metli estimated. That’s down from an expected disposal of over $100 billion at the start of the year.

    Goldman’s long/short hedge fund clients saw their gross leverage falling 12 percentage points during the week through Wednesday, the largest reduction over comparable periods sine at least 2016, according to data compiled by analysts including Vincent Lin. 

    Light positioning by hedge funds and quants is among indicators watched by Goldman’s Scott Rubner to determine whether investors have capitulated. With cash holdings elevated in mutual funds and day traders retreating, one missing ingredient to call the all-clear is a reduction of stocks in US household holdings and retirement accounts, he says.

    “Tracking this cohort is my single and most important focus from the lows here,” he wrote in a note last week. “We have not capitulated, it is very slow on the way out.” 

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    Pound Jumps Most in 17 Months as Traders Eye Tight Labor Market

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

    “People don’t need too strong an excuse to buy sterling right now,” said Geoffrey Yu, a strategist at BNY Mellon. “Even a modicum of good data or even data that isn’t as bad as previously expected can see them coming back because of valuations.”

    The move accompanies a broader dollar decline, with the greenback underperforming all Group-of-10 currencies bar the Japanese yen as risk sentiment rebounded. The Bloomberg Dollar Spot Index slid 0.5%, a third day of declines and the longest losing streak since March.

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    China Economy Czar Vows Support for Tech Firms After Crackdown

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

    China’s top economic official gave an unusual public show of support for digital platform companies Tuesday, suggesting Beijing may be ready to let up on a year-long clampdown on technology giants as it battles a slowing economy.

    The government will support the development of digital economy companies and their public listings, Vice Premier Liu He, who is President Xi Jinping’s most senior economic aide, said after a symposium with the heads of some of the nation’s largest private firms. Baidu Inc. founder Robin Li, Qihoo 360 Technology Co.’s Zhou Hongyu and NetEase Inc. chief William Ding were among the tech luminaries spotted at the forum, according to a video posted online.

    Liu’s remarks reported by state media were short on detail but signal further easing of the regulatory risk for China’s technology behemoths including Baiduand Tencent Holdings Ltd., as investors await clues on whether a rout in their shares is near an end. The Hang Seng Tech Index rallied as much as 6% Tuesday on optimism the meeting would affirm Beijing’s intention to dial back some of its restrictions.

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    Ride of the 'Volkyries'

    Thanks to a subscriber for this report by Zoltan Pozsar for Credit Suisse. Here is a section:

    As I see it, the risk of recession, whether it is real or merely implied by an inversion of the yield curve, won’t deter the Fed from hiking rates higher faster or from injecting more volatility to build up negative wealth effects, and signs of a recession might not mean immediate rate cuts to ramp demand back up …

    …cuts may have to wait until the Fed is certain that inflation is surely dead.

    Back to the level of the stock market under the Fed call.

    According to President Daly’s comments, the recent stock market correction and the rise in mortgage rates is “great”, but not enough (“want to see more”). Chair Powell also noted in his press conference that he wants to see further tightening in financial conditions still. At face value, that implies that the Fed won’t stop shaping expectations until we see more damage to stocks and bonds.

    Rallies could beget more forceful pushback from the Fed – the new game…

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    Delhi suffers at 49C as heatwave sweeps India

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

    The effects are visible. Farmers say the unexpected temperature spikes have affected their wheat harvest, a development that could potentially have global consequences given supply disruptions due to the Ukraine war.

    The heat has also triggered an increase in power demand, leading to outages in many states and fears of a coal shortage.

    Mr Modi also flagged the increased risk of fires due to rising temperatures.

    And

    D Sivananda Pai, director of the Institute for Climate Change Studies, points to other challenges apart from climate change - such as increasing population and the resulting strain on resources.

    This, in turn, leads to factors that worsen the situation, such as deforestation and increasing use of transport.

    "When you have more concrete roads and buildings, heat is trapped inside without being able to rise to the surface. This warms the air further," Mr Pai says.

    And the cost of such extreme weather events is disproportionately borne by the poor.

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    Another Stablecoin Loses Its Peg as Algorithm Fails to Keep Pace

    This article from Bloomberg may be of interest to subscribers. Here it is in full:  

    Deus Finance’s DEI token has lost its 1-to-1 peg to the dollar, becoming the latest failure of an algorithmic stablecoin during a period of crypto market stress.

    DEI is currently trading at 70 cents, according to data tracker CoinGecko. With a market value of about $63.5 million, the token is tiny compared with the more than $18 billion TerraUSD stablecoin that shook crypto markets when it become depegged last week. 

    Read more: Crypto Hedge-Fund Head Predicted Terra’s $60 Billion Implosion

    Put out by Deus Finance, a marketplace for financial services, DEI is different from TerraUSD, or UST, in that it’s a fractional reserve stablecoin, backed by coin collateral, consisting of 20% DEUS tokens and 80% of other stablecoins, such as USDC.

    Deus’s team is working to restore the peg, according to a Tweet.

    The depegging comes several months after Deus Finance was hacked, with some coins stolen.

    UST is currently trading at about 6 cents. Last week, even the world’s biggest stablecoin, Tether -- which is not algorithmic and claims to have full reserves -- lost its dollar peg before regaining it. Crypto bellwether Bitcoin is trading at less than $30,000, down from over its all-time high of almost $69,000 in November.

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