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July 19 2022

Commentary by Eoin Treacy

As Farnborough Air Show Sizzles, Airbus Makes Expo a Slow Burner

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

“Boeing has been the biggest beneficiary at Farnborough to date,” said Sheila Kahyaoglu, an aviation analyst at Jefferies LLC.

Airbus Chief Executive Officer Guillaume Faury acknowledged in an interview Monday that business was “probably a bit less now than it used to be in the past because we are constrained by the supply chain.”

The Toulouse-based company has had to grapple with so-called gliders -- fully built aircraft sitting on the ground without engines that can’t be completed amid a shortage of components, from engines to computer chips The planemaker now has 26 planes without engines, six more than at the end of May, according to Faury, who said he’s optimistic the issue will be resolved by the end of the year.

Besides, the company came into the show with some major orders under its belt, including a deal from China for 292 airliners worth more than $37 billion just this month.

Even if Airbus has to cede the commercial bragging rights to Boeing this year, the European company can take solace in the fact that it has an order backlog stretching out years, giving it little reason to hunt for fresh deals. The company’s best-selling A320 family is sold out until 2027. Faury said his priority now is to serve existing customers and get the supply chain sorted.

Eoin Treacy's view -

Airlines are still buying planes with the expectation business will return to normal in due course. Of course, with the backlog of orders at Airbus and Boeing they are not under any pressure to take delivery in the short term. Meanwhile the most pressing issue is the oil price and staffing levels.



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July 19 2022

Commentary by Eoin Treacy

Stuart Kirk tells FT investors need not worry about climate risk

This presentation by Stuart Kirk at a Financial Times conference in May is a notable discussion on subject of ESG and climate. 

Eoin Treacy's view -

Kirk was afforded the opportunity to share his frank views and resigned from his position at HSBC less than a month later.

That helps to highlight how polarized the discussion on climate is. There is no room for a dissenting public voice. That’s despite the fact he did not deny climate change but instead suggested we need to adapt.



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July 19 2022

Commentary by Eoin Treacy

Nancy Pelosi to Visit Taiwan Despite China Warnings, FT Reports

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

On Tuesday, European Parliament Vice President Nicola Beer began a three-day visit to Taipei -- leading the most senior EU legislative delegation to visit Taiwan. Beer told reporters after her arrival that the “family of democracies” need to support Taiwan after China’s crackdown on Hong Kong’s opposition and Russia’s invasion of Ukraine. 

No ‘Blind Eye’
“We won’t have a blind eye on China’s threat to Taiwan,” Beer said. “Europe was late for Hong Kong. We won’t be late for Taiwan. There is no room for Chinese aggression in democratic Taiwan. For the moment, we witness war in Europe. We do not want to witness war in Asia. And so now it’s the moment to stand firm on the side of Taiwan.” 

China’s refusal to condemn Russia’s invasion of Ukraine has complicated its efforts to shore up relations with the Europe Union. Top European leaders haven’t responded to an invitation from Xi to meet him later this year in Beijing, the South China Morning Post reported, citing a person familiar with the matter. 

Eoin Treacy's view -

This is a major escalation of rhetoric from Europe and the USA. China will bristle at what they consider direct interference in a domestic matter. The One China policy is the biggest red line the Communist Party has.



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July 18 2022

Commentary by Eoin Treacy

July 18 2022

Commentary by Eoin Treacy

The Colorado River Compact

This article form Pennsylvania State University may be of interest to subscribers. Here is a section:

Of course, the specification of an absolute amount of water to each of the states and Mexico has raised a few serious problems that remain contentious. First, the river is over-allocated. The 1920’s – coincidentally the time that the Compact was negotiated was an anomalously wet period with annual flows as high as ~20 million acre-feet (Figures17-18). In contrast, the long-term mean discharge of the river is about 15 million acre-feet, yet 16.5 million are allocated. Furthermore, the river flow is highly variable and based on historical data and tree ring reconstructions, it seems that decades-long dry periods with flows less than 13-14 million acre-feet may be common. Second, climate projections indicate that the region will become drier in the long-term, and some have suggested that we have already entered an era of steadily declining river flows along the Colorado. Fourth, improved understanding and renewed interest in the environmental impact of decades of dramatically reduced flow have spurred new pressures to allocate some discharge for the natural system. Finally, demand is likely to increase as populations in the region continue to grow, further stressing the already over-allocated river (Figure 18).

Eoin Treacy's view -

This article from Ceres may also be of interest. Here is a section:

Agriculture uses approximately 80% of the Colorado River’s water, using it to irrigate 15% of the nation’s farmland, and produce 90% of the winter vegetables. Wheat, corn, berries, and fresh produce are likely to be particularly strained by supply rationing to manage water-stress, as well as the crops, including alfalfa and hay, used by farmers to feed cattle. A recent study found that the largest consumer of river water in the Western U.S. is irrigation for cattle-feed crops. 



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July 18 2022

Commentary by Eoin Treacy

Wall Street Set for New ETF Gold Rush as Single-Stock Era Begins

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

A new ETF-for-everything era may have just begun on Wall Street, swelling an industry that already boasts nearly 3,000 products and $6.2 trillion in assets.

The booming world of exchange-traded funds is about to get even more crowded after the very first single-equity ETFs launched Thursday -- despite a torrent of regulatory warnings over their risks while retail investors are still reeling from the crash in speculative trades from crypto to meme stocks.

The eight products from AXS Investments look like the start of a coming invasion of amped-up strategies that will seek to enhance or invert the performance of volatile companies, including Tesla Inc., Nvidia Corp. and PayPal Holdings Inc.

Another proposed lineup from Toroso Investments offers to layer on a bullish options strategy in order to boost returns. All told, at least 85 more such ETFs are currently planned, according to filings tracked by Bloomberg, covering some 37 companies.

That’s just the start. With a never-ending fee war taking costs on index-tracking ETFs to rock-bottom levels, the arrival of single-stock products opens up a lucrative avenue for issuers, with leveraged or inverse trades tracking major companies up for grabs. 

All told, the Securities and Exchange Commission may have inadvertently put new investing tools in the hands of day traders at a dangerous time with recession risk sparking bear markets. 

Eoin Treacy's view -

The rational investor is going to question the wisdom of setting up single stock ETFs. Afterall can’t you simply buy the share? The reason for setting up single stock ETFs for shares like Nvidia and Tesla is because their options are expensive. Options sell in minimum sizes of 10 contracts for retail traders. If the underlying has a lower nominal value, the options will be cheaper to buy for smaller investors.



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July 18 2022

Commentary by Eoin Treacy

Email of the day on REITs and homebuilders

What you were saying about the huge migration to Texas makes me wonder if this isn't the right time to buy home builders who are active in that area? Or REITs?  What about NXRT, an old favourite of mine which has now come right done (fortunately I got out)? It specialises in refurbishing multi-family properties in the sunbelt. Is it too early to buy again do you think?

Eoin Treacy's view -

Thank for this question which may be of interest to the Collective. A realtor friend of mine shared his rationale. If a buyer is worried about interest rates rising, then buy now before they go higher. If they are worried about rates falling buy now because that will inflate prices and you can always refinance. I think it is safe to say a realtor will always have a convincing rationale to buy



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July 15 2022

Commentary by Eoin Treacy

July 15 2022

Commentary by Eoin Treacy

Summers Says Fed 'Let Us Down Quite Badly' and Still Unrealistic

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

Former Treasury Secretary Lawrence Summers issued one of his harshest criticisms yet of the Federal Reserve’s slowness in moving to raise interest rates, and warned that policy makers are still presenting forecasts that are unrealistic.

“In 2021, our central bank let us down quite badly,” hurting policy makers’ credibility, Summers said on Bloomberg Television’s “Wall Street Week.” “It made mistakes in the core functioning of a central bank,” including in its failure to lean in against fiscal stimulus last year, he said.

Among the errors has been a “repeated poor forecasting record -- and I have to say that it’s not something that’s been fully fixed,” Summers said. The June median Fed official predictions showed inflation coming back toward the 2% target but unemployment only reaching a high of 4.1% by 2024 -- a “highly implausible” result, he said.

“Frankly I think in 2021 our central bank lost its way. It was talking about the environment, talking about social justice in a range of things,” Summers, a Harvard University professor and paid contributor to Bloomberg TV, said. “It was confidently dismissing concerns about inflation as transitory.”

Turning to Japan, which has seen its currency tumble to the weakest since 1998 as the Bank of Japan declines to join its peers in tightening policy, Summers said it’s likely to be a challenge to exit the current zero-yield targeting regime.

Dollar’s Impact
“Sooner or later they’re going to leave the yield curve control strategy and I’m not entirely sure what’s going to happen when they do,” Summers said. “In the meantime, the pressures are likely to build,” with the potential for “an even weaker yen,” he said.

While some emerging markets are also suffering from a strengthening dollar, Summers said that he didn’t see a “systemic” crisis along the lines of 1998. Still, countries with “particularly unsound policies” including Turkey and Argentina are a concern, he said.

Eoin Treacy's view -

The world as it is, the reactions of traders to evolving stimuli, and the world as we would like it to be, are three very different places.

The reality of massive money supply growth in 2020/21, and the subsequent decline in supply growth represent the background for market. The absence of clear sources of new liquidity suggest it is unproductive to expect sharp rebounds on par with those seen in 2021.



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July 15 2022

Commentary by Eoin Treacy

Gold: Dividing up our forecast

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

Historically, gold prices have often come under pressure in the early stages of a slowdown as central bank policy is still tightening or is tight and real interest rates are rising. Of course, this dynamic reverses when policy rates are cut. We expect a further lift to real interest rates this year, particularly as inflationary risk fades in 2H22. As such, additional liquidation of exchange-traded funds can be expected. We advise protecting the downside to longer-term holdings in the yellow metal into year-end. However, we see opportunities to be more positive though 2023 as the Federal Reserve pivots to an easier stance and the US dollar weakens.  

Eoin Treacy's view -

Gold is often regarded a perpetual zero coupon bond. It therefore thrives in an increasingly negative real interest rate environment and struggles when a rates trend towards positive real rates.



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July 15 2022

Commentary by Eoin Treacy

India's Forex Reserves Fall to 15-Month Low as RBI Defends Rupee

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

India’s foreign exchange reserves dropped to their lowest in 15 months as the central bank probably stepped up its intervention to support the rupee that is testing new lows amid foreign capital outflows.

The reserves fell by $8.06 billion to $580.3 billion as of July 8, data released by the central bank showed Friday. This is the second straight week of decline and comes as the rupee nears the psychologically-important level of 80 per dollar.

While most emerging markets are seeing a sell-off on the US Federal Reserve’s rate-hike outlook, the Indian currency has lost about 7% this year, staying in the middle of the regional pack where the South Korean won has weakened by over 10% and the Philippine peso has shed over 9.5%.

A bigger import bill due to high commodity prices is also boosting demand for dollars, putting pressure on the local currency.

Monetary authorities in Singapore and Philippines on Thursday responded to the situation by going for emergency tightening. Some economists in India are factoring in the possibility of an unscheduled announcement by the Reserve Bank of India too. The central bank, which is due to announce its rate decision Aug. 4, had surprised with an off-cycle move in May.

At the current level, the reserves will cover less than 10 months of imports. Investors are worried that the drop in reserves leaves the rupee vulnerable to speculators, but even now these are much larger than they were during the taper tantrum of 2013, Bloomberg’s economist Abhishek Gupta wrote on Friday ahead of the data release. 

Eoin Treacy's view -

India is in a better position to defend against surprises than at any time in its history. In 2008, reserves of $300 billion were considered healthy. Today they hold $580 billion which is down from a peak of $640 billion in August 2021. That has not done much to arrest the decline of the currency but it does provide the RBI some options.



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July 14 2022

Commentary by Eoin Treacy

Video commentary for July 14th 2022

Eoin Treacy's view -

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: Dollar pause supports asset prices, Nasdaq-100 up, oil rebounds, European natural gas firm, central bank total assets trending lower, joblessness trending higher, picking ultimate winners in tech. 



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July 14 2022

Commentary by Eoin Treacy

Email of the day on electricity costs over the next two years

I enjoy reading and listening to Mr. Treacy commentary which helps me in a number of facets of my financial decisions (I live in the UK).

Mr. Treacy has recently been commenting on commodity pricing easing as one of the by-products of early onset recession.

I have been wrestling whether to fix my electric and gas rate with current provider for 2 years (which is 52% higher than current price). Whilst pundits are predicting 65%+ rate rises Mr. Treacy’s comments suggest otherwise (commodities easing).

I would be interested in Mr. Treacy view on this matter.

Eoin Treacy's view -

Thank you for this question. It is a sign of the times that the savings from successfully deciding on what electricity plan to sign up for could pay for a subscription to this service.



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July 14 2022

Commentary by Eoin Treacy

Email of the day on the Fed's balance sheet

You are sending out comprehensive information that I am not finding anywhere else, addressing multiple markets, which is quite helpful for me as an investor. So that brings up two questions: First, I wonder if you agree that the Fed has already reduced its balance sheet by about $1 trillion dollars? (As I heard recently from one analyst, which, given the rise in the dollar could explain the decline in values of multiple assets...) And, second, given the drop in so many assets: Bitcoin, gold, stocks, uranium recently, metals on the LME, to name a few, are we already actually in a recession, even though not officially labeled by the powers that be, is this, in fact a recessionary event we are proceeding through regardless on any official labeling, in your opinion?

Eoin Treacy's view -

Thank you for this question which may be of interest to the Collective. The Fed only began reducing the size of its balance sheet in July. They are starting at a pace of -$47.5 billion and plan to double that to $95 billion in the autumn. The bulk of global quantitative tightening so far has been achieved through the strength of the Dollar.



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July 14 2022

Commentary by Eoin Treacy

China Readies $1.1 Trillion to Support Xi's Infrastructure Push

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

However, there’s a chance that despite the fiscal largess, overall infrastructure investment growth could still disappoint. First, while Beijing is letting local governments issue more bonds, it’s still telling them to reduce so-called “hidden” debt -- off-balance sheet borrowing from banks by state-owned companies, which has financed a large chunk of China’s infrastructure over the last decade.

Second, fiscal funds need to be supplemented by lending from commercial banks and private investors -- both of which may be reluctant to lend in a risky environment. Finally, local governments in recent years struggled to find infrastructure projects that could generate returns large enough to repay the special bonds. Some economists estimate local governments left 2 trillion yuan of funds unspent last year. 

While Beijing is telling local authorities to speed up spending, it remains to be seen if attitudes will shift.

“Funds are less of a constraint for infrastructure investment this year, while the bottlenecks lie mainly with project pipelines and government incentives,” Goldman Sachs Group Inc. economists including Xinquan Chen wrote in a note last week. In a sign that the fiscal push is yet to rev up construction, sales of excavators in China have been sinking since April last year. In January-June, the sales plunged 53%.

Eoin Treacy's view -

Arguing China needs more high-speed railways is a bit difficult when the national railway already has almost $1 trillion in outstanding debt and no passengers. That begs the question whether the new debt being issued will be used to retire/bring off balance sheet on balance sheet or on new projects.



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July 13 2022

Commentary by Eoin Treacy

Video commentary for July 13th 2022

Eoin Treacy's view -

A link to today's video commentary is posted in the Subscriber's Area.

Some of the topics discussed include: CPI surprises on the upside and investors price in another big rate hike but bonds rallied and stocks steadied. Willingness to look through trouble and buy the dip has been the hallmark of this bull market but corporate profits are peaking, unemploymenbt is about to rise and we have not felt the ill effects of a recession yet. 



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July 13 2022

Commentary by Eoin Treacy

Email of the day on beneficiaries from a recession:

Your daily talks, now focusing on the probability of a recession, are as always full of interest. I never miss them, or if I have to, I at least read the Comments of the Day.

I've been struggling to decide on some "investments" that could profit from the recession scenario, and which could remain there for the medium term, without my having to watch them every day for sudden reversals. Any suggestions? Shorting a commodity ETF?  Shorting the US banking sector? I'm sure you have other ideas.

Eoin Treacy's view -

Thank you for this long-term patronage and this question which may be of interest the other subscribers. The phrases “buy and forget” and “shorting” don’t normally go together. Shorting necessarily means leverage. You can’t walk away from a leveraged position because they can go against you in a hurry.



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July 13 2022

Commentary by Eoin Treacy

Will release of $3B Bitcoin from Mt Gox cause market bottom in August?

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

Should the release of the remaining Mt Gox funds have a similar effect on the price of Bitcoin, it would likely drop below $10,000. However, even in recent months, there has been equal sell pressure on Bitcoin from parties such as Luna Foundation Guard, Three Arrows Capital, and Bitcoin miners.

LFG sold several billion dollars worth of Bitcoin, which had a negligible effect on Bitcoin as the market absorbed the selling pressure. The following weeks since the event did result in Bitcoin’s price decline due to a change in market belief and overall global outlook. The markets may well absorb any selling from Mt. Gox creditors, but the social sentiment of early Bitcoiners relinquishing their coins could create a bearish psychological sentiment.

Eoin Treacy's view -

Bitcoin is a liquidity barometer. The Mt.Gox liquidator releasing additional supply into the market would be a headwind at the best of times. Doing so while interest rates are rising and liquidity is being siphoned out of the system, will only have a larger negative impact on bitcoin prices.



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July 13 2022

Commentary by Eoin Treacy

Chinese Homebuyers Across 22 Cities Refuse to Pay Mortgages

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

The payment refusals underscore how the storm engulfing China’s property sector is now affecting the country’s middle class, posing a threat to social stability. Chinese banks already grappling with challenges from liquidity stress among developers now also have to brace for homebuyer defaults.  

Now is “a critical time for social stability,” said Chan, adding that “the forgoing of down payments may bring social instability.”

A drop in home values hasn’t helped. Average selling prices of properties in nearby projects in 2022 were on average 15% lower than purchase costs in the past three years, according to Citigroup’s research. 

Eoin Treacy's view -

How much do prices have to fall before consumers give up hope they will ever recoup their down payment through a sale? I guess we have the answer in China where many of the home purchases are speculative to begin with and tens of millions of apartments stand vacant at the best of times.
 



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July 12 2022

Commentary by Eoin Treacy

July 12 2022

Commentary by Eoin Treacy

Anger in Shanghai as Covid Return Spurs Fear of New Lockdown

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

Tension is spreading through Shanghai as residents watch the Covid-19 caseload tick higher, fueling fears they’re headed back into lockdown little more than five weeks after exiting a bruising two-month ordeal.

The city reported 59 new infections for Monday, the fourth day in a row case numbers have held above 50. The sharp rise from single digits about a week ago follows the detection of the more contagious BA.5 sub-strain of the omicron variant, which has triggered two additional rounds of mass testing between Tuesday and Thursday this week across nine of the financial hub’s 16 districts, as well as other areas where cases have been found. 

China’s strict Covid Zero approach is once again being tested as outbreaks flare across the country amid the arrival of a sub-variant that has fueled rising caseloads elsewhere. Already, close to 30 million people nationwide are under some form of movement restrictions to quell transmission, but authorities have so far steered clear of strict lockdowns in key economic regions.

Eoin Treacy's view -

Quarantines work in the initial stages of an outbreak because there is still some hope the rate of infection can be contained. The only reason to sustain a quarantine during a pandemic, where there is no hope of containing the global spread, is to slow the rate of infection. The time bonus gained from slowing the rate of infection can be used to prepare treatments, vaccines and recovery areas, but no one is under any illusion that quarantines can indefinitely turn back a pandemic. Eventually everyone is going be infected.



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July 12 2022

Commentary by Eoin Treacy

Heathrow Asks Airlines to Stop Selling Seats to Ease Chaos

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

London Heathrow is imposing a two-month cap on daily passenger traffic, a dramatic response by the UK’s busiest airport to the flight chaos gripping Europe as airlines and ground crew struggle with a surge in travel demand. 

The airport will limit daily passenger traffic to 100,000 departing people through Sept. 11, asking airlines to refrain from selling summer tickets. Current forecasts are modeling for as many as 104,000 passengers a day over the summer, still below the roughly 125,000 passengers that left daily this time before the pandemic.

Eoin Treacy's view -

Anyone who thought demand for international travel would never return to normal has been proven very wrong. If anything, pent up demand is contributing to even higher demand because people have been cooped up at home for so long. If China’s population ever get to travel again, tourist locations will be swamped.



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July 12 2022

Commentary by Eoin Treacy

A Deeply Inverted Yield Curve Means Credit Is Set to Dry Up Next

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

The other constraint is the so-called ‘spot real rate’, which measures the Fed’s target rate minus current headline inflation. The premise is that the Fed cannot tighten financial conditions sufficiently to wring out inflation if it ends rate hikes with the spot real rate still negative.

Putting this together, if the Fed gets to, say, a 4.5% target rate with inflation in 2Q 2023 at the same level, maybe it can call it a day. That’s a very high inflation level but also a restrictive level of policy which will mean significant economic pain. If, for example, the US economy lapses into recession and inflation falls to 4%, the Fed might feel confident that inflation was headed down to its 2% target even if the fed funds rate is only 3.0% when this occurs.

The scenarios above are more akin to the early 1970s when the Federal Reserve allowed real yields to remain negative in the face of double digit inflation. It’s not the crushing blows that Paul Volcker administered to the US economy.

Even so, inflation is so high that there are almost no scenarios where the fed funds rate doesn’t get to at least 3 or 3.5%. More likely we go higher than that.

That’s when banks will likely face problems with defaults and net interest margins.

Eoin Treacy's view -

The 10-2-year yield curve spread is currently at negative 9 basis points. That’s the most inverted the spread has been since 2007. Jay Powell dismissed this indicator as useful and prefers to look at the 10-year – 3-month spread. That measure has contracted by 40 basis points since Friday. In early May it was at 230 basis points. Today it is at 80.



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July 11 2022

Commentary by Eoin Treacy

July 11 2022

Commentary by Eoin Treacy

Email of the day on imminent recession risk

What’s your view of global recession in late 2022 or 2023? thanks for given some information on this.

Eoin Treacy's view -

Thank you for this question which may be of interest to the Collective. Financial conditions are tightening almost everywhere so recession risks are certainly rising. The dilemma for investors is we are only two years on from the pandemic panic, so it is very early to think about recession risk. Nevertheless, it is a question we need to deal with because exogenous factors are more relevant today than at any time in recent memory.



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July 11 2022

Commentary by Eoin Treacy

Global Strategy Weekly

Thanks to a subscriber for this report by Albert Edwards for SocGen. Here is a section:

The commodity complex is now seeing a collapse in prices, and this shows great similarity to what we saw in mid-2008. Although the oil price decline is slower and lagging, likely because of the Ukraine war, other industrial commodity prices are in virtual freefall. Soft-landing advocates must now face the overwhelming evidence of economic collapse and extricate their heads from the sand. ¢

Despite the fallout from the Ukraine war, agricultural prices too have also imploded, and that will sound a note of caution for those who think the oil price cannot fall as quickly as other industrial commodity prices. With the oil price having slid from $125/b to under $100 in a month, it should not be long before the yoy comparisons are negative, as with food prices.

Headline CPI inflation will likely turn negative, and the inflation narrative will then evaporate (temporarily), so trigging a collapse in US 10y yields back below 1%. What a shock that will be!  

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 



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July 11 2022

Commentary by Eoin Treacy

China Stocks Drop Most in a Month on Covid Flareups, Tech Fines

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

Chinese stocks had their worst day in about a month as a Covid resurgence, combined with fresh fines for the country’s tech giants, sent investors running for the door.

The Hang Seng China Enterprises Index, a gauge tracking mainland firms listed in Hong Kong, slumped 3.1%, its biggest loss since mid-June. Tech heavyweights, property developers and electric-vehicle makers were among the biggest drags. 

A slew of bad news hit the Chinese market over the weekend and Monday morning, including regulatory fines on past transactions done by Alibaba Group Holding Ltd. and Tencent Holdings Ltd., a rejection by China Evergrande Group’s bondholders on a proposal to extend debt payment, and a warning by a prominent investor’s wife that a key lithium maker’s stock is overvalued. 

The selloff is a reminder that the nation’s Covid Zero policy and lingering uncertainty toward tech crackdowns remain key risks for investors betting on a sustained rebound in Chinese shares. The Hang Seng China gauge has recorded just one positive session in the last eight after rallying nearly 30% from a March low.  

Eoin Treacy's view -

The pandemic continues to be a major factor in the daily life of China, even as the rest of the world moves on. The reality of a large population with little immunity and the threat of rapidly evolving strains are growing more infectious suggests the quarantine system will slow the advance but can never overcome it.



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July 08 2022

Commentary by Eoin Treacy

July 08 2022

Commentary by Eoin Treacy

TSMC Expects 30% Sales Rise Despite Global Economic Ructions

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

Sales growth this year should accelerate from 2021’s 24.9%, which was in dollar terms, Chairman Mark Liu said at the company’s annual shareholder meeting on Wednesday. That’s in line with executive remarks in April that gave an official outlook of topping mid- to high-20% growth in 2022.

TSMC’s projection comes as concerns persist that inflation, the war in Ukraine and Chinese lockdowns will hammer demand for gadgets. On Wednesday, executives acknowledged smartphones and computers have been hard-hit but that spending in other areas such as electric vehicles have exceeded expectations. They played down the effect of inflation, saying the rise in prices was gradually abating.

“The current inflation has no direct impact on the semiconductor industry as the demand drop is mainly for consumer devices like smartphones and PCs while EV demand is very strong and partially exceeds our supply capacity so we are making inventory adjustments,” Liu said. “Utilization rate is full for the rest of the year.”

TSMC reaffirmed previous projections for $17.6 billion to $18.2 billion of revenue this quarter, supporting gross margins of as much as 58%.

TSMC, the most advanced maker of chips for tech giants from Apple Inc. to Nvidia Corp., rose more than 1% in Taipei, after having shed more than a tenth of its value this year. While the Taiwanese company has been one of the biggest beneficiaries in past years of soaring demand for chips in a growing range of connected devices, investors fear policy tightening around the world will begin to erode consumption in 2022.

 

Eoin Treacy's view -

BMW reported today that its sales of electric vehicles are on track to double this year. That’s in line with the company’s projections even as sales of conventional vehicles decline sharply. Tesla also reported sales of vehicles in China are rebounding quickly.



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July 08 2022

Commentary by Eoin Treacy

China Tries to Tamp Down Nationalist Fervor Over Abe Shooting

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

The Foreign Ministry struck a softer tone on Friday. China was “shocked” by the attack, spokesman Zhao Lijian said at a regular press briefing in Beijing just before news that Abe had died, saying the nation hoped he would recover soon.

“This unexpected incident should not be linked with China-Japan relations,” Zhao added. When asked about some nationalist voices in China cheering the shooting, Zhao declined to “comment on the remarks of net users.”

Eoin Treacy's view -

The Chinese administration has been fostering a domestic nationalistic movement for years. That helps fuel domestic support for extraterritorial ambitions amid the government’s significant militarization efforts.



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July 08 2022

Commentary by Eoin Treacy

Germany's Habeck Urges Canada to Help Thwart Putin on Gas

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

Germany’s vice chancellor made a public plea to the Canadian government to release a turbine that’s caught up in sanctions against Russia and critical for gas flows to Europe. 

Economy Minister Robert Habeck told Bloomberg that the turbine for the Nord Stream 1 pipeline needs to be returned before maintenance work begins on Monday. Releasing the component would remove an excuse for Russian President Vladimir Putin to keep the conduit closed.

“I’ll be the first one who will fight for a further strong EU sanction package, but strong sanctions means it must hurt and harm Russia and Putin more than it does our economy,” Habeck said in a phone interview late Wednesday. “Therefore, I ask for understanding that we have to take this turbine excuse away from Putin.”

Eoin Treacy's view -

Germany has begun rationing gas. That’s aimed at doing whatever is necessary now, so they have adequate reserves for the winter. Even then it is going to be a tight market environment.



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July 07 2022

Commentary by Eoin Treacy

July 07 2022

Commentary by Eoin Treacy

China Data Show Economy Shrinking in Challenge to Xi's Target

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

A quarterly drop in GDP, which has only happened once before, underlines China’s slower rebound from coronavirus curbs than in 2020, providing less of a boost to a struggling global economy. Debate about the accuracy of official data will likely persist this year as President Xi Jinping urges officials to strive to meet an ambitious target for annual GDP growth of about 5.5%, while at the same time sticking with a Covid Zero policy that requires tough restrictions wherever virus cases emerge.

“There is no plausible story that GDP growth should be positive in the second quarter,” said Logan Wright, head of China markets research at Rhodium Group. “The downturn in household consumption is very significant within both the official retail sales data and other proxies. And the property sector remains a significant drag.”

The evidence from alternative indicators is overwhelming of an ongoing slump in the economy. Travel data shows passenger trips taken on China’s roads were mostly below last year’s levels into July, according to transport figures analyzed by TS Lombard. The number of domestic flights in the quarter was down 62% from the same period last year, according to data provider Variflight.

Eoin Treacy's view -

Covid cases in Shanghai doubled today. Earlier this week the newer BA5.2 subvariant was found in Xian and is now also in Beijing. The omicron variant appears to be mutating much more quickly than prior strains but is also resulting in less severe symptoms in most of the world. China has the complication of an unvaccinated population and is only now introducing vaccine mandates.



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July 07 2022

Commentary by Eoin Treacy

Ruble Halts Longest Series of Losses Since April: Inside Russia

This note from Bloomberg may be of interest. 

Russia’s currency is set to end four days of losses against the greenback as demand for foreign currency declined in Moscow. The country’s main stock index drops for a second day.

Ruble gains 0.1% to 63.2800/$; adds 0.9% versus euro to 64.1850

USD/RUB rate might correct to 55-60 range in the near future, George Vaschenko, head of Russian trading at Freedom Finance in Moscow, writes in a note

“Ruble weakening was not accompanied by significant trade volumes; the weakening of demand will lead to a decline in the exchange rate”

Eoin Treacy's view -

The Ruble has been supported by the strength of Russian energy exports. The $20 pullback in oil prices from between June 30th and yesterday had a knock-on effect for the currency. Despite the fact the Euro was breaking down against the Dollar, the Ruble fell faster. That’s a clear sign of how dependent Russia is on high energy prices to sustain the value of the currency.



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July 07 2022

Commentary by Eoin Treacy

Email of the day on volcanos and all-in-sustaining-costs

Best wishes and greetings from Australia.  The e-mail covers 2 topics:

VOLCANOES

Several years ago (it might have been 10+ years ago) FullerTreacyMoney used to publish occasional articles and comments from ??? concerning the impact of the various volcanoes around the world on temperatures, crops etc.  I have not seen any articles lately.  Do you remember this newsletter?  Is this service still around and do you still follow it?

The reason I ask is that we have been having some weird weather in Australia recently (e.g. raining in winter when it never rains in winter) and it has been suggested to me that the volcano that erupted in Tonga at the start of 2022 is the cause.  (as opposed to global warming that seems to be the cause for everything bad these days).  It would be nice to get some more authoritative back-up before I use the example more widely.   If you still follow this line of thought, could you please point me to the reference site?  Thanks.

AISC

As you know I am the author of the textbook "Mining Economics and Strategy" which you have quoted on occasions.  I am in the process of revising and extending it for republication in 2024 (it will just be titled "Mining Economics").  Amongst the topics will be some discussion on All-in-Sustaining-Cost, not covered in the current book.  I agree there is insufficient definition of this term.

The term started to be used because investors (who knew nothing about mining) used to get perennially upset when some mining company was seemingly doing well, but then needed cash just to sustain production.  Just when the patient investors were lining up for dividends the dividends wouldn't materialize because the mining companies needed the cash themselves.  (Terms like "profitless prosperity" were common).  So mining companies - mostly gold mining companies - started to use this AISC term as an alternative to "cash" costs to indicate to investors what sort of overall margin they had over the published gold price going forward.   Now, it seems, investors are regarding this with more weight than it was ever intended.  And, according to the article you referenced, it seems some mining companies are creatively using the AISC term to present their situation in a more-favourable light than it deserves.  But you are right - the term is not well defined.  Even if the mining company is not deliberately misrepresenting their situation, there are two major short-comings in common application:

1)  A mining company might be planning a steady reduction in output over the ensuing few years as reserves get depleted, so the AISC would include (for example) replacement capital and other capital needed to fulfill this plan, but this doesn't necessarily mean that production will be sustained at current rates.  The AISC doesn't necessarily imply output will remain constant (but I'm sure that many investors think this is the case).

2)  Mines seldom produce just one product.  A gold mine almost always produces silver, for example.  But in an attempt to present things in "gold" terms - overly simplified for anyone who don't want to take the time to understand the economics properly - the silver "credits" will be subtracted from the price of gold necessary for the mine to remain viable ... with the absurd situation (if there are many by-products) where sometimes a gold mine could have an AISC of close to zero ... depending on the price of silver or other by-products used in the analysis.  Often, the selling price used for these by-products may not even be shown and probably not highlighted.

Lesson: as you highlight, investors should be wary of putting too much weight on any published AISC numbers.

Eoin Treacy's view -

Thank you for this informative email and I look forward to reading the updated version of Mining Economics. 

The Browning Letter was written by Evelyn Browning-Garriss until 2016. Unfortunately, she died of cancer in 2017. Her son, James took over the publication and is still producing it. I reached out and they kindly forwarded the June issue. (subscription details). I don’t see mention of the Tonga volcano, but he has been predicting a wet winter in eastern Australia because of the strengthening La Nina. Here is a section:

The Pacific is going to continue pushing warm water up against the east coast of Australia through winter. This will increase precipitation for the entire season in New South Wales and Victoria as well as southern Queensland. Early in the season, rainfall will also move along the southern borders of South Australia and Western Australia. Some typhoon activity could also occur thanks to the westerlies coming from Antarctica.



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July 07 2022

Commentary by Eoin Treacy

Email of the day on holding gold miners

Eoin, what is the rationale for continuing to own GDX when it has cracked through the $30 mark which you have been very confident about holding, and you have now sold Gold? If Gold is going lower still, GDX is going to go with it, likely with higher beta. I am left with GDX which has been a horror show, now down 40% in just a couple of months, and pondering what to do with it.

Eoin Treacy's view -

Thanks for this question which I’m sure others are asking. I was hopeful the $30 area would hold because it is the upper side of the base formation. Unfortunately, the market doesn’t listen to what I think. Life would be a lot easier if it did. I bought my initial position during the pandemic panic of 2020 because I thought it was a no brainer. That was the correct instinct but my second purchase was completed at too high a level, so now my total position is running a loss.



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July 06 2022

Commentary by Eoin Treacy

July 06 2022

Commentary by Eoin Treacy

Boris Johnson fights on but hit by new wave of resignations

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

New chancellor Nadhim Zahawi has urged unity after his predecessor, the health secretary, and several junior ministers walked out.

But the prime minister has been hit by six further resignations, taking the total to 16 in the past day.

It comes as he prepares for PMQs later and a grilling by senior MPs.

Mr Johnson's premiership has been plunged into crisis following the dramatic resignations of Chancellor Rishi Sunak and Health Secretary Sajid Javid.

They quit within minutes of each other on Tuesday following a row over Mr Johnson's decision to appoint Chris Pincher deputy chief whip earlier this year.

Their departures triggered a wave of resignations from more junior roles that has continued on Wednesday.

In six further departures ahead of PMQs, education ministers Will Quince and Robin Walker, Justice Minister Victoria Atkins, Treasury minister John Glen, and ministerial aides Laura Trott and Felicity Buchan have all walked out.

Eoin Treacy's view -

Boris Johnson is a proven vote winner, but it was widely reported when he became Prime Minister that he is not well liked by his party colleagues. That later point is now becoming relevant as demand for solutions to unfolding economic issues are in high demand. Regardless of efforts to remove him, the range of possible options to mounting economic, inflationary and energy challenges will be the same.



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July 06 2022

Commentary by Eoin Treacy

EU parliament backs labelling gas and nuclear investments as green

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

The new rules will add gas and nuclear power plants to the EU "taxonomy" rulebook from 2023, enabling investors to label and market investments in them as green.

Out of 639 lawmakers present, 328 opposed a motion that sought to block the EU gas and nuclear proposals.

The European Commission welcomed the result. It proposed the rules in February after more than a year of delay and intense lobbying from governments and industries.

Eoin Treacy's view -

I wonder if we are seeing the end of an era of idealism and the return of harsh Cold War realism. This is particularly relevant for Germany’s Green Party. The decision by the European Parliament gives cover to the Greens to embrace nuclear as a suitable alternative to coal. That’s not to ignore the fact that it would be a monumental step. However, since Annalena Baerbock is both the leader of the Green Party and is also the German foreign minister, she has firsthand experience of the lengths Russia will go to achieve its geopolitical aims. If the Greens are to embrace nuclear, now would be the ideal time.



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July 06 2022

Commentary by Eoin Treacy

A Battle of Inflation Versus Recession: Views on US Yield Curve

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

“The 10-year yield may have been depressed for a large part of the past 15 years or so because global central banks have increased their balance sheets substantially and have reduced the term premium at the long end of the curve. And so you can get around these possible distortions by focusing more closely on how the market is pricing central bank policy.”

“What you will see is, three to six months from now, most if not all of these recession-probability metrics that we get from the yield curve will begin to start flashing at least orange, if not red.”

No Sense
“The Fed is telling us that they want to go to 3.8% sometime in early 2023; the two-year yield is over 100 basis points below that level right now,” noted Jim Caron, chief fixed-income strategist at Morgan Stanley Investment Management.

“This doesn’t make any sense whatsoever -- unless one of two things: one, the market just doesn’t believe that the Fed is actually going to be able to hike in the way that they’re saying they will, or, something’s going to happen along the way.”

More broadly, “the markets are right now are surrendering to the fact that we’re likely to have a hard landing or a recession,” he said.

Eoin Treacy's view -

 Long-dated yields have generally tended to rise during periods of quantitative easing because the Fed crowds out other investors and reduces the risk in other asset classes. Therefore, there is less inclination to hoard bonds and more incentive to buy risk assets; both public and private. That suggests the argument QE depresses long-dated yields is wrong. 



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July 05 2022

Commentary by Eoin Treacy

Video commentary for July 5th 2022

July 05 2022

Commentary by Eoin Treacy

Euro Tumbles to 20-Year Low, Putting Parity With Dollar in Sight

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

“It is hard to find much positive to say about the EUR,” said Dominic Bunning, the head of European FX Research at HSBC. “With ECB sticking to its line that we will only see a 25bp hike in July – at a time when others are hiking much faster – and waiting for September to deliver a faster tightening, there is also little support coming from higher yields.” 

Money-market traders are betting ECB will deliver around 140 basis points this year, down from more than 190 basis points almost three weeks ago. The repricing gathered pace after a string of weak economic data last week, with traders trimming bets again on Tuesday after French services PMI was revised lower. 

Investors have also been more cautious on the euro due to the risk of so-called fragmentation, when economically weaker nations see unwarranted spikes in borrowing costs as financial conditions tighten. The ECB is expected to deliver further details of a new tool to backstop more vulnerable countries’ debt at their policy meeting later this month.

The losses Tuesday were compounded by poor liquidity and selling in euro-Swiss franc, according to three Europe-based traders. The euro fell as much as 0.9% against the Swiss franc to 0.99251, the lowest level since 2015. 

“The FX market is not back up to full liquidity given the US holiday,” said Mizuho’s Jones. “Any given size of trade is likely to have a greater impact on market movement.”

Eoin Treacy's view -

Russia’s calculus is simple enough. They are betting the economic pain European countries are enduring because of their support for Ukraine will be so great they will be willing to make a deal sooner rather than later.



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July 05 2022

Commentary by Eoin Treacy

Gold Drops to Six-Month Low as Dollar Surges on Recession Fear

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

Gold slumped to the lowest in more than six months as the dollar rallied amid growing recession fears that caused losses across risk assets.

The greenback surged to the highest in more than two years as investors retreated to the haven, putting pressure on bullion. US stocks briefly slumped more than 2% amid fears that the Federal Reserve’s rate hikes to damp inflation could cause a slowdown in the world’s largest economy.

A pronounced drop in the euro also aided the dollar’s gain, driven by bets that the European Central Bank will be slower to tighten monetary policy than the Fed. Recession concerns in the bloc are particularly acute due to fears Russia will cut supplies of natural gas. 

Gold fell 1.9% to $1,774.26 an ounce, after earlier touching the lowest since mid-December 2021. The Bloomberg Dollar Spot Index climbed 1.1%. Silver and platinum slid, while palladium edged lower.

Eoin Treacy's view -

The Dollar is not only rallying against the Euro and Pound. It is surging against just about every currency. The Bloomberg Dollar Index, which has less of a Euro weighting, is rallying to test the 2020 peak. The regular Dollar Index has already broken higher.



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July 05 2022

Commentary by Eoin Treacy

July 04 2022

Commentary by Eoin Treacy

July 04 2022

Commentary by Eoin Treacy

July 04 2022

Commentary by Eoin Treacy

Woman given one year to live is now cancer-free after experimental treatment

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

When she found out the cancer had spread to her lungs, chest bone and lymph nodes, she was given one year to live.

David spent the following six months undergoing chemotherapy, and had a mastectomy in April 2018. This was followed by 15 cycles of radiotherapy which cleared her of cancer.

However, the cancer returned in October 2019 when scans showed multiple lesions throughout David’s body.

David then decided to take part in a clinical trial where she was given experimental medicine combined with immunotherapy drug Atezolizumab, which she has injected every three weeks.

After two years on the trial, the mother-of-two has been declared cancer-free once again.

Eoin Treacy's view -

Roche acquired Genentech in 2009. Atezolizumab is the fruition of that merger and continues to make its way through clinical trials.
Immuno-oncology went through a significant bull market in 2016/17 as the promise of curing cancer looked realizable for the first time. The difficulty of creating a one-size-fits-all solution resulted in much of the enthusiasm being squeezed out of the sector. Nevertheless, the results are impressive even if the scalability is not a panacea.



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July 04 2022

Commentary by Eoin Treacy

Biden Might Soon Ease Chinese Tariffs, in a Decision Fraught With Policy Tensions

this article from the Wall Street Journal may be of interest to subscribers. Here is a section: 

Mr. Biden himself has said in recent weeks that he is considering a tariff cut, noting that the levies were introduced by the previous administration.

The U.S. and China signed a trade deal in 2020, but the U.S. kept most levies on Chinese imports as a means to ensure compliance with the accord's provisions, including promises to increase purchases of U.S. goods.

Beijing has fallen far short of that purchase commitment.

Ms. Tai, who was appointed by Mr. Biden, has repeatedly defended the tariffs as a useful tool in confronting China over its trade practices.

"The China tariffs are, in my view, a significant piece of leverage, and a trade negotiator never walks away from leverage," Ms. Tai told a Senate subcommittee meeting on June 22.

China has long pressed the U.S. to ease the tariffs, contending they hurt both countries.

"With inflation rates running high across the globe, the U.S. needs to lift all the additional tariffs imposed on China, as this will serve the interests of businesses and consumers and benefit both countries and the world at large," Chinese Foreign Ministry spokesman Wang Wenbin said at a June 15 press conference.

Eoin Treacy's view -

The Biden administration is panicking about inflation if they are truly considering removing sanctions on China. The one hallmark of this government has been the continuity of policy with regard to China so a change would likely be viewed by markets as positive and particularly so for China since they would be under much less pressure to comply with trade agreements.



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July 04 2022

Commentary by Eoin Treacy

Iran Slashes Cost of Its Oil to Compete With Russia in China

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

Russian exports to China surged to a record in May, with the OPEC+ producer overtaking its cartel ally Saudi Arabia as the top supplier to the world’s biggest importer. While Iran has cut its oil prices to remain competitive in the Chinese market, it’s still maintaining robust flows, likely in part due to rising demand as China eases strict virus restrictions that had crushed consumption.

“The only competition between Iranian and Russian barrels may end up being in China, which would work entirely to Beijing’s advantage,” said Vandana Hari, founder of Vanda Insights in Singapore. “This is also likely to make the Gulf producers uneasy, seeing their prized markets taken over by heavily discounted crude.”

Eoin Treacy's view -

An emerging disparity between the price of oil available outside of NATO and within NATO is not sustainable over the long-term. Eventually, that arbitrage will close. In a short-term scenario, Europe will economise, everywhere else will do whatever is necessary to boost supply. That would mean building pipelines, offshore drilling and relaxation of environmental concerns. At the same time, alternatives like new nuclear will need to be unabashedly championed. Without that concerted effort, a long-term scenario is industrial capacity will migrate to where energy is cheapest. That would gut Europe’s export model.



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July 01 2022

Commentary by Eoin Treacy

July 01 2022

Commentary by Eoin Treacy

US 10-Year Yield Slips Back Below 3% as Recession Fears Grow

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

The latest leg of the bond-market rally came after Fed Chair Jerome Powell said on Wednesday that the risk of harm to the economy from higher rates was less important than restoring price stability. Traders continue to expect another 75-basis-point rate increase in July, and swaps referencing Fed policy
meeting dates price in a peak rate near 3.5% in March 2023, followed by a drop to about 3% by year-end.

“The market is digesting increasing odds of recession,” said Janet Rilling, senior portfolio manager at Allspring Global Investments, which manages $541bn in assets. And it’s likely that “inflation will stay pretty elevated. So the Fed will continue to be aggressive” raising rates. 

In turn, she said the extent of the recent drop in Treasury yields means shifting to a more defensive posture. “Watching today’s movement, this could be presenting an opportunity here
to reduce duration.”

The market added to gains, amassed before the US trading day began as European bond markets rallied, after the release of personal income and spending data for May. Spending rose 0.2%, half the expected increase. The price index for purchases rose 0.6% versus an expected 0.7%, supporting the view that an
inflation peak is being established. 

Eoin Treacy's view -

I’ve seen a lot of commentary in the financial media about where R-star might reside. It’s a valuable discussion. Afterall, we all want to know what the real inflation-adjusted neutral rate of interest is. However, the discussion must be grounded in accepting that it is impossible to prove until after the fact.

Money supply doubled in the month to April 2020 and remained at an elevated month-over-month level for a year. That quantity of money printing has resulted in a significant inflation scare. It overstimulated demand at a time when supply was constrained from responding as quickly. The volume of outstanding debt is higher today than during any previous cycle, so investors are understandably troubled.  



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July 01 2022

Commentary by Eoin Treacy

Aussie Leads Commodity-Currency Selloff as Recession Risk Rises

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

Traders abandoned bets on commodity currencies to favor the dollar on Friday as the risk of a global recession weighed on key raw-material prices. 

The Australia’s dollar declined as much as 2% against the greenback to the weakest since June 2020, while New Zealand’s kiwi slid as much as 1.5% to its the lowest in 13 months. The Canadian dollar also fell, heading for its second loss in three days.

Data showing US consumer spending fell in May for the first time this year added to ongoing fears of a global recession amid mounting expectations for aggressive Federal Reserve rate hikes. Worries over domestic growth in other developed nations are also rising, especially as New Zealand economy’s unexpectedly contracted in the first quarter. 

“Commodity currencies prices aren’t under tremendous pressure yet, but you are starting to see them turn,” said Steven Englander, global head of Group-of-10 FX research at Standard Chartered. “For the first time in a long time, inflation isn’t the market discussion right now. The market discussion is about growth.”

Central banks are expected to keep tightening with traders pricing another 225 basis points of hikes in Australia and about 180 basis points in New Zealand by year-end, according to data compiled by Bloomberg.

That combination of poor growth prospects and aggressive rate hikes translates into “the worst of all possible worlds for commodities,” said Englander. 

Eoin Treacy's view -

After spending so long in lockdown, it would have been reasonable to expect Australia to go through the same trend of revenge spending as much of the rest of the developed world. Unfortunately, events are getting in the way. Growth is falling and inflationary pressures are forcing tightening. The Australian Dollar broke lower today to extend the drop below the psychological 70¢ level.



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July 01 2022

Commentary by Eoin Treacy

GM Sees Profit Down on Inventory Woes, Reaffirms '22 Outlook

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

General Motors Co. expects second-quarter sales and profit to take a hit due to supply-chain problems, but the automaker said it can make up for delayed production later this year and reaffirmed its full-year guidance. 

GM had 95,000 vehicles in inventory as of June 30 -- most of them built in June -- that can’t be sold until certain semiconductors arrive to finish assembly, according to a Friday securities filing. The carmaker expects to finish building those vehicles by the end of the year, allowing the company to keep its full-year guidance. 

The semiconductor shortage has eased, but carmakers continue to wrestle with the availability of certain chips. The shortfall has forced GM and others to either cut production at times or start assembling vehicles without some chips and finish them when supplies arrive.  

GM said second-quarter sales fell 15% due to production and supply issues. As big a drop as that is, it’s a sign of improvement from the second half of last year when supply-chain problems caused a sales shortfall of more than 40%.

Detroit-based GM said second-quarter profit will come in between $1.6 billion and $1.9 billion; the average of analysts’ estimates is $2.4 billion. 

Despite the hit to quarterly sales, GM is sticking to its expectations of 2022 net income between $9.6 billion and $11.2 billion, adjusted operating profit of $13 billion to $15 billion and adjusted earnings of $5.76 to $6.76 a share. 

Eoin Treacy's view -

GM’s issues with securing the types of chips they require for vehicles highlights the nuances within the sector and the challenges of managing global supply chains when demand ramps higher in an unpredictable manner.



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June 30 2022

Commentary by Eoin Treacy

Video commentary for June 30th 2022

Eoin Treacy's view -

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: consumer finance companies trending lower is a negative signal, bond yields contract, stocks begin to steady, lumber rebounds oil weak, copper extends decline, China steadies, European gas prices surge and local industrials trend lower, Australia pulls back sharply. 



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June 30 2022

Commentary by Eoin Treacy

New York Fed-Backed Yield Curve Is Set to Invert by September

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

At the end of May, the latest available data, the New York Fed’s recession gauge showed only a 4% probability of an economic contraction in the next 12 months. But if the forward market has it right, the model will signal a surging odds of a downturn soon enough. According to the New York Fed, the yield curve has predicted essentially every US recession since 1950 with only one false signal in 1967.

In the underlying spot market, the 10-year yield is still more than 100 basis points above Treasury bills -- but traders in the forward market expect interest rates will be hiked into restrictive economic territory before the year is out. 

Fed fund futures suggest Powell will raise borrowing costs by a total of about 125 basis points in July and September to close to 3%, around the highest since 2008. 

The predictive ability of the yield curve has stirred debate, and Powell has downplayed its significance. In March, he noted the metric he was more inclined to look at is the difference between bets on where the three-month rate will be in 18 months’ time and that same rate today.

Eoin Treacy's view -

The simple message from the bond market is if the Fed follows through on raising rates by another 175 basis points a recession is inevitable. Then comes the job of pricing in whether that is in fact likely.



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June 30 2022

Commentary by Eoin Treacy

Oil at $150 May Be Closer Than You Think

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

The global oil market is so tight on the cusp of the second half that a single, powerful jolt could unleash the furies and power prices toward $150/bbl within a few swift, brutal days. This is a high-risk environment for crude, as well as for global growth, inflation, and by extension for assets from equities to bonds.

Brent eased in June as the Fed stood up, recession angst built, and one or two faint signs of demand destruction crept into the mix. But the benchmark remains well up in 2Q, and wherever you look, market signals -- both esoteric and mainstream -- testify to extraordinarily tight conditions. Also of note, US stockpiles at the Cushing hub just hit the lowest since 2014, and OPEC+ (which meets today to assess policy) has scant spare capacity.

To say that a spike toward $150/bbl is entirely possible is not to say that the milestone will come to pass. But these are strange and rare times in energy markets that are being addled by war, sanctions, monetary-policy ructions, pandemic recovery, and the legacy impact of scant industry investment. Add to that roster of drivers, elevated weather risk, as well as scope for disruptions beyond those seen this week in Libya and Ecuador.

To get a sense of how much tension the market has, look at what sober-minded folk are saying. Shell CEO Ben van Beurden swung through Singapore this week and said the world is set for a “turbulent period” as spare energy production capacity is running “very low”. Significantly, he talked of a “fear factor” as a result of an “ever-tighter market”. Buckle up for the coming quarter.

Eoin Treacy's view -

There is no doubt inventories are tight and the dearth of investment means additional new supply will be slow to come online. It is, however, worth remembering the world is not running out of oil. Offshore exploration has all but disappeared. The reason there is a supply shortage is because much of the world has decided to stop attempting to produce more.



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June 30 2022

Commentary by Eoin Treacy

Chinese Property Titan Says Housing Market Has Reached Bottom

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

“In the short term, the market has bottomed out, but the recovery is a slow and gentle process and will take time,” China Vanke Co. Chairman Yu Liang said at the company’s annual general meeting Tuesday, according to a transcript posted on its WeChat account.
 
Yu cited a mild sales increase in May from April in first- and second-tier cities, adding that the recovery may become more distinct in June. That would be welcome news for developers, which are counting on a sales rebound to ease a crippling cash crunch that triggered a wave of defaults. 

A Bloomberg Intelligence gauge of developer stocks climbed as much as 2.7% to the highest in a month after Yu’s comments. Signs of improvement in the housing market have emerged after local governments eased some buying curbs and authorities cut mortgage rates. New-home sales in 17 cities monitored by China Index Holdings surged 89% so far in June from a month earlier, also helped by a loosening of Covid restrictions.

Eoin Treacy's view -

China Vanke is so well connected it may as well be part of the government. The fact its CEO is stepping out in front of the media and speaking up for the property market is a clear signal the government believes prices have fallen enough to begin remedial action.



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June 29 2022

Commentary by Eoin Treacy

Video commentary for June 29th 2022

June 29 2022

Commentary by Eoin Treacy

Lawyers, Guns and Money

Thanks to a subscriber for this edition of Grant’s Almost Daily. Here is a section:

The prospect of a bruising stretch for the pension industry at large colors the migration into the deeper end of the risk swimming pool. An analysis from Moody’s Investors Service last Wednesday projects a systemwide 12.2% loss over the 12 months through June 30, far below the assumed 6.8% return target. That shortfall would leave assets sufficient to cover 6.9 years of retirement benefits, down from 8.3 years in mid-2021 and the lowest figure since at least 2016.

Moreover, the ratings agency noted that “a persistent environment of high inflation would likely drive up wages for active employees and cost-of-living adjustments for retirees, increasing future pension obligations and governments' budget outlays.” State-directed efforts to contain raging price pressures may prove less-than-effective, as California Governor Gavin Newsom announced plans to distribute $1,050 direct stimulus checks to 23 million local residents “who are grappling with global inflation and rising prices of everything from gas to groceries,” his office declared.

Nothing a bit more leverage and alternative assets can’t fix.

Eoin Treacy's view -

The success of the FANGMANT shares is well understood. They benefitted from their all-in bets on 4G connectivity, and their market cap appreciation was amplified by the ballooning interest in ETF investing which concentrated flows in the largest names.

It is much harder to monitor the size of the private markets because they are unlisted by definition. The one thing we can be sure of is private markets have exploded in size since 2008. Their performance has been amplified by the exceptionally low interest environment.



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June 29 2022

Commentary by Eoin Treacy

MicroStrategy Buys $10M Bitcoin in Middle of Crypto's Big Chill

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

As of June 28, the company holds about 129,699 Bitcoin bought for about $3.98 billion, or $30,664 per coin, according to the filing. 

The Tysons Corner, Virginia-based enterprise software maker is expected to reveal a significant financial hit when it releases its second quarter 10-Q this summer, given its enormous exposure to the bellwether token, which has more than halved in value this year. 

Eoin Treacy's view -

With an enterprise value of $4.3 billion almost the entire notional value of MicroStrategy is tied to an unprofitable bitcoin position. It is far from the only company to be underwater on its bitcoin purchases.



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June 29 2022

Commentary by Eoin Treacy

Email of the day on real yields

Could you please explain how the Fed US Treasury H15 Constant Maturity 10 Yr Real Yield (H15X10YR Index) is calculated?

Eoin Treacy's view -

Thank you for this question which others may have an interest in. A lot of the answer can be found by comparing the chart of the constant maturity real yield with the TIPS chart.


The only difference I can see is that the constant maturity imputes an accurate bond yield with exactly 10-years to mature even when there is no bond that matches that exact maturity. I am growing progressively more distrustful of these kinds of measures which rely on TIPS. It's a very small market and the Federal Reserve is very active in it so it is unlikely to give an accurate depiction of what the real yield in fact is.



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June 29 2022

Commentary by Eoin Treacy

Social-Media Companies Face Regulatory Risk in California for Harming Children

This note may be of interest to subscribers. Here is a section:

A bill passed Tuesday by California's Senate Judiciary Committee could allow government attorneys in the state to sue social-media companies such as Meta Platforms, TikTok and Snap for the use of any design or feature that would cause children to become addicted to their platforms. This could have implications for these companies' regulatory and legal risk-management profile as they would have to pay a civil penalty of up to $25,000 per violation or up to $250,000 for a knowing and willful violation. Some 90% of teens aged 13 to 17 in the U.S have used social media, according to The American Academy of Child and Adolescent Psychiatry, which estimates that, on average, they are online almost nine hours a day, not including time for homework.

Eoin Treacy's view -

The user interface for social media apps is heavily curated to ensure it is addictive. That’s equally applicable to both adults and children. Therefore, it is reasonable to think there are going to be a large number of lawyers salivating at the chance to attack cash rich companies.



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June 29 2022

Commentary by Eoin Treacy

June 28 2022

Commentary by Eoin Treacy

Video commentary for June 28th 2022

Eoin Treacy's view -

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: downside key reversals for the Dow and S&P, Nasdaq 3% lower, oil firm, copper rolling over, Dollar firm, emerging currencies weak, Renminbi downside key reversal, H-Shares relative strength for now, 



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June 28 2022

Commentary by Eoin Treacy

Inventory Woes Lead to Another Margin Miss

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

Concerns about company margins have been in focus as stock prices have slid this year. Another major US corporation is reporting a miss, which may add to anxiety about the upcoming earnings season.

Nike’s fourth-quarter gross margin trailed estimates, with an 80 basis-point drop from the prior year, due to what the firm said were higher inventory “obsolescence reserves” in China, along with elevated freight and logistics costs. Production issues amid Covid shutdowns have been resolved, but shipping logjams are still an issue, boosting inventory as many items were stuck in transit.

Earlier this month, bellwether national supermarket chain Kroger also reported a profit-margin miss, because of some price cuts and higher supply-chain costs. That was exactly the combination of factors that’s been a source of worry about corporate profitability.

Nike shares initially popped in postmarket trading, but pared some gains. Watch for more from the company on its 5pm conference call. Meantime, big banks, like JPMorgan, BofA and Morgan Stanley, are announcing their shareholder payout plans in the wake of the Fed’s stress tests; shares were mixed with JPM dipping slightly.

Eoin Treacy's view -

Nike is another company dealing with high inventory levels. That’s stranded capital until the excess levels are worked off. Given the seasonal nature of many product lines and the industry practice of bringing out new designs on a regular basis, there is a clear scope that significant discounting will be required to clear stock levels. That’s good news for consumers, less so for Nike.



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June 28 2022

Commentary by Eoin Treacy

EU Nears Combustion Car Era's End as Italy May Drop Opposition

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

In an attempt to enable a compromise, Germany proposed adding in a non-binding part of the car emissions law a call on the commission to propose registering after 2035 vehicles running exclusively on carbon-neutral fuels. The addition is important to Germany and can be a bridge for the overall discussion, said Environment Minister Steffi Lemke. 

“We need a strong and fast CO2 reduction, but we need to keep openness on technologies,” she told the ministers. “We hope that this addition, which is important to the German government, hopefully this is agreeable and which can enable us to reach a joint acceptable solution.”

Eoin Treacy's view -

As a major energy importer the EU has a clear incentive to reduce dependence on imported fuels. That’s well understood. The other side of that argument is Russia is clearly of the opinion that if the EU does not wish to buy its exports, it will find customers that do.



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June 28 2022

Commentary by Eoin Treacy

Rupee Has RBI Backstop as $2B of FX Futures Roll Into July

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

The Indian rupee, which fell to a record low of 78.79 on Tuesday, may draw support from the rolling of over of nearly $2 billion in currency futures, positioning in the derivatives segment show, apart from central bank intervention.

The outstanding position in dollar/rupee futures contracts due to expire on June 28, have fallen by nearly $1.4 billion between Monday and Tuesday, while open positions maturing on July 27 have jumped by roughly $2 billion to $5.8 billion during the same period.

India’s monetary authority has been intervening across markets in recent months to defend the local currency with some analysts expecting it to weaken past 81 per dollar by year-end. The RBI has about $590 billion of forex reserves, after it ballooned to a record high of over $640 billion in September last year.

Eoin Treacy's view -

The Rupee might be short-term oversold but it is trending lower. This has been a significant breakdown and suggests the surprises will be on the downside even if in the short-term there is scope for a bounce.



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June 27 2022

Commentary by Eoin Treacy

Video commentary for June 27th 2022

Eoin Treacy's view -

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topic discussed include: China outperforming as Xi commits to hitting growth targets, Australia rebounds impressively following Wall Street on Friday, oil and gas extend gains, gold eases, copper pauses, bond yield firm. 



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June 27 2022

Commentary by Eoin Treacy

China Stocks Approach Bull Market as Investors Catch Up on Gains

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

Adding to a growing number of market participants turning more positive on Chinese shares, abrdn plc’s regional chairman Hugh Young said they look to be the best home for fresh money in Asia amid a tough investment environment.

“We are inclined to put more money into China again, depends on the portfolio,” Young said in an interview on Monday, adding that the firm underweights the country’s shares in portfolios. “It’s very hard to be super bullish about anything at the moment” but valuations in China are reasonable and the investing landscape could improve.

Deutsche Bank AG’s private bank global chief investment officer Christian Nolting said last week he was considering turning overweight on Chinese stocks and Morgan Stanley, Bank of America and Jefferies Financial Group all ramped up bullish commentary this month.

Eoin Treacy's view -

Xi Jinping’s statement that China will hit its growth target has been greeted with enthusiasm by investors. While COVID zero represents a challenge for growth, it increases the potential more liquidity will be made available. At present concerns about further inflating asset bubbles are on being downplayed.



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June 27 2022

Commentary by Eoin Treacy

Do U Dare to Dream?

Thanks to a subscriber for this report focusing on uranium, from BMO, which may be of interest to subscribers. Here is a section:

Playing Into a Number of Pertinent Thematics: The global push for energy independence following Russia’s invasion of Ukraine has provided a tailwind for uranium expectations, as nuclear build-outs are back in vogue. The role of uranium, and wider nuclear technology, in a low-carbon global economy is becoming ever clearer and is driving significant research and development into the next generation of technologies, just as happened with solar power around 2010. Given this pathway, we believe the uranium price will ultimately have to rise to necessary levels to stimulate the increased production required to match growing demand needs; hence, we have increased out L/T price to US$58/lb, from US$50/lb. Furthermore, government strategy in the U.S., potential Chinese exports of the Hualong reactor technology and development of small modular reactors (SMRs) all have potential to see demand surprise on the upside relative to our base case.

Eoin Treacy's view -

Sprott’s decision to enter the uranium market as a major buyer resulted in a major breakout in September 2021. The price quickly jumped from $11 to $20. Since then it has returned to unwind most of that advance.



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June 27 2022

Commentary by Eoin Treacy

The Return of Industrial Warfare

Thanks to a subscriber for this informative article by Alex Vershinin for RUSI (Royal United Services Institute for Defence and Security Studies). Here is a section:

Presently, the US is decreasing its artillery ammunition stockpiles. In 2020, artillery ammunition purchases decreased by 36% to $425 million. In 2022, the plan is to reduce expenditure on 155mm artillery rounds to $174 million. This is equivalent to 75,357 M795 basic ‘dumb’ rounds for regular artillery, 1,400 XM1113 rounds for the M777, and 1,046 XM1113 rounds for Extended Round Artillery Cannons. Finally, there are $75 million dedicated for Excalibur precision-guided munitions that costs $176K per round, thus totaling 426 rounds. In short, US annual artillery production would at best only last for 10 days to two weeks of combat in Ukraine. If the initial estimate of Russian shells fired is over by 50%, it would only extend the artillery supplied for three weeks.

And

The war in Ukraine demonstrates that war between peer or near-peer adversaries demands the existence of a technically advanced, mass scale, industrial-age production capability. The Russian onslaught consumes ammunition at rates that massively exceed US forecasts and ammunition production. For the US to act as the arsenal of democracy in defence of Ukraine, there must be a major look at the manner and the scale at which the US organises its industrial base. This situation is especially critical because behind the Russian invasion stands the world’s manufacturing capital – China. As the US begins to expend more and more of its stockpiles to keep Ukraine in the war, China has yet to provide any meaningful military assistance to Russia. The West must assume that China will not allow Russia to be defeated, especially due to a lack of ammunition. If competition between autocracies and democracies has really entered a military phase, then the arsenal of democracy must first radically improve its approach to the production of materiel in wartime.

Eoin Treacy's view -

China’s stated aim is to “reunite” with Taiwan politically by whatever means are necessary. This article from Taiwan News, focusing on the Koumintang’s (pro-unity party) recent stated pro-US stance may be of interest. 



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June 24 2022

Commentary by Eoin Treacy

June 24 2022

Commentary by Eoin Treacy

Markets Are Losing the Anchor of a Generation

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

There was one necessary condition underlying the bond market’s ability to shrug off the worst inflation numbers in a generation after only a week; nobody is really sure if they believe the Fed. Credibility is vital to central banks, and I argued for Businessweek on Thursday that it is indeed as important an anchor to the monetary system as gold used to be. A round trip like this showed extreme hesitance to accept the Fed’s guidance; arguably, the currency of its forward guidance has been adulterated.

That said, the Fed can’t have lost all credibility. The rebound in bond yields started Thursday morning as Jerome Powell began taking his second day of questions from Congress. Unlike on Wednesday, he said that his commitment to get inflation back down to 2% was “unconditional.” That, like many central banking pronouncements in the past, had an effect. But it's still concerning that the Fed needs to be more shrill to get its message across; it does look as the coinage of forward guidance is being debased:

Meanwhile, a telling indicator of how far sentiment has swung back toward bracing for a (disinflationary) recession comes from inflation breakevens. German inflation expectations have receded after a dramatic surge over the last 12 months, although they still remain higher than they were at the beginning of the year. The same is not true of US breakevens for average inflation over the next 10 years, and for the five years starting five years hence. Both are now lower than they were in May last year — an extraordinary fact given the extent of the inflationary shock since then, and the new geopolitical drivers for inflation that have arisen this year. If you’re convinced that much higher rates of inflation are on the way, along with higher interest rates to combat them, then the market is still making it very cheap for you to bet on that outcome

Eoin Treacy's view -

There is talk of the ECB raising rates in July, but Europe is already in a recession and Germany is fearful Russia will stop natural gas exports through the original Nordstream pipeline altogether. Against that background the ensuing economic contraction would make the case for interest rate hikes moot.



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June 24 2022

Commentary by Eoin Treacy

EV Has a Problem: 90% of the Battery Supply Chain 'Does Not Exist'

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

The EV battery problem is now serious enough that Rivian CEO RJ Scaringe recently warned that 90% to 95% of the battery supply chain “does not exist.” And Tesla CEO Elon Musk cautions that prices for lithium have already “gone to insane levels.” 

China is the world’s leader in EV battery production—with over 12 times the output of the United States. CPA’s research found that both China and Europe will continue to outpace the U.S. in EV battery production. By 2025, China will account for 56% of global battery production; the U.S. will account for just 19%.

Right now, much of the U.S. auto industry relies on foreign-owned battery technology—and focuses mainly on final assembly of batteries instead of the more complex challenge of designing and producing battery components. This contributes only a relatively small share of the value of overall battery manufacturing. Instead, America’s EV manufacturers need to jump into technical design, including innovation, intellectual property, and the materials science of battery component manufacturing—not just the assembly.

Eoin Treacy's view -

The irony is that most of the battery materials, from copper to nickel and lithium are mined in the Americas. Nevertheless, China successfully secured the resources due to an unerring commitment to ensure it has what it needs to further economic development. Maintaining that focus is probably easier for an energy importer than an exporter. National priorities tend to be shaped by domestic factors. One thing is for certain, without access to critical materials battery factories will be idle. The bear market in nickel and copper should ameliorate that situation.  



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June 24 2022

Commentary by Eoin Treacy

Permian Basin Facing Pollution Rules That Could Curb Drilling

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

The Biden administration is considering triggering tougher anti-smog requirements that could curb drilling across parts of the Permian Basin, the world’s biggest oil field that straddles Texas and New Mexico.

The Environmental Protection Agency is weighing labeling parts of the Permian Basin as violating federal air quality standards for ozone -- a designation that would force state regulators to develop plans for cracking down on that smog-forming pollution. The move, outlined in a regulatory notice, could spur new permitting requirements and scrutiny of drilling operations.

Ozone levels in the basin have surpassed a federal standard “for the last several years -- really since the fracking boom took off in the Permian,” said Jeremy Nichols, climate and energy program director for WildEarth Guardians. The conservation group formally petitioned EPA for the so-called non-attainment designation in March 2021 and, roughly six months later, warned the agency it intended to sue to force action. The designation “basically says you’ve got to clean up this mess or the consequences are going to get even more severe as far as restricting your ability to permit more pollution and more development,” he said. 

While Texas does not have monitors taking ozone readings on its side of the Permian, monitors just over the border in the Eddy and Lea counties of New Mexico have recorded average ground-level ozone levels exceeding the 2015 standard of 70 parts per billion several years running. Even at low levels, ozone can worsen asthma, emphysema and other respiratory illnesses.

If the region is deemed in violation, state regulators would have three years to develop plans for lowering ozone levels, including by preventing new industrial facilities from worsening air quality and ensuring existing sites deploy technology to keep pollution at bay.

The resulting uncertainty could constrain energy development in the region, said Todd Staples, president of the Texas Oil and Gas Association. “Creating uncertainty on permitting and inserting unnecessary regulatory barriers will only negatively impact the production necessary to meet the needs of consumers."

Eoin Treacy's view -

This a good example of how the trend of environmental legislation is an inhibiting factor to the continued supply growth of conventional fossil fuels like oil and gas. It appears unlikely the Biden administration will intervene to avoid intervention that could deter production.



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June 23 2022

Commentary by Eoin Treacy

Video Commentary for June 23rd 2022

Eoin Treacy's view -

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: copper extends breakdown with battery metals, stocks stable, bonds rebound, Dollar pauses, Powell mentions Fed balance sheet to contract by $2 to $3 trillion which suggests the end of tightening is not imminent.  



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June 23 2022

Commentary by Eoin Treacy

Currency War Breaks Out in a World Short on Fixes for Inflation

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

The European Central Bank’s Isabel Schnabel started it. In February she flashed a chart showing how much the euro had weakened against the US dollar. Two months later, the Bank of Canada’s Tiff Macklem bemoaned the decline of the Canadian dollar. Swiss National Bank President Thomas Jordan suggested he’d like to see a stronger franc. The US dollar had been soaring—now up 7% for the year—as the Federal Reserve prepared to aggressively combat inflation.

And so one by one, central bankers elsewhere, just as desperate to tame the relentless march of inflation in their own backyards, began sending not-so-subtle signals that they would for once welcome a stronger currency—which helps reduce the cost of imports by boosting buying power abroad. It’s a form of intervention so rare that their jawboning alone moved markets.

On June 16, two of them upped the ante: Switzerland surprised traders with the first rate increase since 2007, sending the franc soaring to its highest level in seven years. Hours later, the Bank of England announced its own rate increase and signaled bigger hikes to come

Eoin Treacy's view -

Competitive currency appreciation a viable defense against inflation. A stronger currency makes imports less expensive but also depresses the competitiveness of domestic export-oriented businesses. In the last week Norway raised by 0.5%, the Czech Republic by 1.25%, UK by 0.25%, Switzerland by 0.5%, USA by 0.75% and Brazil by 0.5%. The ECB appears likely to raised by 0.25% in July. Here is a link to global-rates.com which carries a useful monitor for short-term rate movements. 



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June 23 2022

Commentary by Eoin Treacy

Germany Warns of Lehman-Like Contagion From Russian Gas Cuts

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

“If this minus gets so big that they can’t carry it anymore, the whole market is in danger of collapsing at some point,” Habeck said at a news conference in Berlin that was called at short notice. “So a Lehman effect in the energy system.”

Europe’s largest economy faces the unprecedented prospect of businesses and consumers running out of power. For months, Russian President Vladimir Putinhas gradually reduced supplies in apparent retaliation over sanctions imposed over the invasion of Ukraine. The standoff escalated last week after steep cuts to the main gas link to Germany, putting reserves for the winter at risk.

The heightened alert tightens monitoring of the market, and some coal-fired power plants will be reactivated. At the current rate of gas inflows, Germany would need 116 days to reach its target to fill 90% of storage capacity, which would mean it would take until mid-October to do so -- a time of year that households would usually start consuming more gas for heating.

Eoin Treacy's view -

Germany had to nationalise the regional banks during the credit crisis, and they are still under state control. It is increasingly likely that at least part of the German natural gas business is going to be nationalised. That might well be necessary to smooth the potential for rolling blackouts for consumers and businesses this winter.



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June 23 2022

Commentary by Eoin Treacy

CATL Unveils EV Battery With One-Charge Range of 1,000 Kms

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

Contemporary Amperex Technology Co. Ltd. unveiled an electric-car battery it said has a range of over 1,000 kilometers (620 miles) on a single charge and is 13% more powerful than one planned by Tesla Inc., a major customer. 

CATL, as the world’s biggest maker of electric-car batteries is known, will start manufacturing the next-generation “Qilin” next year, according to a video the Chinese company streamed online Thursday. The battery charges faster than existing cells, and is safer and more durable, CATL said. 

The Qilin battery, named after a mythical Chinese creature, has an energy density of up to 255 watt-hour per kilogram, Ningde, Fujian-based CATL said. 

“It’s an important advancement for CATL as it keeps them at the forefront on the innovation side,” said Tu Le, managing director of Beijing-based consultancy Sino Auto Insights. “Being the lowest cost provider isn’t enough to command loyalty, there needs to be more to it -- and that seems to be the Qilin battery for CATL.”

CATL’s shares climbed 5.9% in Shenzhen, closing at the highest since Feb. 9. 

The company said Wednesday it raised 45 billion yuan ($6.7 billion) in a private placement of shares, with the proceeds intended for production and upgrade of lithium-ion battery manufacturing in four Chinese cities, as well as research and development.

CATL has experienced a wave of volatility this year, grappling soaring prices of raw materials as well as rumors of trading losses. Its first-quarter net income slid 24% from a year earlier to 1.49 billion yuan. The company hasn’t explained a 1.79 billion yuan derivatives liability, the first such charge since it listed.

Eoin Treacy's view -

The massive run-up in battery metal prices has put significant pressure on companies dependent on buying them to support their businesses. Lithium, copper, cobalt and nickel prices have surged this year as projections for future demand and low available supply created an inelastic trading environment. That created problems for nickel traders which resulted in a short covering price spike and lithium prices also surged to previously unimaginable levels.



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June 22 2022

Commentary by Eoin Treacy

Video commentary for June 22nd 2022

Eoin Treacy's view -

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: copper and nickel break lower, cyclicals now underperforming, Treasury yields contract, Dollar eases, gold steady, Wall Street bounces but fails to hold intraday highs, market continues to price in recession risk.  



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June 22 2022

Commentary by Eoin Treacy

Biden to Urge Gasoline Tax Pause as Prices Drag on Democrats

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

President Joe Biden will ask Congress to suspend the federal gasoline tax for three months, after his administration’s previous efforts failed to curb soaring pump prices that weigh heavily on his party’s political fortunes.

Biden will call for a pause in tax collections through September in a speech scheduled for 2 p.m. Wednesday in Washington, senior administration officials said. The national average gasoline price hit a record this month above $5 a gallon, even after Biden ordered a historic release from US reserves earlier this year.

Any pause, however, is fraught with contradiction. Lowering the price of gasoline may spur demand, potentially exacerbating supply imbalances already roiling markets. Biden entered office describing climate change as an existential threat and pledging to scale back US drilling; he’s now calling for measures to make fossil fuels less expensive, while all but begging oil companies to boost production and refining.

And it’s unlikely Congress will heed the president’s request, as many Democrats have concerns about the move and Republicans aren’t inclined to help Biden with his biggest political liability ahead of a critical election in November.

Eoin Treacy's view -

I tuned in to watch Jay Powell’s testimony in front of the Senate today. I was struck by how partisan the questioning was. Democrats are eager to shift blame for high prices and Republicans are eager to the pin the blame for high prices on the current administration. Tomorrow he speaks to Congress where a lot more people are up competing for re-election this year so the tone of the questioning is likely to be more aggressive. The tax holiday on gasoline is a crowd-pleasing measure which is unlikely to implemented. Meanwhile oil prices extended their decline as traders price in falling demand amid slowing growth.



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June 22 2022

Commentary by Eoin Treacy

Powell Says Soft Landing "Very Challenging," Recession Possible

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

Federal Reserve Chair Jerome Powell gave his most explicit acknowledgment to date that steep rate hikes could tip the US economy into recession, saying one is possible and calling a soft landing “very challenging.”

“The other risk, though, is that we would not manage to restore price stability and that we would allow this high inflation to get entrenched in the economy,” Powell told lawmakers on Wednesday. “We can’t fail on that task. We have to get back to 2% inflation.”

The Fed chair was testifying before the Senate Banking Committee during the first of two days of congressional hearings. In his opening remarks, Powell said that officials “anticipate that ongoing rate increases will be appropriate,” to cool the hottest price pressures in 40 years. 

“Inflation has obviously surprised to the upside over the past year, and further surprises could be in store. We therefore will need to be nimble in responding to incoming data and the evolving outlook,” he said.

 

Eoin Treacy's view -

“Very challenging” is likely a gross understatement. I was surprised to hear him say the economy is very strong and capable of withstanding additional interest rate hikes. Instead, I suspect we are going to see an abrupt fall off in the volume of goods traded as the cumulative effects of inflation cut into disposable income.



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June 22 2022

Commentary by Eoin Treacy

Simon Cowell Sings on Stage?! Metaphysic Will Leave You Speechless

This video from America’s Got Talent may be of interest. Here is a link.

Eoin Treacy's view -

The march of technological innovation is agnostic to what we might be comfortable with. In a world of heightening geopolitical stress, the capacity for deep fakes to become totally prevalent is non-trivial. If there was declining faith in the trustworthiness of media coverage before, that is only going to deteriorate in future.
 
This article from extremetech covering the development of swarms of drones acting in concert is also worthy of consideration. Here is a section:
 
The swarm has another interesting and somewhat alarming capability. The designers showed the algorithm can follow a human target through the environment with incredible accuracy. If one robot loses sight of the target because they walk behind a tree, another will be able to maintain visual contact. That means the first robot still knows where the target is and can pick up again on the other side of the obstruction. With more development, this technology could make it virtually impossible for a person to evade the swarm. What happens then is up to the operator of said drone swarm. 
 

This is what the future will look like but the war in Ukraine has also been a bonanza for drone manufacturers. They are the ultimate throw away device and future wars will largely be fought by machines.



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June 22 2022

Commentary by Eoin Treacy

June 21 2022

Commentary by Eoin Treacy

Video commentary for June 21st 2022

Eoin Treacy's view -

A link to today's video commentary is posted in the Subscriber's Area.

Some of the topics covered include: Hang Seng firms on support from China's credit impulse. US retail inventories surging which will hit demand for Chinese exports, Wall Street bounces, oil, copper and gold stable to weak, grains roll over, Treasury yields stable, Yen at new low.



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June 21 2022

Commentary by Eoin Treacy

Email of the day on gold and the Dollar

In the past both you and David thought that the precious metals where to be the last recourse for the currencies. Is that still a big factor for your bullishness vs the precious metals?

At the moment for the USA the dollar is very strong. Some, as u know, think it has overdone, peaked.

Is that the reason why you still like gold longer term.

Would appreciate your comments

Eoin Treacy's view -

Thank you for this topical question which may be of interest to the Collective. Gold is a monetary metal and does best when it is appreciating in every currency.

At present the Dollar is very strong and that has impeded gold’s performance in US Dollars. The strong performance of the Brazilian Real and Russian Ruble have had much the same effect on the price when denominated in those currencies. Gold is trending higher in Euro and is even more impressive from the perspective of a Yen-based investor.



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June 21 2022

Commentary by Eoin Treacy

Global Food Inflation Gets Reprieve as Wheat and Oilseeds Tumble

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

Agricultural commodities fell, offering some reprieve to rampant food inflation, as traders weigh incoming data on harvests and looming recessions in some major economies.

Wheat harvests are kicking off across the Northern Hemisphere, with analysts continuing to increase production estimates for some key growers like Russia after favorable weather. The US will give an update on its winter-wheat harvest progress later on Tuesday.

The prospect of recessions is also weighing on commodity prices, according to analyst Agritel. Subdued economies can mean lower fuel use or spur shoppers to cut back on higher-priced foods like meat. Chicago soybean oil is headed for its longest retreat since 2019, Paris rapeseed erased its year-to-date gain and Malaysian palm oil recently entered a bear market as rival producer Indonesia ramps up exports.

Eoin Treacy's view -

The oldest adage from the commodity market is the cure for high prices is high prices. I was in two different supermarkets yesterday and failed to find pasta for sale. Meanwhile the supply of instant noodles does not appear to have been impacted, probably because they are higher margin products. The leap in wheat prices and price sensitivity of consumers means demand destruction may already be setting in.



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June 21 2022

Commentary by Eoin Treacy

Chinese Developer Accepts Wheat, Garlic as Payment to Woo Buyers

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

As China’s property slump persists, one developer is trying to entice farmers to buy homes by accepting their crops as payment. 

Central China Real Estate Ltd. is offering to pay farmers as much as 160,000 yuan ($24,000) for their wheat to offset down payments for homes in its River Mansion residential project in Shangqiu, a city in Henan province, according to a Monday marketing post. Weeks ago, it offered to accept garlic from growers looking to buy homes in another project in Kaifeng city.

The move reflects how far some developers are willing to go to attract wary homebuyers as the economy slows and the industry endures a crippling cash crunch. Central China, the country’s 37th-largest builder, recently sought state support when its parent company agreed to sell a stake to the provincial government. 

Its perk to farmers appears aggressive. Central China was offering to buy wheat at 4 yuan a kilogram, higher than the record 3-3.1 yuan that China’s state stockpiling company was purchasing the grain for earlier this month. 

Landlocked Henan is China’s largest wheat-producing area. The country just had another bumper harvest of winter-sown wheat. 

Similarly for garlic, Central China offered to pay 10 yuan a kilogram last month. That’s higher than the 6.92 yuan wholesale price as of June 10, according to weekly data released by the commerce ministry. 

Eoin Treacy's view -

Property manias tend to start in prime areas and move progressively further into the hinterland. During a crash it is usually the third tier cities and far flung suburbs that see the most aggressive selling pressure. Eventually, even the prime areas take a hit. China’s tier 3 cities have seen an epic bull market in housing as capital fled the exorbitant prices in the tier 1 cities. It is a measure of how desperate the company is to make sales that it is now willing to accept volatile commodities rather than insist on cash.



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June 20 2022

Commentary by Eoin Treacy

Video commentary for June 20th 2022

June 20 2022

Commentary by Eoin Treacy

Germany turns to coal as Russia cuts gas supplies

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

The Greens party minister also said the country will rely more on coal-fired power plants to produce electricity. A bill providing the legal basis is making its way though parliament and should take effect quickly after discussions in the upper house on July 8. 

Using more coal to generate power is “bitter, but it’s simply necessary in this situation to reduce gas consumption,” he said. “We must and we will do everything we can to store as much gas as possible in the summer and fall.” 

Siegfried Russwurm, president of the German industry lobby group BDI, said the country should “stop gas-fired power generation now and get coal-fired power plants out of reserve immediately,” in an interview with Funke Mediengruppe published Saturday. Importing electricity from neighboring countries has its limits, he said.

Savings will also have to be made by the industry. An auction model will begin this summer to encourage industrial gas consumers to save fuel, which can then be put into storage, Habeck said, adding that the government is ready to take further measures if needed.

Eoin Treacy's view -

There is a lot of discussion in the financial media about the possibility the Eurozone will break up. I don’t see that as a realistic possibility. Europeans understand they are in a better position to oppose foreign adventurism together than apart. Putting cherished climate goals on the long finger is an example of the lengths they are willing to go to protect national interests.



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June 20 2022

Commentary by Eoin Treacy

Greenlight Presentation at Sohn Conference 2022

Thanks to a subscriber for this presentation by David Einhorn. Here is a section:

However, the Fed is limited in raising rates. Powell faces a problem that Volker didn’t have. We have $24 trillion of debt held by the public, which is over 6 times in the last 20 years.

Approximately $7 trillion has to be rolled in the next year. Every 1% increase in rates adds $70 billion to the deficit annually. So, raising rates to 4% would be an additional $280 billion, 85 would be $560 billion, and a full Volker 19% would be $1.3 trillion…and that’s just the first year.

Raising short rates will also cause a strain on the Fed’s financials, where assets are of long duration and the funding is at overnight rates $5 trillion of overnight liabilities costs an extra $50 billion per percent increase in interest the Fed will pay on reserves. I will let you figure out the rest of the math for bigger increases.

The fiscal situation has limited the Fed’s flexibility.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

The 1.5% increase in the Fed Funds rate so far this year has increased the deficit by $105 billion. Nevertheless, the Dollar has been firm and there has been little concern about the knock-on effects of this on government finances. That is because fiscal tightening is in effect even if it is not being talked about.  



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June 20 2022

Commentary by Eoin Treacy

UK Confronts 1970s-Style Problems With Strikes and Inflation

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

The UK this week will face up to surging inflation and labor strikes as well as a rising risk of recession in a series of setbacks that have echoes of the 1970s.

Strikes are likely to halt at least half of all trains for three days in the worst disruption to mass transit since Margaret Thatcher was prime minister. The teachers union also is set to ballot its members on a strike, adding to the list of professions considering action.

On Wednesday, inflation is set to rocket to a new 40-year high with the cost of goods leaving factories already racing ahead at a double-digit pace. Last week, the government confirmed the economy shrank in the three months through April, the weakest performance since a coronavirus lockdown.

 

Eoin Treacy's view -

The risk of a wage/price spiral is nontrivial in the UK. The effort to keep wage increases below the official inflation rate is obviously aimed at reducing that possibility but workers are understandably upset. The challenge is everyone feels the same way, but only the most organized unions have the collective bargaining power to achieve their goals. That’s going to further underscore the gap between the privileged and the underrepresented in society. Meanwhile transportation strikes fall most heavily on people who do not have the luxury of working from home.



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June 17 2022

Commentary by Eoin Treacy

June 17 2022

Commentary by Eoin Treacy

Biden Takes Swing at Inflation, Signs Law to Cut Shipping Rates

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

“One of the factors affecting prices is this: nine major shipping companies consolidated into three alliances controlling the vast majority, mostly shipping in the world,” Biden said.

“And each of these nine is foreign-owned. During the pandemic, these carriers increased their prices by as much as 1,000%.”

Attempts to “demonize ocean carriers” are not only inaccurate but dangerous because they undermine the ability to understand the root of US supply-chain problems, the World Shipping Council said in a statement.

“As long as America’s ports, rail yards and warehouses remain overloaded and unable to cope with the increased trade levels, vessels will remain stuck outside ports to the detriment of importers as well as exporters,” the WSC said. “Ocean carriers continue to move record volumes of cargo for our country and have invested heavily in new capacity – America needs to make the same commitment and invest in its land-side logistics infrastructure.”

Eoin Treacy's view -

Price controls are a lot easier to impose when the targets are overseas companies. The challenge is that insisting ships need to leave with full cargoes ignores the reality of a trade imbalance. China does not import the same quantity of goods from the USA that it exports. It’s impossible to send every ship back full, at a minimum loading empty containers is time consuming and additional layers of compliance raise costs and slow down turn around. Of course, there is also the possibility these measures could shift supply of ships away from the USA if the burden of regulation becomes too onerous.



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June 17 2022

Commentary by Eoin Treacy

Crypto Lender Babel Freezes Withdrawals as Industry Pain Spreads

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In a sign of deepening turmoil in the crypto community, Babel Finance became the second major digital-asset lender this week to freeze withdrawals, telling clients it is facing “unusual liquidity pressures” as it contends with recent market declines.

“The crypto market has seen major fluctuations, and some institutions in the industry have experienced conductive risk events,” the Asia-based lender and asset manager said in a notice on its website to explain the temporary measure.

Eoin Treacy's view -

Another day, another crypto exchange declines to allow withdrawals. Cryptocurrencies are pure liquidity plays so they are unlikely to recover until there is clear visibility on where the next outsized round of new money is going to come from.



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June 17 2022

Commentary by Eoin Treacy

Seagen Surges on Report Merck Eyeing Purchase of Company

This article by Caitlin Fichtel for Bloomberg may be of interest to subscribers.

Seagen jumps as much as 20% Friday, the most since February 2021, after Dow Jones reported that Merck is eyeing a purchase of the biotech firm, citing people familiar with the matter.

Merck gains as much as 1% Friday
Report adds that talks have been in progress for a while, although a deal is not imminent
Marketing agreement could be struck instead of full purchase
Other unnamed companies are also interested in Seagen

Eoin Treacy's view -

The biotechnology sector was overtaken by vaccine mania during the pandemic. A small number of companies led by Moderna quickly grew to dominate the weighting of the sector. For 18 months the biotech index behaved more like a small number of vaccine providers, than the wide array of solutions to intransigent problems the companies it is comprised by represent. The collapse of vaccine providers, as the immediate risk from this pandemic recedes, means the biotech sector is back trading on the individual merits of its companies.



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June 16 2022

Commentary by Eoin Treacy

Video commentary for June 16th 2022

June 16 2022

Commentary by Eoin Treacy

Traders Bet Dovish Bank of Japan to Capitulate After Swiss Shock

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

A Small BOJ Policy Change Should Have a Large Ripple Effect While Japan’s policy makers are expected to continue with monetary easing, there’s growing speculation in global markets about the potential for a shock decision. The BOJ has been keeping a lid on government bond yields since 2016 and defending that cap vigorously in recent days, but pressure is building to either alter its policy stance or give guidance on when that will end after the Federal Reserve’s biggest interest-rate hike since 1994. The yen rallied as much as 1.1% Thursday.

“As the BOJ is now the last central bank standing as regards easy policy, it’s unsurprising that bets against the BOJ are building,” according to Jeremy Stretch, head of G-10 foreign-exchange strategy at CIBC. While Stretch expects the central bank to stick with its current policy, “any suggestion of an adjustment to the YCC threshold would result in a material bounce in JPY valuations,” he wrote, referring to yield-curve control, in a note published Thursday.

Eoin Treacy's view -

The Dollar began to ease today as the risk of recession rises and other countries join the Fed in raising rates. The surprise more by both the SNB and BoE begs the question how long the BoJ can hold out against rising inflationary pressures. They will certainly be among the last to raise rates.



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June 16 2022

Commentary by Eoin Treacy

Russia's Gazprom continues cutting natural gas supplies to Europe just as customers try to build up inventories for winter

This article from Business Insider may be of interest to subscribers.

Gazprom said Thursday it was further cutting gas flows to Europe citing more technical issues with its Nord Stream pipeline, Reuters first reported. 

Russia's state-run supplier's latest reduction, the second in just two days, edges the Nord Stream's pipeline's capacity down by 40%. The move comes as European countries try to bulk up gas storage in anticipation of winter. European stores are currently 56% full, Reuters said. 

Gazprom said issues with a gas compressor lead to the initial reduction. The company said that a delay in equipment sent to Canada for repairs is to blame for Thursday's reduction in flows, a claim that Germany disputes as a reason to push gas prices higher.

European natural gas prices climbed as much as 30% Thursday morning on the news. Norway, Europe's second-largest supplier behind Russia, has increased exports to make up for a curb in Russian gas in light of the Kremlin's invasion of Ukraine. The EU pledged to be 90% rid of Russian supply by the end of 2022, and fully exit from Moscow-sourced fossil fuels by 2027. 

The EU has also turned to liquefied natural gas to make up for supply shortcomings in light of its sanctions against Russia, although a fire in Texas last week at a key export hub lowered supply expectations. 

Eoin Treacy's view -

Russia’s energy/economic military strategy will be most effective if it can prevent Europe from rebuilding inventories over the summer. The rationale is European politicians will be much more amenable to make concessions if their populations are cold and miserable this winter.



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June 16 2022

Commentary by Eoin Treacy

Rheinmetall Unveils New Tank as Arms Demand Set to Surge

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The German arms maker expects revenue to surge by as much as 20% per year driven by growing demand for military equipment, according to Chief Executive Officer Armin Papperger. Rheinmetall is boosting capacity and can at least triple ammunition production within the next twelve months, he told Germany’s Bild am Sonntag in an interview. 

The company also is able to double military truck output “because a lot of Cold War infrastructure can be reactivated fairly quickly,” the CEO said.

Rheinmetall’s first modernized Marder light tanks are also ready for delivery, Papperger said, adding that when and where the vehicles get shipped depends on the German government. Berlin has faced criticism for what some see as tepid commitments to deliver weapons to Ukraine.

Rheinmetall is currently updating 100 decommissioned Marder vehicles, 88 Leopard 1 tanks and additional Leopard 2 versions. The vehicles could potentially be delivered to Ukraine or replace equipment dispatched by other countries.

Eoin Treacy's view -

Spending money on arms is always easier when there is a war. The argument for modernizing the military apparatus of any country is more difficult without a clear urgent reason to do so. That’s especially true for democracies where competing priorities often take precedence and even more so for Europe with explicit protection guarantees from the USA. .



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