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September 27 2022

Commentary by Eoin Treacy

House Sales Collapse as UK Lenders Withdraw Mortgage Offers

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

Deals for house purchases are collapsing after lenders pulled mortgage offers in response to soaring interest rates.

Smaller lenders such as Kensington, Accord Mortgages and Hodge were among those to say they were withdrawing products Tuesday. That follows the decision by Lloyds Banking Group Plc -- the UK’s biggest mortgage provider -- on Monday to halt some offers, while Virgin Money UK Plc temporarily stopped offering home loans to new customers.

Major firms weighed in later Tuesday. HSBC Holdings Plc told brokers it was removing new mortgage products for the rest of the day while Nationwide Building Society announced that it was increasing rates across product ranges starting Wednesday. Banco Santander SA said it was removing some products and increasing rates on many others.

Jessica Anderson, a 33-year-old who works in publishing, was set to buy a house in Walthamstow, east London, with her husband until the seller pulled out last week.

“We’re in an uncertain position where we’re not sure whether it still stands,” she said, regarding the couple’s mortgage offer. “Since the approval there have been two interest rate increases.”

Eoin Treacy's view -

The UK housing market is at a significant point of peril because of interest rate uncertainty. Fixed rate loans typically trade at a 100-basis point premium over the 5-year government yield. At present that implies a mortgage rate of 5.7%.



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September 26 2022

Commentary by Eoin Treacy

Email of the day on batteries and the challenge of commodity supply

Congrats on your opinion on a larger correction and acting on it with put purchases.

Last week Double Line presentation  had a chart that showed the performance of equity and the different credit subclasses, Ags., EM, HY, ClOs and so forth. Showed  the large move by equities compare to credit over the same time period. It made me wonder how much further the equity correction can go.

You often follow interesting companies, you mention EQNR from Norway. have you ever looked a Freyr. It is also Norwegian and is involved in batteries. During  the last days because of a report on its possible growth it had a huge move , but during this correction it may be a good opportunity, let me have your thoughts. Based on your comments  how much the market has already priced in the EVs maybe it is not a good idea.

The move on copper is not a good signal  

Trust all is well for you  and your family

Eoin Treacy's view -

Thank you for these well wishes and questions which may be of interest to the Collective. Of my nine different long-dated put positions, the only one not in profit is Tesla and yet that is the one I have the greatest hopes for. They all have maturities in 2024, but I expect the point of maximum pessimism will arrive while they still have some time value.



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September 23 2022

Commentary by Eoin Treacy

UK's Biggest Tax Cuts Since 1972 Trigger Crash in Pound, Bonds

This article from Bloomberg may be of interest to subscriber's. 

Liz Truss’s new British government delivered the most sweeping tax cuts since 1972, slashing levies on rich households and companies in a bid to boost economic growth in a move that triggered a massive market selloff in UK assets.

Chancellor of the Exchequer Kwasi Kwarteng announced a series of tax cuts and regulatory reforms that will cost £161 billion over the next five years. That fanned concerns about inflation, already near a 40-year high, and about a spiraling government debt burden. 

The pound crashed below $1.11 for the first time since 1985, sliding 2% in addition to declines earlier in the week. Borrowing costs on five-year government bonds jumped the most for a single day on record as traders dumped UK assets.

“It is extremely unusual for a developed market currency to weaken at the same time as yields are rising sharply,” said George Saravelos, global head of foreign exchange research at Deutsche Bank AG. He warned the UK currency is “in danger” and suggested markets were treating it like a developing economy. 

The package was more ambitious than expected, with a big giveaway for the UK’s wealthiest households and plans to tear up planning rules and reform financial regulations. 

Kwarteng scrapped the 45% additional rate of income tax, paid by only the richest earners, leaving the top rate at 40%, and cut the basic rate from 20% to 19%. He paid only lip service to concerns about rising public debt, reiterating a pledge to “reduce debt as a percentage of GDP over the medium term.”

The Conservative administration hopes its program of lower taxes and deregulation will turbo-charge the economy, staving off a recession that the Bank of England says has already begun and shaking the UK out of a decade of weak growth.

 

Eoin Treacy's view -

In case it needs to be said, these are not Conservative policies. Cutting taxes and embarking on an historic fiscal stimulus while inflation is raging is not sound policy. It is only going to make the job of the Bank of England even more difficult and taxes will inevitably have to rise in future to fund these measures.



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September 23 2022

Commentary by Eoin Treacy

Brookfield plans 12-16 gigawatts of India renewables over next decade

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

Brookfield is looking to multiply its current 4 GW renewable portfolio by 3 to four times in India within the next decade in generation as well as help corporates make the transition to decarbonise and invest in building large scale supply chain in the country, said a top executive.

The renewables current assets under management is approximately $1 billion.

Earlier this year, Brookfield Asset Management announced that it raised a record $15 billion for its inaugural Global Transition Fund. This marks the world's largest private fund dedicated to the net zero transition, signaling that investors are still committed to establishing cleaner portfolios. Brookfield is the single largest sponsor of the fund having deployed $2 billion itself.

Brookfield deals with state utilities but sees incremental green power demand coming from corporates who are increasingly becoming bulk consumers. For example, as part of its road map to achieve 100 per cent dependence on renewable energy by 2025. Amazon on Wednesday announced its first utility-scale projects in India — three solar farms located in Rajasthan. These include a 210-megawatt (Mw) project to be developed by India-based developer ReNew Power, a 100 Mw project to be developed by local  developer Amp Energy India, and a 110 Mw project to be developed by Brookfield Renewable Partners.

Eoin Treacy's view -

Brookfield is the name that comes up in almost every conversation I have with investors. The name is treated reverentially because the team so artfully plotted a route through the Global Financial Crisis and the subsequent boom.



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September 22 2022

Commentary by Eoin Treacy

Email of the day on elevated valuations:

on today's video you highlighted the virtues of the NOBL Dividend Aristocrat index, but on closer inspection the yield on this is just 2%. A year ago, that was 4x the yield on short term treasuries in the US, but with 1 and 2- year treasuries yielding 4% now, double that of NOBL, there seems to be far less support from those seeking out yield.
The TINA approach is fast coming to an end. With that in mind, and with the Sterling continuing to take strain, what investment vehicles are available to us in the UK to invest in 3M, 1Y an 2Y US Treasury paper?

Eoin Treacy's view -

Thank you for this question which may be of interest to the Collective. There is of course a big difference between capturing a high yield now and buying with the expectation of dividend increases in future. It is essentially the difference between current yield and yield to cost.



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September 21 2022

Commentary by Eoin Treacy

Unspoken Rules

Eoin Treacy's view -

I have been thinking a lot about the aspects of the market we all tend to take for granted. The types of conclusions we have been conditioned to draw, because that is always how markets work. It strikes me as a big question because we should be asking if these market norms are the result of the decades-long process of disinflation or are they rules that transfer between big secular themes.

The basic working hypothesis of the markets is the Fed will rescue its stock market. The EU will rescue its bond market and China will rescue its property market. The rationale for all three is the same. That’s what they have always done because those are the biggest asset classes owned by consumers in all three jurisdictions.



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September 20 2022

Commentary by Eoin Treacy

Beyond Meat COO Arrested for Biting Man's Nose After College Football Game

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

His arrest is the latest blow to the plant-based protein company, which last month slashed its revenue outlook for the year and said it would cut 4% of its workforce.

Eoin Treacy's view -

The irony of a vegetarian food company executive taking bites out of unwary civilians put me in mind of Soylent Green. Afterall, the movie might have been released in 1973 but it is set in 2022. Here is a section from the Wikipedia description:  

By 2022,[3] the cumulative effects of overpopulation, pollution and an apparent climate catastrophe have caused severe worldwide shortages of food, water and housing. In New York City alone, there are 40 million people, and only the city's elite can afford spacious apartments, clean water, and natural food. The homes of the elite are fortified, with private security and bodyguards for their tenants. Usually, they include concubines (who are referred to as "furniture" and serve the tenants as slaves). The poor live in squalor, haul water from communal spigots, and eat highly processed wafers: Soylent Red, Soylent Yellow, and the latest product, far more flavorful and nutritious, Soylent Green.



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September 19 2022

Commentary by Eoin Treacy

Email of the day on global property prices

In the Big Picture Roundup, you shared this wonderful chart.

The problem is that the way that you shared it, means that we could not see the date axis.

It would be great if you could share a better version of this chart e.g., on Comment of the Day

Thank you in advance

Eoin Treacy's view -

Thank you for pointing this out. The aspect ratio between my monitor and the recording software is not always one to one. Here is the chart you were asking about.

What I like about this chart is it starts in 2000. It graphically illustrates that some property markets completely sidestepped the housing crash associated with the global financial crisis in 2008. These same markets, notably Australia, Canada, New Zealand and Sweden are expensive on a price/income and price/rent basis.



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September 12 2022

Commentary by Eoin Treacy

Thoughts from the Road

Thanks to a subscriber for this report from Mike Wilson at Morgan Stanley. Here is a section: 

After the discussion around earnings trajectory for the S&P 500, the focus then typically turned to how to trade it. Here, we have some sympathy for the view that markets may potentially hold up very tactically until the EPS cuts actually happen. As already noted, conference season is upon us and investors are ready for some bad news at least with regard to how 3Q is progressing. However, the degree of that deterioration is more debated now given the recently announced $500 billion student debt forgiveness and extended moratorium on loan payments until December, combined with the energy subsidy announced this past week in the UK to help consumers through the winter. Both of these are rather large fiscal stimulus packages that could keep the "tone" of company commentary less bearish than feared, and potentially delay the eventual cuts. Nonetheless, we have high conviction that EPS cuts will play out in earnest over the next 2-3 months, and as a reminder from our note last week, mid-September through October is a particularly challenging seasonal period for EPS revisions.

Eoin Treacy's view -

The yield curve (10-year – 2-year) inverted for a week in April and has been persistently inverted since June. The classic version of the yield curve (10-year – 3-month) is not yet inverted but it is still trending lower. This spread collapsed from an artificially elevated level in May. It tends to be much more volatile than the longer-dated version because short-term interest rates can whip around a lot.  



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September 07 2022

Commentary by Eoin Treacy

Email of the day on the S&P 500

Thanks for another very informative comment of the day. do you expect the SP500 to test the lows of 2020? I would very much like to hear your views on this. Thanks in advance. Best rgds.

Eoin Treacy's view -

Thank you for this topical question. As a repeat delegate at the Chart Seminar, you will remember that targets are more a reflection of personal bias than an accurate predictor of where prices are likely to trade. Since I am short the Nasdaq-100 I am keenly aware of the influence that has on my personal psychology and that is likely to affect how I view downside potential. Let’s look at the chart facts.



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September 07 2022

Commentary by Eoin Treacy

Lululemon stock soars as earnings show company's customers are still visiting its stores in droves and paying full price

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

"New guest acquisition remains strong, with transactions by first-time guests increasing over 20% in (the) quarter," McDonald told analysts on the company's earnings call, according to a FactSet transcript.

"Transactions by existing guests increased in the high teens. Traffic across channels remains robust, with store traffic up over 30%, and e-commerce traffic increasing over 40%. And importantly, we are not creating this traffic through markdowns or price promotions. Lululemon remains predominantly a full-price business, and we have not changed our promotional cadence or markdown strategy and we have no plans to do so."

Still, inventories rose 85% to $1.5 billion at quarter-end, up from $800 million in the year-earlier period. "The company believes its inventories are well positioned to support its expected revenue growth in the third quarter," it said in its earnings release.

An inability to clear inventories to make way for fresher products and steep declines in traffic to stores has plagued most other clothing retailers this earnings season.

Eoin Treacy's view -

Mrs. Treacy was complaining last week that her pickleball team’s Lululemon uniform was out of stock. In her search she found plenty of inventory on third party sites at more than 100% markups. That’s suggests robust consumer demand for the company’s products.

 



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September 05 2022

Commentary by Eoin Treacy

New UK Prime Minister

This note from Bloomberg may be of interest: 

Thanks for joining us as we took you through the results of the Conservative leadership race. Liz Truss will take office Tuesday and give a speech outside her new home -- No. 10 Downing Street. In the meantime, these are the key takeaways so far:

Liz Truss won the race to be the UK’s next prime minister, but achieved a smaller-than-expected margin of victory over Rishi Sunak, with 57.3% of Tory members’ votes.
She vowed to cut taxes, grow the economy, and address the crises in energy and the National Health Service.
Truss will visit Queen Elizabeth II in her Scottish castle to be formally appointed on Tuesday, after which she will make a speech to the nation and appoint members of her cabinet.
She inherits a forbidding in-tray: surging inflation, predictions of a recession and a record squeeze on living standards spurred by soaring energy prices.
Truss has promised to announce how she would help Britons through the cost-of-living crisis in her first week -- reports suggest she could freeze energy bills and offer targeted financial help to low-income households and pensioners.

Eoin Treacy's view -

The Pound and Gilts have sold off aggressively over the last month as traders priced in the rising potential Liz Truss would succeed Boris Johnson. The most urgent issue is the massive impending jump in electricity costs. No prime minister can survive through that kind of living standard decline, so price caps are inevitable.



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September 05 2022

Commentary by Eoin Treacy

China's Currency Struggles Spell Trouble Across Emerging Markets

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

“With the yuan set to weaken further, other emerging markets will face downward pressure on their currencies,” said Per Hammarlund, the chief emerging markets strategist at Skandinaviska Enskilda Banken AB. “The impact will be felt the most by nations which compete directly with China on exports.”

The yuan declined for a sixth consecutive month in August, capping the longest losing streak since the height of the US-led trade war in October 2018. It will fall even more and cross the psychological mark of 7 per dollar this year, banks including Societe Generale SA, Nomura Holdings Inc. and Bank of America Corp. say.

It’s a stunning reversal for a currency that stood out for its resilience at the outbreak of Russia’s war in Ukraine. In the days following the Feb. 24 invasion, the yuan was the only emerging-market exchange rate to avoid a decline, trading at an almost four-year high against MSCI Inc.’s benchmark index. Global demand for it deepened -- from countries like Russia and Saudi Arabia looking to reduce their reliance on the dollar to US bond investors seeking new havens.

Eoin Treacy's view -

China is the destination for most industrial commodity exports, so a weaker currency boosts domestic inflation. At the same time many countries in China’s hinterland compete with it for exports. A cheaper Renminbi forces them to also depress their currencies.



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September 01 2022

Commentary by Eoin Treacy

Entering The Superbubble's Final Act

Thanks to a subscriber for this article by Jeremy Grantham. Here is a section:

My theory is that the breaking of these superbubbles takes multiple stages. First, the bubble forms; second, a setback occurs, as it just did in the first half of this year, when some wrinkle in the economic or political environment causes investors to realize that perfection will, after all, not last forever, and valuations take a half-step back. Then there is what we have just seen – the bear market rally. Fourth and finally, fundamentals deteriorate and the market declines to a low.

Let’s return to where we are in this process today. Bear market rallies in superbubbles are easier and faster than any other rallies. Investors surmise, this stock sold for $100 6 months ago, so now at $50, or $60, or $70, it must be cheap. Outside of the late stage of a superbubble, new highs are slow and nervous as investors realize that no one has ever bought this stock at this price before: so it is four steps forward, three steps back, gingerly exploring terra incognita. Bear market rallies are the opposite: it sold at $100 before, maybe it could sell at $100 again.

The proof of the pudding is the speed and scale of these bear market rallies.
1. From the November low in 1929 to the April 1930 high, the market rallied 46% – a 55% recovery of the loss from the peak.
2. In 1973, the summer rally after the initial decline recovered 59% of the S&P 500's total loss from the high.
3. In 2000, the NASDAQ (which had been the main event of the tech bubble) recovered 60% of its initial losses in just 2 months.
4. In 2022, at the intraday peak on August 16th, the S&P had made back 58% of its losses since its June low. Thus we could say the current event, so far, is looking eerily similar to these other historic superbubbles.

Eoin Treacy's view -

Have we seen the secular peak in this market? That’s the only real question investors need to concern themselves with. The above statistics are certainly compelling, but the size of the rebounds should also be considered relative to the size of the initial declines from the peaks. Let’s round out that data.

1. The Dow Jones Industrials Average accelerated to the peak on September 3rd 1929. It fell 47.87% to the initial low on November 13th
2. The peak in 1973 was a failed upside break from a range that had been forming since 1966; with the Dow failing at the psychological 1000 on several occasions. That failed upside break resulted in a deeper pullback than any (25% & 36%) posted during the ranging phase. The failed downside break in 1974 resulted in a 75% rebound. It was another six years before a breakout to new highs was sustained.
3. Between March 10th and May 26th 2000 the Nasdaq Composite fell 40.72%.
4. Between January 7th and the low on June 17th the S&P500 declined 24.52%.



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August 31 2022

Commentary by Eoin Treacy

Greenland ice melt has already locked in 10 inches of sea level rise

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

 

To understand how this melting ice will impact sea levels around the world, scientists use computer models of ice flow and complex climate interactions. According to the authors of this new study, this approach has shortcomings in that they are imprecise and don't account for a number of factors scientists are observing in the field. These include more rain that is accelerating the melting of surface ice, an influx of tropical ocean currents into Greenland's fjords, and the darkening of the sheet surface that causes it to absorb more heat.

"We’re observing many emerging processes that the models don’t account for that increase the ice sheet’s vulnerability," study author Alun Hubbard, Professor of Glaciology at University of Tromsø, writes in an accompanying piece for The Conversation.

Eoin Treacy's view -

So if we change shorten the average from 40 years to 20 years and then linearly project that higher number forward, we get a headline grabbing doomsday prediction.

The problem with making such bombastic predictions is the capacity of the general population to sustain a feeling of terror is not infinite. Eventually people settle down into a fatalistic emotional state where they just don’t care anymore. Sea levels rising 10 inches by 2100 is not going to put food on the table today.

​It surprises me that there is still no widespread acceptance that improving living standards are the solution to just about every social or environmental problem.
When people are better educated and have solid working conditions, they have more regard for luxuries like a safe, clean environment. Take care of people and everything else takes care of itself.



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August 29 2022

Commentary by Eoin Treacy

ECB's Lane Urges 'Steady Pace' of Rate Hikes to Minimize Risks

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

Officials attending the Federal Reserve’s Jackson Hole gathering signaled the ECB is prepared to at least repeat the 50 basis-point hike enacted in July, with some not excluding an even larger increase. Executive Board member Isabel Schnabel urged “strong determination to bring inflation back to target quickly.”

While Lane didn’t spell out whether he’d oppose a 75 basis-point step, his comments suggest officials would need to see the need for a higher “terminal rate,” or high point of the current hiking cycle, for him to support such a move.

The Irish official said a “multi-step adjustment path towards the terminal rate also makes it easier to undertake mid-course corrections if circumstances change.” If new data called for a lower terminal rate, “this would be easier to handle under a step-by-step approach,” he said. 

Among the more cautious voices on the Governing Council is Executive Board member Fabio Panetta, who said last week that policy maker must tread carefully as a significant economic slowdown would ease inflationary pressure. 

Eoin Treacy's view -

The ECB has one of the most out of control inflation problems in the world. The pressure being exerted on the region from Russia’s energy war is not about to disappear. However, the successful filling of gas storage facilities ahead of schedule will moderate the risk of shortages this winter.  



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August 26 2022

Commentary by Eoin Treacy

Truss, Sunak Under Pressure to Clarify UK Energy Bills Support

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

With just 10 days to go until Boris Johnson’s successor as premier and Conservative Party leader is announced, neither candidate has detailed how much assistance they’ll provide to families and businesses who face soaring energy costs, despite Chancellor of the Exchequer Nadhim Zahawi conceding that the current support package is “not enough.”

Whichever candidate wins the Tory leadership contest, addressing the impact of rocketing energy bills will be at the top of their in-tray after Ofgem said on Friday that a price cap on average annual energy bills would rise to £3,549 ($4,206) in six weeks’ time. That’s 178% higher than last winter and 80% more than at present. 

Eoin Treacy's view -

The only questions considered are how much support to provide. Fiscal discipline is out of favour at present. With inflation and energy prices hitting living standards so aggressively, the UK government is under extraordinary pressure to ease the pain.



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August 25 2022

Commentary by Eoin Treacy

War and Industrial Policy

This report from Zoltan Pozsar at Credit Suisse may be of interest. Here is a section:

More broadly, the three “moments” of reckoning we discussed above mean that global supply chains, whether they produce military or civilian goods, are facing a Minsky Moment – a Real Minsky Moment. Paul McCulley’s term referred to the implosion of the long -intermediation chains of the shadow banking system that marked the onset of the Great Financial Crisis. Today, we are witnessing the implosion of the long -intermediation chains of the globalized world order: masks, baby formula, chips, missiles, and artillery shells, for now. The triggers aren’t a lack of liquidity and capital in the banking and shadow banking systems, but a lack of inventory and protection in the globalized production system, in which we design at home and manage from home, but source, produce, and ship everything from abroad, where commodities, factories, and fleets of ships are dominated by states – Russia and China – that are in conflict with the West.

Inventory for supply chains is what liquidity is for banks. In 2007 -08, big banks ran on “just -in -time” liquidity: the dominant form of liquidity was market liquidity, for which you could always sell assets into a deep market without moving prices, so you did not have to have liquidity reserves at the central bank. Similarly, big corporations today run “just -in -time” supply chains for which they assume that they can always source what they need without moving the price. But not really: the U.S. military has to wait a little bit as Raytheon “will take a little while”; Taiwan and Saudi Arabia have to wait as well until the conflict in Ukraine is over; and if your washing machine broke recently, you’ll have to wait a bit too until defense contractors are done buying them up to rip chips out to make missiles.

Eoin Treacy's view -

In propagating the Belt and Road Initiative, China has long complained that the USA’s policy towards it is one of containment. That has become more much overt since 2016. Sanctions on chip manufacturing capacity are an escalation. The rationale for such moves is obvious. The USA and Europe need time to rebuild domestic manufacturing capacity.



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August 24 2022

Commentary by Eoin Treacy

Heard on the Street: Tesla Rival Finds Its Lane

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

BYD is scouting lithium mines to protect itself from surging prices of the essential battery metal. Despite rapid sales growth, BYD's margins were hammered last year due to high raw material prices. Net margins fell to 1.4% in 2021 from 2.6% a year earlier, according to FactSet. That compares with Tesla's 10.3%.

There is some hope of that reversing however, as commodity prices retreat again and new, pricier models hit showroom floors: The models in BYD's launch pipeline are twice as expensive as prior ones, according to Goldman Sachs. The bank expects BYD's net margin to expand to 2.2% this year and 2.5% in 2023.

BYD has paid down debt rapidly in recent years and as of December had more cash and short-term investments on hand than debt according to FactSet -- a reverse of the situation as recently as June last year.

In the downside scenario of a nasty Chinese recession, that could prove to be an important cushion.

One obvious challenge at home will be getting buyers to pony up for pricier cars with China's economy, potentially at least, deep in the doldrums. But for now at least, the company seems confident. BYD, which reports on Aug. 29, said in July that first-half net income could climb as much as 207% to 3.6 billion yuan, equivalent to about $528 million.

Sustaining such heady numbers will be a challenge but with strong, cost-effective technology, an integrated supply chain and Beijing's determination to dominate the sector, it would be a mistake to count BYD out.

 

Eoin Treacy's view -

Chinese lithium carbonate prices are still close to CNY500,000 a tonne. Significant investment and political will are being devoted to boosting supply of the metal but that is a medium-term objective. Meanwhile, nickel, copper, cobalt and manganese have all retraced much of their initial price spikes. That’s more about less demand than a sudden increase in supply.  



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August 22 2022

Commentary by Eoin Treacy

August 19 2022

Commentary by Eoin Treacy

Larry Summers on Inflation and 'the New McCarthyism'

This interview has some interesting nuggets. Here is a section on male employment:

We have a large number of people who are estranged from our economy. In 1960, 5% of men were not working between the ages of 25 and 54. Today it’s more like 15%. If 15% of men are not working at any point in time, then a quarter of the people will have been out of work for a year or more over a four or five-year period. That’s destructive to the economy's productive potential. It’s destructive to their families. It’s destructive to the areas in which they live. It’s destructive to the moral fabric of our national life.

Eoin Treacy's view -

I recently finished reading Coming Apart by Charles Murray. It’s a harrowing account of how the polarization in the economy is manifested in a growing rift between the privileged, insulated upper class and a benefits-dependent underclass.  



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August 17 2022

Commentary by Eoin Treacy

UK Inflation Hits Double Digits for the First Time in 40 Years

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

“UK CPI inflation surged in July amid rising food prices that helped lift the rate above market expectations. The peak is still likely come in October, when energy prices are due to be increased again -- we see annual CPI moving to a little below 13% at that point. With inflation now more than five-times the Bank of England’s target, the question isn’t whether the central bank will tighten, it’s by how much? Today’s reading makes it more likely than not that the BOE lift rates by 50 basis points in September -- our baseline ahead of the data release was for a 25-bp move.”

Economists are growing increasingly pessimistic about the UK, with the risk of a recession now seen as far more likely than not due to rising cost pressures. The BOE expects a recession to start in the fourth quarter, lasting into the early part of 2024.

The central bank expects inflation to surpass 13% later this year when regulators allow energy bills to rise again. That would mark the worst reading since September 1980, when Margaret Thatcher’s government struggled to bring a wage-price spiral under control.

 

Eoin Treacy's view -

In the normal course of events UK inflation should have peaked already. Money supply growth peaked on a year over year basis 18 months ago and on a month over month basis is now negative. At the same time the Bank of England has been raising rates, albeit modestly, for the last eight months and is now also talking about reducing the size of its balance sheet.



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August 12 2022

Commentary by Eoin Treacy

Email of the day on the big question

Q: Are we in a bear or a bull?

Eoin Treacy's view -

Thank you for voicing the question I believe everyone is asking. The short answer is yes, the long answer is more nuanced. Let’s frame this discussion in terms of the yield curve spread. The 10-year – 2-year is sharply negative. The 10-year – 3-month and the 10-year – Fed Funds Rate have both accelerated lower but are not yet negative. All three point toward significant monetary tightening. That is before the impending acceleration in the contraction of the Fed’s balance sheet is 



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August 11 2022

Commentary by Eoin Treacy

Email of the day on surging electricity prices

I know you have consistently highlighted the challenges that UK households will experience in relation to their energy bills, and just today they are saying that "typical" households could be paying nearly £600 in January, money that most just can't find. Already consumers are a collective £1.3 billion in arrears on their bills, with an expected 86% hike in the energy cap expected on 1 October.

But far less is said of the impact on businesses, and on this I can shed some very specific light. I own a small business, an indoor children's play centre. On 1 December last year I renewed my energy supply contract, and faced with an increase then from 15p/kwH to 20p/KwH I opted to take just a 1 year renewal, with gas prices fairly stagnant until then as you know.

I have been informed today that when I come to renew once more on 1 December, I am going to staring at a tariff of anywhere between 50p/kwh to as much as 89p/kwh. I was also told in no uncertain terms by the 'sales' person at my current supplier, that they are trying to migrate away from small and medium business in this environment, and are deliberately pricing us away. the daily fixed standing charge will move from £83 per month, to potentially as much as £1,000.

For context, my own energy bill is going to shift from £20k per year to closer to 60k-£70k. This is going to be catastrophic for U.K. businesses, as many will be left in dire straits, unable to keep the lights on, and customers cool (in summer) or sufficiently warm in the winter. So many businesses in the hospitality sector especially are saddled with the burden of Covid "bounce back loans", delayed VAT repayments, and of course huge inflation on input costs with a consumer at breaking point. Business closures = higher unemployment...it is looking particularly dire here in the U.K.

Eoin Treacy's view -

Thank you for sharing this visceral experience of price increases business owners are experiencing. The challenges are significant and options to raise prices are inhibited so many businesses will close. The strike action in the UK which has been building for months and will escalate further. They are a symptom of how much living standards are being impacted by the rising cost of living.



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August 10 2022

Commentary by Eoin Treacy

Cooler Inflation Takes Fed's Rate-Hike Size "Down to the Wire"

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

“This is a necessary print for the Fed, but it’s not sufficient,” Pond said. “We need to see a lot more. You can think about this print as sort of like the weather -- it’s better today than it has been over the past few days. But it’s still summer. There’s still a lot of humidity out there. It’s not great. So it’s in the right direction. But we’re certainly not there yet.” 

For Diane Swonk, the chief economist at KPMG LLP, the Fed is now hedging against risk of future supply shocks as well as combating current inflation and will likely favor a 75 basis-point increase.

“The Fed is no longer willing to rest on their laurels on a one-month move,” she said. “The greater risk for the Fed is to stop too soon than stop too late. It will take a lot more cooling than this for the Fed to shift its decision rule, although in this economy, September seems an eternity away.”

Eoin Treacy's view -

The big question for investors is whether the Federal Reserve will focus on core or non-core items in how much they decide to raise rates in September. Commodity price inflation is less urgent today than earlier this year. Lumber prices have made a full round trip. Wheat has fully unwound the Ukraine invasion surge. Palm Oil is steadying in the region of the 2008, but the price has almost halved from the peak level. 



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August 09 2022

Commentary by Eoin Treacy

Recession Watch Spreads as Global Curves Follow Treasuries Trend

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

Bond investors in New Zealand are not as sanguine. Yields on two-year debt are just two basis points below 10-year rates, the narrowest gap since 2015 when the curve last inverted. The difference between Australia’s 10- and three-year bond futures stands around 17 basis points.

Much of the fears in Australia and New Zealand are centered on concerns about the housing market, which experienced a post-pandemic boom when borrowers piled in to take advantage of record-low interest rates. The two central banks have indicated that borrowing costs will continue to rise.

“The Australian economy is already showing some cracks -- weak consumer sentiment, falling dwelling prices, cooling consumer spending -- and New Zealand’s economy is showing more,” said Andrew Ticehurst, a rates strategist at Nomura Holdings Inc. in Sydney. “Australia will slide into recession in the second quarter of next year under the weight of recent and prospective RBA rate hikes, which will expose Australia’s Achilles’ heel, an extended housing market and highly leveraged consumers.”

Australian consumer confidence dropped for a ninth straight month in August to reach a two-year low, according to a report released Tuesday by Westpac Banking Corp.

Eoin Treacy's view -

The yield curve spread (10-year – 2-year) is a reliable lead indicator for US recessions. It does not have nearly the same strong record of predicting recessions for other countries. That is probably because other countries do not rely so heavily on their banks for credit creation. 



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August 08 2022

Commentary by Eoin Treacy

Assessing the Macroeconomic Consequences of the Inflation Reduction Act of 2022

Thanks to a subscriber for this report from Moody’s. Here is a section:

Lawmakers appear close to passing into law the Inflation Reduction Act of 2022. The legislation is born out of the Build Back Better agenda that President Biden proposed more than a year ago. It raises nearly $750 billion over the next decade through higher taxes on large corporations and wealthy individuals and lower Medicare prescription drug costs, to pay for nearly $450 billion in tax breaks and additional government spending to address climate change and pay for lower health insurance premiums for Americans benefiting from the Affordable Care Act (see Table 1). The remaining more than $300 billion goes to reducing the federal government’s future budget deficits (see Chart 1). Broadly, the legislation will nudge the economy and inflation in the right direction, while meaningfully addressing climate change and reducing the government’s budget deficits.

Eoin Treacy's view -

The renewable energy sector rebounded emphatically on the prospect of additional subsidies last week. Removing the limitation on EV rebates so every buyer gets a $7500 discount and reinstating the 30% tax credit for solar installations are both stimulative for their respective sectors.



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August 05 2022

Commentary by Eoin Treacy

Treasury Yields Leap as Jobs Data Spur Bets on Bigger Fed Hikes

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

Yields on two-year Treasuries surged in response to the jobs report, a reflection of the expected Fed rates over that period. Market pricing indicated a 75 basis-point increase to the Fed’s key rate is now seen as a more likely outcome in at the central bank’s September meeting than 50 basis points.

Powell has described the labor market as “tight to an unhealthy level,” and has been seeking a moderation to help bring demand for products and services more in line with supplies that have been constrained by Covid-19 disruptions. He and other Fed leaders are worried about the potential for a wage-price spiral, with higher wages feeding into inflation in a cycle that is hard to break.

“This number is so comprehensively strong with a pretty significant uptick in wages,” said Mark Spindel, chief investment officer at MBB Capital Partners LLC in Chicago. “Companies are paying up for labor. Income matters most. When you look at the breadth of the employment report, and the earnings, this is an enormous tailwind for income.” 

Eoin Treacy's view -

It has been widely reported that the USA has missed out on 2 million immigrants following the isolationist policies adopted by President Trump’s administration. At least 1 million of those would have been highly educated/skilled individuals.



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August 04 2022

Commentary by Eoin Treacy

BOE Gives a Lesson in Honest Central Banking

This article by Mohamed El-Erian for Bloomberg may be of interest to subscribers. Here is a section:

The Bank of England is reminding the world what a politically independent central bank can and should do: act as a “trusted adviser,” willing to share analytically honest views that other more politically sensitive institutions are either unable or unwilling to do.

Of course, this is not a risk-free approach. Such honesty — rather than catalyzing appropriate responses from policy-making agencies that lead to better economic and social outcomes — can provoke household and corporate behaviors that accelerate the bad outcomes. Yet the risks involved are worth taking, especially when the alternative is a central bank that loses institutional credibility, sees the effectiveness of its forward policy guidance erode and becomes even more vulnerable to political interference.

It should also be noted that the UK’s situation differs in some important way from those of other countries. The country’s economic challenges are complicated not only by the energy price catch-up but also by the political transition and the changing nature of the country’s relations with its trading partners.

Eoin Treacy's view -

In the last six weeks gilt yields have pulled back aggressively from 2.75% to test the region of the trend mean around 1.75%. This is the first area of potential resistance and is the point at which traders will begin to question how likely a long-term low interest rate environment is.  



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August 01 2022

Commentary by Eoin Treacy

From Profits to Pay, JPMorgan's Gold Secrets Spill Out in Court

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

JPMorgan holds tens of billions of dollars in gold in vaults in London, New York and Singapore. It is one of four clearing members of the London market, where global gold prices are set by buying and selling metal held in a few London vaults -- including JPMorgan’s and the Bank of England’s.

JPMorgan is the biggest player among a small group of “bullion banks” that dominate the precious metals markets, and internal documents presented by prosecutors provided a glimpse of just how dominant a role the bank has played. 

In 2010, for example, 40% of all transactions in the gold market were cleared by JPMorgan. 

And

Another set of important clients were central banks, which trade gold for their reserves and are among the biggest players in the bullion market. At least ten central banks held their metal in vaults run by JPMorgan in 2010, according to documents disclosed in court. 

Eoin Treacy's view -

With such a large position in the gold market, JPMorgan has both significant information and motive to swing prices in the interests of its trading desks on an intraday basis. That’s not quite the same as saying they have the capability to depress pricing over a prolonged period. That kind of overt manipulation would quickly attract the attention of other market participants and opposing positions aimed at pressuring the bank would be taken.



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August 01 2022

Commentary by Eoin Treacy

India's GDP can grow to $40 trillion if working-age population gets employment: CII report

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

“The golden period of 30 years between 2020-50 where our working age population will bulge can be an important horizontal enabler to bolster growth, even as the developed world including China ages,” the report notes.

The report adds that over the years, India has experienced rising literacy rates, but level of vocational training/skilling is low, which gets reflected in the high unemployment rate among the educated. “Closing the skill gaps of its qualified workforce will be critical, as India depends more on human capital than its peer countries that have a similar level of economic development,” it said, adding that skilling and reskilling require a coordinated response from the government, industry, academia even as COVID continues to cause structural changes to the workplace.

“The reversal in India’s structural transformation back toward agriculture is a sign of fall back to subsistence employment. Enhanced safety nets through PM-KISAN and the MGNREGA will be critical investments needed to ensure that incomes of small and marginal farmers are protected and their basic needs are met… But manufacturing and services will still have to be the two key growth engines going forward,” it said.

Eoin Treacy's view -

Given the trajectory of emerging market development over the decades, it is stating the obvious that India needs to do whatever is necessary to improve employment opportunities for its millions of young people. The fact the conversation is taking place is at least a good starting point.



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July 28 2022

Commentary by Eoin Treacy

Email of the day on energy prices

Fyi, have finally bit the bullet and fixed energy price with EDF for 2 years until July 2024.

The Nord Stream pipeline 1 issue over the last few days made me make the final decision.

Would welcome Mr Treacy comment about the recent events with Russia cutting supplies and short and medium-term implications. Will we ever see the energy prices normalize? His comments are always very insightful.

Eoin Treacy's view -

Thank you for sharing your experience and this question which may be of interest to the Collective. Russia has a clear interest in Europeans being uncomfortable this winter. Wars are expensive. Quick victories are always desirable. That’s not always how things work out but eventually every war ends with some form of negotiation or withdrawal.



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July 27 2022

Commentary by Eoin Treacy

Morgan Stanley's Slimmon Recommends Bargain Hunting in August

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

For Slimmon, the beat-down in consumer sentiment has gone far enough to warrant betting on a turnaround.

“There’s a very low expectations in those stocks right now. What if the direction of change is actually higher for consumer sentiment?” he said. He views the risk-reward as attractive.

“Those stocks might recover dramatically because they’re down so much.” He plans to snap up shares “well into the weakness” in August, which is among historically the worst months for equities as volumes are thin and workers are on vacation.  

Stock market moves during this period are usually dominated by macro events. “The macro story this year is not very good,” he said, citing a global geopolitical crisis and the lack of an August meeting among Fed officials.

“The focus of the market shifts from what ultimately long-term drives stocks, which is earnings. And when the shift goes to other things like macro events that creates volatility.”

As for those areas he will likely stay away from, he offered two sectors. “If you think about what’s worked year-to-date on a relative performance basis, there are two groups that have really done well: energy and defensives,” he said. “It’s a little late to be selling the energy stocks. They’ve been so creamed. I wouldn’t be aggressively buying those stocks.”
 

Eoin Treacy's view -

Many investors are anticipating the Jackson Hole conference in August will be a time for central bankers to declare the peak for inflation is in. The most risk tolerant traders are initiating long positions today to ensure they have the cushion of rebound ahead of that event. There is clear scope it will be a buy the rumour and sell the news event if central bankers fail to deliver.



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July 26 2022

Commentary by Eoin Treacy

Diabetes breakthrough restores insulin production using existing drug

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

The team says that the new potential treatment has a few advantages over other techniques currently in use or under development. Pancreas transplants are effective, but subject to organ donor shortages and other complications like rejection. Other teams have converted skin cells into stem cells and used those to produce new beta cells, and although results have been promising in mice, immune-suppressing drugs need to be given to prevent rejection.

The new treatment would work much faster, within a matter of days, and without the need for surgery. But perhaps the biggest advantage is that GSK126 is already approved by the US FDA and elsewhere in the world as a treatment for cancer. Its safety profile is already being assessed in clinical trials, which could reduce hurdles down the road for its use against diabetes.

That said, the scientists caution that it is still very early days. These experiments were conducted on cells in culture – not even in animals yet – so there’s still plenty of work to do. Nevertheless, it remains an intriguing new possible tool.

Eoin Treacy's view -

Diabetes is the ultimate money-spinning chronic disease. It is manageable for Type-2 patients if they have the personal discipline to abide by a low sugar diet. The problem is most people who end up with diabetes suffer from poor impulse control or are happy to take the drug regime prescribed to live as they please. The number of patients continues to trend higher as living standards rise and every day provides a bounty that would once have been reserved for festivals.



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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 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 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 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 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

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 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 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 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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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 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 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 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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May 23 2022

Commentary by Eoin Treacy

Shipping's $500 Billion Profit Can Take on Amazon

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

Besides splurging on dividends and share repurchases, the once-scarcely profitable container lines are planning to use this once-in-a-lifetime haul for acquisitions and investments. Some aim to turn themselves into end-to-end logistics giants, in the vein of Amazon.com Inc. or FedEx Corp.

In theory, this should make them more resilient when shipping freight rates normalize, which is bound to happen one day. Shipping costs have already come down a bit, but due, in part, to the spread of omicron in China, some industry observers now don’t expect port congestion to ease until next year. 

Of course, the big risk is these hungry hippos waste their epic windfall on empire building, and an industry that’s already on the defensive due to its inflation-stoking profiteering may end up stoking an even greater political backlash.

It’s a sign of how the ambitions of the shipping industry have been transformed that a container liner joining forces with an airline no longer seems unusual: Mediterranean Shipping Co. is angling to acquire a controlling stake in Italian flag carrier ITA Airways, while the billionaire principal shareholder of Germany’s Hapag Lloyd, Klaus-Micheal Kuehne, has built a 10% stake in Lufthansa AG. In addition to expanding its own air-cargo fleet, Maersk agreed to acquire air-freight forwarding specialist Senator International in November.

Eoin Treacy's view -

The two things that bring down shipping rates are softer demand from lower economic growth and a surge in supply of new ships. If shipping companies are spending some of their windfall on logistics or airlines, that does nothing to increase the supply of new ships.



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May 23 2022

Commentary by Eoin Treacy

Bank Stocks Gain on JPMorgan's Biggest Rally Since November 2020

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

JPMorgan Chase & Co. jumped by the most in 18 months as upbeat comments from Chief Executive Officer Jamie Dimon on the US economy and improved guidance helped drive bank shares higher.

Shares of the JPMorgan rose as much as 7.1% on Monday, the most since November 2020, after the start of the company’s investor day, when it boosted its annual forecast for net interest income excluding its markets business and maintained its expense outlook. The KBW Bank Index climbed as much as 4.4%, with Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. all gaining more than 5%.

Wells Fargo banking analyst Mike Mayo said in a note to clients that the biggest takeaway from JPMorgan’s gathering so far is that it shows there’s “no recession imminent.” JPMorgan’s presentation was bullish for the company and “even more so for the industry,” he added.

Bank shares have been under extensive pressure this year as worries that an aggressive series of interest rate hikes by the Federal Reserve could plunge the US economy into a recession. The KBW Bank Index has fallen 25% since hitting a record high in early January.

JPMorgan has been the worst hit among the biggest banking stocks. While Monday’s surge has helped erase some of the decline this year, the lender is still down nearly 22%, making it the worst performing big bank stock. Still, analysts have not given up on the company, with the average 12-month price target forecasting a 23% gain, near the highest it’s been since the pandemic began.

Eoin Treacy's view -

Rising interest rates are generally considered positive for banks because they get to charge more for their services. The challenge today is the spread they rely on to profit has evaporated as the yield curve has flattened. The absolute rate on mortgages also means refinancing income has disappeared on mortgages. That implies banks will probably do better when the yield curve steepens and yields contract.



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May 20 2022

Commentary by Eoin Treacy

Email of the day on global food shortages

The media highlight the possibility / likelihood of a worldwide food shortage - could you please cover this subject and share with us your conclusion and how a smart investor could potentially take advantage of such regrettable drama for large parts of the world population.

Eoin Treacy's view -

Thank you for this question which I’m sure is of interest to the Collective. The last time we had a food shortage scare was in 2007/08 when fertilizer shares were accelerating to records, commodity prices were strong, and the rising prosperity of the global consumer was driving calorie consumption for billions of people.



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May 18 2022

Commentary by Eoin Treacy

Norway Targets Record Gas Sales This Year as Europe Shuns Russia

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

Norwegian gas sales are on course to test a record high this year as Europe seeks to reduce its dependence on top supplier Russia as soon as possible. 

Total exports from fields in the Nordic nation are poised to jump about 8% this year to 122 billion cubic meters, the government said in its updated outlook on Wednesday. The country sold similar volumes in 2017, a record year for exports.

The continent’s second-biggest supplier is pumping at full tilt, benefiting from record prices and higher demand than ever for its fuel. The European Union aims to curb imports from Russia by two thirds this year because of the war in Ukraine.

European prices spiked after Russia’s invasion in late February, deepening an energy crisis that started last year. Costs have since eased but they remain historically high and traders remain on the edge because of the uncertainty of flows and payment regimes. 

“High prices give the companies strong incentives to utilize the production capacity on the fields,” Petroleum and Energy Minister Terje Aasland said. “Companies are producing at full, or near full capacity.” 

Norwegian producers have tweaked operations at some fields, including reducing gas injections for oil recovery. Energy major Equinor ASA will also restart its Hammerfest LNG plant this month. The facility has been shut after a fire in late 2020.  

The extra volume would amount to an increase of about 9 billion cubic meters this year compared with 2021 sales. While every molecule counts, it’s just a fraction of Russia’s flows to the European Union, which exceeded 155 billion cubic meters last year. That was about 40% of the bloc’s total consumption. 

Eoin Treacy's view -

Europe has a chronic need to boost energy security. Importing from a friendly country, with a long history of sound governance like Norway, is infinitely preferable to relying on Russia. That’s great news for Norway’s balance of payments.



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May 17 2022

Commentary by Eoin Treacy

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

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

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

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

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

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

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

Eoin Treacy's view -

There is still a great deal of uncertainty about the trajectory of monetary policy and the continuing impact of the war in Ukraine. The challenge for investors is to determine if this has been adequately priced in by the pullback to date.



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May 12 2022

Commentary by Eoin Treacy

Coinbase Gives $256 Billion Reminder About Agonies of Bankruptcy

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

Coinbase Global Inc., like the rest of the cryptocurrency market, is having a really tough week. Not filing-for-bankruptcy bad, but the biggest US crypto exchange did just mention the B-word in a regulatory filing, giving its customers a painful reminder of how bad things could get for them if Coinbase ever does get seriously distressed.

In its quarterly report, Coinbase added a risk disclosure: if the company were to file for bankruptcy, the court might treat customer assets that the exchange is custodian for -- their Bitcoin, Dogecoin or whatever -- as Coinbase’s assets. And they’d be at the back of the line for repayment, forcing normal people, unaccustomed to the ins and outs of federal bankruptcy court, to claw back their money along with everybody else owed money by the exchange.

It’s a huge amount at stake. Coinbase was custodian for $256 billion of customer money on March 31, according to the filing.

Chief Executive Officer Brian Armstrong quickly took to Twitter to elaborate, saying the company is not at risk of going bankrupt and that users’ funds are safe.

Eoin Treacy's view -

Segregated accounts didn’t save MF Global’s clients in 2019. It took six months to get two thirds of their money back and it’s not clear how successful efforts have been to recover the rest. Since the crypto markets are unregulated and Coinbase is an “exchange” rather than a broker, the funds are not truly segregated. The company might not be in imminent danger of going bust, but that only exacerbates the leverage to the bitcoin price. It’s a very binary bet.



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May 06 2022

Commentary by Eoin Treacy

India's Surprise Rate Hike Spurs Aggressive Tightening Bets

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

The Reserve Bank of India stunned markets Wednesday with a 40-basis point rate increase and a move to suck out billions from the banking system. That was a remarkable U-turn from February, when it announced an ultra-dovish policy, highlighting a relaxed stance toward inflationary pressures at home and U.S. tightening abroad.

“We believe the rate hike is a belated acknowledgment of the inflation risks and that policy has been behind the curve,” Nomura analysts Sonal Varma, Aurodeep Nandi and Nathan Sribalasundaram wrote in a note.

Yields on the benchmark 10-year bond jumped as much as 30 basis points on Wednesday to 7.42%, the highest since 2019, while the shorter 4-year yield saw a nearly 50 basis point jump. Yields extended gains on Thursday. 

Eoin Treacy's view -

Emerging market central banks have much more direct experience of the damage high inflation can do. They are usually alert to inflationary pressures and tend to implement remedial action quickly. Brazil hiking from 2% to 12.75% in little more than a year is a good example of that. That also helps to highlight just how out of step the RBI has been. The Repo rate was stock at 4% for nearly two years before this week’s hike.



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April 28 2022

Commentary by Eoin Treacy

U.S. Economy Posts Surprise Contraction, Belying Solid Consumer

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

Against a backdrop of quicker inflation and solid spending, Fed monetary policy is still geared for a half-point rate hike next week. Nonetheless, officials need to balance tighter policy with risks to demand. 

The economy faces other potential headwinds that include knock-on effects from Russia’s war in Ukraine. Growth prospects in Europe are deteriorating, some raw materials are in short supply and the Chinese government’s severe pandemic-related lockdown measures are leaving supply chains in disarray.

The S&P 500 rose and the yield on the 10-year Treasury note remained higher along with the dollar.

“With strong growth of consumer spending, business investment and employment in the first quarter, the U.S. economy was not in a recession at the beginning of the year,” said Bill Adams, chief economist at Comerica Bank. “Growth should resume in the second quarter as the trade deficit and inventories become smaller headwinds.”

Biden blamed the contraction on “technical factors,” saying in a statement that employment, consumer spending and investment all remain strong.

Eoin Treacy's view -

When you feel pressured by inventory shortages and rising prices, the natural response is to accelerate purchases. Orders also tend to be front loaded to forestall the trouble of having to worry about inventory in future.



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April 25 2022

Commentary by Eoin Treacy

Xi Puts Ideology Before Economy With Market-Busting Lockdowns

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

China’s worst equity selloff since early 2020 reflects a growing concern about President Xi Jinping: He
can’t afford the political costs of shifting from a Covid Zero strategy that is pummeling the economy. 
In Shanghai, a weekslong Covid-19 lockdown got even worse, with workers in hazmat suits fanning out over the weekend to install steel fences around buildings with positive cases. In Beijing, the process is just getting started, as authorities on Monday began shutting down a bustling district in the capital to
quash fresh outbreaks. 

The threat of paralyzing China’s two largest and wealthiest cities with a strategy abandoned by most countries helped push the CSI 300 down 4.9%, the gauge’s steepest one-day drop since the first such lockdown in Wuhan two years ago. The spreading lockdowns have investors worried that Xi is sacrificing the Communist Party’s reputation for pragmatic economic management to defend a political narrative that portrays him as the world’s most successful virus-fighter.

“This Covid situation is really putting China into a very dark moment, perhaps the darkest moment in economic terms for the last couple of decades,” Junheng Li, JL Warren Capital founder and chief executive officer, said of the Shanghai lockdown during an interview on Bloomberg TV. “It’s a confidence
crisis in a sense that you’ve got the most affluent city in China with this consensus disappointment and resentfulness towards a very non-sensible policy.”

“People really don’t know, what’s a clear path to get China out of this Covid situation,” Li said.

Eoin Treacy's view -

Democratic capitalist systems focus on the health of the corporate/financial system to achieve social cohesion and rising living standards. Communist systems focus on sustaining political stability to achieve the same ends. That difference doesn’t become obvious until a crisis challenges it.



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April 25 2022

Commentary by Eoin Treacy

Next Grocery Shock Awaits as Food Giants Face Cooking Oil Risks

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

The move by Indonesia, which accounts for a third of global edible oil exports, will add to turmoil facing emerging markets from Sri Lanka to Egypt and Tunisia. Even developed countries could see sharp rises in supermarket prices.

Palm oil is one of the most versatile staples, used in thousands of products from food to personal care items to biofuels. Prices of cooking oils have been on a tear due to drought and labor shortages. Then the war in Ukraine roiled trade of about 80% of global sunflower oil exports, boosting demand for alternatives like palm and soybean oil and sending prices to record highs. 

Indonesia’s ban applies to exports of RBD palm olein, a higher value product that has been processed. Exports of crude palm oil and RBD palm oil will still be allowed, according to people familiar with the matter. RBD olein accounts for 30% to 40% of Indonesia’s total palm oil exports. 

The move could increase costs for packaged food producers such as Nestle, Mondelez International and Unilever. Nestle declined to comment, while the other companies didn’t respond to a request for comment. It may also force governments to choose between using vegetable oils for food or biofuels. 

Eoin Treacy's view -

Palm oil prices initially popped higher on the news of Indonesia’s export ban but were not spared the decline in the wider commodity complex today. Nevertheless, the longer Indonesia’s ban persists the bigger the knock-on effect for regional consumers. Inflationary pressures may ease in industrial commodities, but agricultural prices are less susceptible to slowing Chinese growth.



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April 14 2022

Commentary by Eoin Treacy

Affirm Research Reveals Generational Divide in Americans' Response to Inflation

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

As prices continue to rise amid inflation, so too does financial stress, according to new research from Affirm, the payment network that empowers consumers. The research found that 73% of Millennials / Gen Z consumers - and 66% of U.S. consumers overall - are concerned that rising costs will prevent them from being able to pay for the things and experiences they want to achieve this year.

The study asked 1,740 consumers about how inflation is affecting their spending habits and revealed three key trends around how Americans are responding to the pressure on their wallets.

A night out is off the table - instead, consumers are prioritizing the home as their happy place

Purchases for the home are the top category Americans plan to prioritize as costs rise (38%).
Going out to restaurants (53%), entertainment (47%), and beauty (34%) are the top categories consumers plan to deprioritize.

Eoin Treacy's view -

Buy-now-pay-later is the opposite of delayed gratification. The sector has surged in popularity over the last two years as homebound consumers splurged on anything to relieve the tedium of the pandemic. Lifestyle creep is a hard habit to break and is usually forced on people by a sharp reversal of fortunes.



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April 14 2022

Commentary by Eoin Treacy

Sri Lanka says it will default on its foreign debt as the cost of food and food imports spirals, report says

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

Nomura Holdings Inc. expects an “Ecuador-style debt restructuring” where the existing stock of bonds are exchanged into three longer-dated bonds with a reduction in coupon rates and some principal haircut, said Nicholas Yap, head of Asia credit desk analysts in Hong Kong.

Sri Lanka’s foreign-exchange reserves slumped 16% to $1.94 billion last month. The government was due to make a $36 million interest payment on a 2023 dollar bond April 18, as well as $42.2 million on a 2028 note, Bloomberg-compiled data show. A $1 billion sovereign bond was maturing July 25. 

The economic crisis has evolved into a political stalemate, potentially complicating efforts to negotiate aid. Mahinda Rajapaksa in a speech Monday night called on citizens to be patient as price surges and shortages worsen, while touting his family’s role in ending a decades-long civil war back in 2009. His brother, the president, has said he won’t resign under any circumstances. 

The government hasn’t yet named negotiators for the restructuring process or set a value for the debt recast, Finance Minister Ali Sabry said by phone. Sabry -- who has been in the job for about a week after cabinet resigned en masse -- will be part of Sri Lanka’s team attending the IMF’s spring meetings next week that would discuss a potential aid package.

“We have no choice,” he said, referring to the decision to stop payments. “This should have happened a long time ago.”

Eoin Treacy's view -

Sri Lanka has been heading towards a dire debt situation for much of the last decade. The massive debts taken on to accommodate China’s building of large port facilities at rates, which are multiples of what were available from the IMF, are no doubt part of the problem. The surging cost of imported commodities tipped the country over the edge. 



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April 12 2022

Commentary by Eoin Treacy

Shein's $100 Billion Value Would Top H&M and Zara Combined

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

A Chinese fast-fashion company without a global network of physical stores of its own is seeking a valuation that could be more than the combined worth of high-street staples Hennes & Mauritz AB and Inditex SA’s Zara.

Shein, an online-only retailer of inexpensive clothes, beauty and lifestyle products that pumps out over 6,000 new items daily, is in talks with potential investors including General Atlantic for a funding round that could value the company at about $100 billion, Bloomberg News reported Sunday.

Should Shein succeed with the round, it would make the decade-old brand about twice as valuable as Tokyo-based Fast Retailing Co. -- the owner of Uniqlo -- which last year had more than 2,300 outlets in 25 countries and regions. It would also make Shein the world’s most-valuable startup after ByteDance Ltd. and SpaceX, according to data provider CB Insights.

Eoin Treacy's view -

I wrote about the success of direct-to-consumer Chinese fashion brands in my 2015 China trip report. Back then I was impressed by the speed with which new SKUs were churned out. The injection of capital and internet marketing savvy has grown that business model to the point where every other fast fashion brand is struggling to compete.



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April 07 2022

Commentary by Eoin Treacy

Russia Sidesteps Sanctions to Supply Energy to Willing World

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

With Russia regrouping for a fresh offensive in eastern Ukraine, China is preparing to receive the first commodity shipments from Moscow paid for in yuan since several Russian banks were cut off from the international financial system. 

Russian crude that would normally end up in refineries in Europe or the U.S. is heading for Asia, where buyers, particularly in India, are taking advantage of steep discounts. Shipments from the Black Sea and Russia’s Baltic Sea ports of Primorsk and Ust-Luga started heading to India in March, following earlier cargoes from the same terminals to China.

EU foreign ministers are likely to discuss imposing an oil embargo on Russia when they meet next week, said Josep Borrell, the bloc’s foreign policy chief. Speaking in Brussels on Thursday, Borrell said that a ban on oil is not in the latest sanctions package, though he expects ministers will tackle it on Monday, “and sooner or later -- I hope sooner -- it will happen.”

Russia’s natural gas supplies, which like oil have yet to be sanctioned by the EU, continue to flow freely as Europe faces an energy cost crunch that’s prompting governments to think twice before taking any action that might see prices rise further. 

Italy, one of the biggest buyers of Russian gas, said Wednesday that it would support a ban if the bloc was united behind the idea, a move that Germany among others has so far opposed.

Eoin Treacy's view -

The Russian regime calculated correctly that it would be impossible for Europe to avoid importing its oil and gas for the next few years. They may also have bet that the jump in prices for its exports would come close to compensating for the decline in exports to the OECD. Revelations of war crimes are hard to watch but that doesn’t change the fact Europe is not yet in a position to cut itself off from Russian imports.



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April 07 2022

Commentary by Eoin Treacy

One Trend Must Change Soon to Avoid a UK Recession

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

If the economy is going to avoid recession this year, consumers will need to dip into savings accumulated during the pandemic. So far, the evidence suggests this hasn’t happened. That’s worrying given the deep cost-of-living crisis facing the country.

It’s well documented that the combination of enforced saving during lockdowns and massive government income protection programs has seen household balance sheets to balloon over the past two years.

The cash, once seen as rocket fuel for the recovery, is now being viewed as a way for households to maintain the volume of goods and services they consume while inflation spirals.

That’s what made the latest credit data from the Bank of England all the more concerning. As yet, consumers have shown no willingness to dip into the 200 billion pound slush fund they have amassed even though inflation continues to run well ahead of income growth.

With inflation set to accelerate further those cash reserves will need to be drawn on if the economy is going to avoid falling off a cliff. In our forecast, we have assumed 10% of the stock of deposits is used over the next year, when the hit to spending power will be at its most intense. Consumption still contracts on a quarterly basis in 2Q and 4Q, but the economy avoids recession. About 25% of the pandemic savings are used over our whole forecast period to 2025.

Of course, it may be that as the squeeze on household budgets intensifies, it forces people to use the cash. It’s also possible that rather than run down assets, households borrow. For low income workers, who weren’t able to bolster their savings during the pandemic, that may be the only option if they want to maintain their spending. With that in mind, it was notable that the same credit data showed a big increase in unsecured net borrowing.

Still, with consumer confidence at levels that are normally associated with recessions, the worry is that caution prevails and the economy takes a far bigger hit than we expect this year.

Eoin Treacy's view -

Economic statistics are good at giving some visibility on aggregate numbers but terrible at displaying divergences in opportunity. £200 billion in excess saving ignores the fact most people do not savings. The reality is higher prices mean many people have to make hard decisions about consumption.



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April 05 2022

Commentary by Eoin Treacy

New York Jet Fuel Soars to New Height as Inventories Dwindle

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

Wholesale jet fuel prices in New York continue to soar unabated, touching a fresh record for the second consecutive trading day.  

Jet fuel on the spot market added another 93 cents, surging to $7.61 a gallon on Monday, a new high since Bloomberg started publishing these prices in 1988. Regional stockpiles are at their lowest for this time of year since 2015.

For much of the pandemic, U.S. refiners prioritized making other fuels such as gasoline and diesel with air-travel demand lagging the pace of recovery in other oil markets. Fuel makers began raising jet fuel production in late March as prices suddenly soared above diesel for the first time since Jan. 2020. Fuel accounts for up to a third of operating costs for airlines. Some airlines were already cutting flights as a result of expensive fuel back in early March.

Potentially bringing some relief to East Coast inventories, a jet fuel cargo was diverted mid-voyage to New York from Spain with an estimated arrival next week. Wholesale jet fuel prices have more than doubled within the past month.

Eoin Treacy's view -

Traders must be wondering whether it is advisable to simply buy every commodity contract that has not yet accelerated. Afterall, the number of commodities that have gone from quiescence to fame in the last year continues to grow. 



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April 04 2022

Commentary by Eoin Treacy

Secular Themes Review April 4th 2022

Eoin Treacy's view -

In 2020 I began a series of reviews of longer-term themes which will be updated going forward on the first Friday or Monday of every month. These reviews can be found via the search bar using the term “Secular Themes Review”.

“Play along to get along” has been the default strategy for global peace over the past thirty years. The default proposition was that if we concentrate on commerce, and all grow wealthy together, there was no real need to focus on our political differences. Under that system globalization flourished.

A just in time global supply chain allowed components to be made in a host of different countries, assembled in China and exported to the world. The demise of subsidy regimes allowed commodities, particularly agriculture products, to be produced in the lowest cost regions and exported to the globe. The internet has allowed the dissemination of know-how and services like never before.

In attacking Ukraine, Russia expressed a willingness to risk being cut off from much of the global economy. Regardless, of any other motive, Russia’s invasion of Ukraine is a gamechanger for the global order. With evidence of war crimes emerging, the chances of Russia being welcomed back into the global trading community are growing progressively more distant. We are back in an “Us versus them” global environment.



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March 31 2022

Commentary by Eoin Treacy

Russia's Other War of Attrition Is Against Europe

This article by John Authers for Bloomberg may be of interest. Here is a section:

In a provocative but persuasive column for the New York Times, Bret Stephens suggests that Russia’s war aim is not preventing NATO enlargement, or rebuilding the Soviet empire, but cementing its status as an energy superpower:

Suppose for a moment that Putin never intended to conquer all of Ukraine: that, from the beginning, his real targets were the energy riches of Ukraine’s east, which contain Europe’s second-largest known reserves of natural gas (after Norway’s). Combine that with Russia’s previous territorial seizures in Crimea (which has huge offshore energy fields) and the eastern provinces of Luhansk and Donetsk (which contain part of an enormous shale-gas field), as well as Putin’s bid to control most or all of Ukraine’s coastline, and the shape of Putin’s ambitions become clear. He’s less interested in reuniting the Russian-speaking world than he is in securing Russia’s energy dominance.

Even if this is not the aim, the possibility of entrenching Russia’s energy power is now at the center of the broader conflict between Putin’s Russia and the West. 

Eoin Treacy's view -

I’ve been arguing from the outset that the idea Russia acted irrationally does not make sense. Securing energy assets now so they can never be used to decrease European natural gas reliance on Russia offers an elegant explanation for the aggression. From their perspective it is better to act now, to forestall the certainty Ukraine energy resources would be developed, and risk destroying a supply relationship than to endure a loss of influence of time.



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March 29 2022

Commentary by Eoin Treacy

Biden Says Wait and See on a Russian Pullback

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

Ukraine and Russia failed to clinch a cease-fire in talks that ended in Istanbul on Tuesday, with Moscow saying it will reduce military operations in areas where its forces are being pushed back and Kyiv calling for security guarantees from European Union and NATO members.

U.S. President Joe Biden said he’ll see how Russia acts on a pullback and “see what they have to offer” in further talks with Ukraine.

A Ukrainian negotiator said his country is seeking guarantees for territory that doesn’t include Russian-controlled areas and that Kyiv is willing to discuss the status of occupied Crimea. Russia indicated a meeting was possible between President Vladimir Putin and his Ukrainian counterpart Volodymyr Zelenskiy.

Russia’s delegation left Istanbul, and no date or time was set for any potential future talks, according to a person close to the Moscow delegation. European nations expelled more Russian diplomats from their capitals, even as stocks rose and oil fell on optimism for progress in the negotiations.

Eoin Treacy's view -

This brief history of Finland’s fight against the Soviet Union in 1939 and again in 1944 bears some striking similarities to what is going on in Ukraine today. The most likely outcome remains that Russia will hold the territory it has already won and will negotiate hard for a land bridge to Crimea. In return Ukraine will receive new security guarantees, adopt a neutral foreign policy and will eventually be allowed to join the EU.



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March 29 2022

Commentary by Eoin Treacy

(Don't Fear) The Yield Curve, Reprise

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

It is not valid to interpret inverted term spreads as independent measures of impending recession. They largely reflect the expectations of market participants. Among various terms spreads to consider, the 2-10 spread offers a particularly muddled view. Especially in the present circumstances when the 2-10 spread is very much out of step with the near-term forward spread, which offers a much more precise view of market expectations over the next year and a half, it is difficult to concoct a reason to be concerned about the flattening of the 2-10 spread. In contrast, if and when the near-term spread does contract, we know that investors will then be expecting a cessation in monetary policy tightening. While such a shift in expectations could well be precipitated by future concerns about a recession, that need not be the case. A more benign cause would be a marked easing in inflation and inflation expectations that allow for a cessation of policy firming.

Eoin Treacy's view -

The benign outcome is more often referred to as a soft landing. The 10-2 year spread closed at 1 basis point and was inverted for a brief period intraday. The 10-year-3-month is at 189 basis points which is an historically wide diversion.



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March 25 2022

Commentary by Eoin Treacy

A Revolution in British Meritocracy

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

Nowadays, Brampton Manor Academy regularly gets as many pupils into Oxbridge as Eton College, the alma mater of Cameron, Johnson and the majority of the privileged faces staring out from the 1987 photograph. It does this by dint of high-expectations and relentless discipline. Pupils arrive early in the morning and stay on into the evening in order to accumulate extracurricular activities. Slacking is not tolerated. Pupils are expected to be smartly dressed and always on the ball. Eton — the quintessential, privately-funded British public school — charges about £50,000 a year and selects from the whole world. Brampton Manor charges nothing and selects from one of the poorest boroughs in London. The majority of pupils are from ethnic minorities and one in five gets free school lunches because of their parents’ low incomes.

Eoin Treacy's view -

Education is a contentious subject for politicians, because everyone wants the best for their children despite the fact levels of academic ability vary widely. That desire to secure the best opportunities for one’s offspring has to be married with society’s need to find and nurture the best brains.



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March 22 2022

Commentary by Eoin Treacy

Now That Powell's Convinced Markets He Means It

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

Market-based expectations for how the Fed moves its target fed funds rate have also broken out. The shift in expectations has come with breathtaking swiftness. The following chart shows implicit expectations for rates after each of the next seven meetings as they stood on Dec. 31, where they had moved by the day the tanks entered Ukraine, and where they are now:

Bear in mind that as the year began, CPI had already topped 7% for the first time in four decades. It’s remarkable both how long it took for investors to come around to expecting a sharp monetary tightening, and how swiftly that realization has now taken root.

What does this imply for asset allocation? Higher bond yields tend to be bad news for stocks if they are part of a Fed tightening, and make high stock valuations harder to justify. However, expectations of a more aggressive Fed are even worse for bonds. The mathematics of the bond market on this point is
inexorable. If rates and yields are going up, then bond prices have to come down.

And, indeed, just as those who’ve been saying There Is No Alternative (to stocks) would have predicted, this news has been far worse for bonds than stocks, meaning that the returns for those who are long in stocks relative to bonds have surged to yet another new high:
 

Eoin Treacy's view -

There is a significant anomaly developing in the bond markets. 2-year and 10-year yields are ramping higher on the expectation of future inflation and much higher rates. 3-month bills are also rising but at a much more sedate pace. The rate is currently at 0.5% which approximates the Fed Funds rate. That’s an oddity because investors are increasingly convinced a 50-basis point in May is a certainty.



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March 14 2022

Commentary by Eoin Treacy

Email of the day on how many interest hikes are likely

I and probably many others will be intrigued in your contrarian view that the Fed will hike once and be "done". Whereas as per enclose Bloomberg article others expect seven rate hikes this year.

If only one rate hike does that mean USA stock markets will revert to their bull run?

Eoin Treacy's view -

12-month yields are at 1.19% and climbing. That implies four hikes within the year. The Fed will hike this week, so that implies three additional hikes. I have been of the opinion the Fed will have an extraordinarily difficult time raising rates. If the Fed raises 7 times a recession is inevitable. With three more hikes the chances of a recession are better than even. One and done sounds about right to me. 
 



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March 14 2022

Commentary by Eoin Treacy

Apple Supplier Foxconn in Talks to Build $9 Billion Factory in Saudi Arabia

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

The Saudis are conducting due diligence and benchmarking the offer against others that Foxconn has made for similar projects globally, one of the people said.

Besides Saudi Arabia, Foxconn is also talking with the United Arab Emirates about potentially siting the project there, one of the people said.

The Taiwan-based company has looked to diversify its manufacturing sites amid rising tensions between China and the U.S. that put it in a potentially vulnerable spot.

Riyadh wants the company to guarantee that it would direct at least two-thirds of the foundry's production into Foxconn's existing supply chain, one of the people said, to ensure there are buyers for its products and the project is ultimately profitable.

Foxconn is seeking large incentives including financing, tax holidays and subsidies for power and water in exchange for helping set up a high-tech manufacturing sector in the kingdom, the people said, as Saudi Arabia seeks to diversify its economy away from oil.

The Saudis could offer direct equity co-investment, industrial development loans, low-interest debt from local banks and export credits to compete with other jurisdictions that Foxconn might consider, said another person familiar with the talks.

Saudi authorities and Foxconn didn't respond to requests for comment.

Eoin Treacy's view -

Pandemic exiles leaving Hong Kong brought COVID-19 with them to Shenzhen. The city and its environs have been locked down which is impacting the ability of component suppliers to perform at peak capacity.



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March 12 2022

Commentary by Eoin Treacy

A New World Energy Order Is Emerging From Putin's War on Ukraine

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

“The U.S. can try to make Saudi Arabia increase production, but why would they accept a break in the alliance, which is key for them?” said Paolo Scaroni, former chief executive officer of Italian oil company Eni SpA. 

There’s a political dynamic at play to explain the kingdom’s fidelity to Moscow beyond the gusher of oil revenue. 

Where Donald Trump cultivated a particularly friendly relationship with Saudi Arabia — making his first foreign trip as U.S. president to Riyadh — ties have turned colder under President Joe Biden. On the campaign trail, Biden pledged to make the kingdom a “pariah,” in part because of the killing of columnist Jamal Khashoggi. He will only deal with the elderly King Salman, relegating Mohammed bin Salman to interact with more lowly officials despite being the kingdom’s defacto ruler. 

By contrast, Riyadh’s OPEC+ partnership with Moscow calmed years of distrust between the two oil rivals, and saved the kingdom from relying exclusively on Washington.

“Saudi Arabia doesn’t want to switch horses mid-race when they do not know if the other horse is actually going to show up,” said Helima Croft, chief commodities strategist at RBC Capital Markets. 

Eoin Treacy's view -

The USA going cap in hand to countries like Iran, Venezuela and Saudi Arabia this week, with the request to boost oil supplies must have been both humbling and galling for the Biden administration. For the all the talk of a more enlightened foreign policy the arrogance, even so-called allies, have been treated with is pretty astounding. International rulers will be told not to take it seriously. Afterall they were working in service to the higher cause of abating climate change.



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March 09 2022

Commentary by Eoin Treacy

Ukraine Open to Neutrality But Won't Yield Territory, Aide Says

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

Ukraine is open to discussing Russia’s demand of neutrality as long as it’s given security guarantees, though it won’t surrender a “single inch” of territory, a top foreign policy aide to President Volodymyr Zelenskiy said.

“Surely, we are ready for a diplomatic solution,” Ihor Zhovkva, Zelenskiy’s deputy chief of staff, said in an interview with Bloomberg Television on Wednesday. 

The aide reinforced Ukraine’s demand for security guarantees “from the U.S., from Great Britain, from Germany” and others -- “only security guarantees from Russia will not be enough,” though he declined to spell out what those measures would entail. 

Preconditions for talks with Russian President Vladimir Putin would be a cease-fire and the withdrawal of Russian troops, Zhovka said.

Eoin Treacy's view -

When the war is over, Ukraine is most likely to follow a Finland-type solution. They may apply for membership of the EU, but not NATO. They will receive security guarantees from their neighbours, but will need to retain a significant military and constant vigilance nonetheless. Relations with Russia will be irrevocably damaged and portions of Ukraine will likely become part of Russian territory. However, the fact remains many of Russia’s pipelines flow through Ukraine’s territory. Trading relationships will be necessary.



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March 07 2022

Commentary by Eoin Treacy

Oil Shocks and Recessions

Eoin Treacy's view -

The two things anyone seeking to predict future trouble in the stock market looks at are the yield curve spread and oil prices.

The spread the 10-year and the 2-year is down to 23 basis points, from 120 in October. At the current pace of compression, it could be negative by the end of the week.

The 10-year - 3-month has generally moved ahead of the 10-2 spread but is not doing so on this occasion. That is because bond funds are focusing on short duration bonds because inflationary pressures take a bigger toll on long-dated issues.



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March 04 2022

Commentary by Eoin Treacy

Secular Themes Review March 4th 2022

Eoin Treacy's view -

In 2020 I began a series of reviews of longer-term themes which will be updated going forward on the first Friday of every month. These reviews can be found via the search bar using the term “Secular Themes Review”.

When Wall Street indices were breaking out to new highs in 2012/13 the world looked to be on the cusp of a golden era of globalisation, co-operation, and the inevitable rise of the middle class. Higher living standards would breed a more tolerant society with greater respect for the environment and for our fellow global citizens.

In predicting a secular bull market, we were correct about the market call. Wall Street and the FANGMANT stocks have outperformed global indices by a wide margin over the last decade. It was also correct to expect oil to underperform because of the bounty arising from shale oil and gas. Predicting a decade ago that the USA would become energy independent was seen as maverick. Today it’s a fact.

The social upheaval that began with the monetary and regulatory response to the credit crisis represents a significant threat to the utopian ideal of the everyman. Exporting job security in return for cheap products has hollowed out the middle class in most developed countries. The evolution of the subscription business model has also reduced individuals to cash flows; where ownership of hard assets is marketed as an outdated concept. This has contributed to significant social upheaval and the response to the coronavirus pandemic amplified it.  

At the same time, the trend of geopolitical tension continues to rise. The concentration of wealth in the hands of a small number of people, companies and countries is creating greater competition. China is much more active in staking its claim to global trade than in the past and Russia’s current invasion of Ukraine is reflective of a desperate need for both security and relevance in a world that is actively working to use less of its primary export; oil.



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March 03 2022

Commentary by Eoin Treacy

India Plans To Tap Smaller Russian Banks As Sanctions Hit Local Exporters' Payments

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

The Indian government is exploring ways to reach out to smaller Russian banks that have not been sanctioned, according to an official in the Ministry of Commerce. One of the routes being considered is via smaller Russian banks that are outside the ambit of sanctions, said the official, who isn't authorised to disclose details and spoke on the condition of anonymity.

An alternative method of setting up a rupee mechanism has also been discussed, the official said. In looking for a solution, India may look to a system it had established nearly a decade ago for payments to Iran. Caught in the regulatory crossfire, Indian exporters are also worried that their shipments might be left unattended at Russian ports with no insurance.

"Earlier, we came to know that the Export Credit Guarantee Corp. of India has removed its umbrella insurance cover for Russian exports. Now, we hear there is going to be a case-by-case evaluation," said Rahul Singh, an exporter of engineering goods, including electrical machinery, to Russia.

To complicate matters, large amounts of engineering goods have already been shipped, said Singh. He has now reached out to the government regarding this. "Even if we receive payments, there will be a significant delay.

Eoin Treacy's view -

India is just one example of how trade settlement has been upended by sanctions on Russia. Getting paid for goods already sent is a major headache but who in their right mind would send more without having some security that future payments will be forthcoming. This is going to have a significant knockon effect for both the Russia and wider emerging markets sector.



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March 01 2022

Commentary by Eoin Treacy

Kyiv TV Tower Hit as Russia Targets the Capital

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

Russia said it would press forward with its invasion of Ukraine until its goals are met, as troops were seen moving in a large convoy toward the capital, Kyiv. In the country’s second-largest city, Kharkiv, the mayor said residential areas were being bombed in what he called “a war to destroy the Ukrainian people.”

Eoin Treacy's view -

Hitting the TV tower is aimed at attempting to put Ukraine’s ability to appeal directly to Russia’s population out of commission. The impassioned broadcasts from Ukraine’s president must be particularly annoying for the Russian aggressors. Unfortunately, the success of the initial resistance means Russia is doubling down on the bombardment.



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February 24 2022

Commentary by Eoin Treacy

The Invasion of Ukraine Is a Tragic Sin

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

I have met Putin, and I have watched him as a journalist since before he became president. My analysis of his actions was always based on the assumption of his rationality. There was always something to gain, a manageable risk of losing. Perhaps I was wrong from the start. Perhaps Putin has changed in recent years as his close circle narrowed and negative selection expelled people with a broader vision from the ranks of his advisors. Quite likely, Ukraine has long constituted an exception from Putin’s rationality, as most of its people time and time again chose the Western path, away from Putin’s vision of the Russian World.

I left Russia after the Crimea annexation because I couldn’t accept it and felt it was a great historical wrong — both for Ukraine and for Russia. But I ended up returning to that assumption of rationality. I analyzed Putin’s moves from a cost and benefit perspective. I have a lot of rethinking to do.

The invasion is an irrational move. It makes any further negotiations with Putin and his clique pointless: There is, quite clearly, nothing he won't do, no line he won’t cross, no matter what he says or what deal he makes. From this point on, autarky is the only feasible economic choice for Russia, and a retreat into isolation is the only remaining cultural and political choice. At the same time, Russia's dependence on China, which has grown in recent years, is no longer a matter of choice. Any security benefits from turning Ukraine — and neighboring Belarus, from whose territory Putin also attacked — into a buffer state are illusory since Russia also borders actual NATO member states, which now will arm themselves as heavily as possible. 

Eoin Treacy's view -

I was not expecting a full-scale invasion, but my positions benefitted anyway. I agree we are now in a new environment and it will be years before Russia’s relationship with most of its biggest trading partners is repaired.



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February 24 2022

Commentary by Eoin Treacy

Petrobras Revenue Hits Record as It Resists Cheap Fuel Calls

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

Political pressure for Petrobras to make fuel cheaper for Brazilians is mounting ahead of presidential elections in October, but the giant oil producer has instead focused on taking advantage of the windfall from crude’s rally to shore up its finances and reward investors.  

Once the world’s most indebted oil producer, Petrobras last year managed to reduce its debt below $60 billion ahead of schedule, thanks also to the sale of refineries. 

Meanwhile on the campaign trail, former president Luiz Inacio Lula da Silva is leading the polls and calling for fuel price relief and more investments in refining. This has put Bolsonaro on the defensive, though a recent rally in the local currency has helped mitigate the impact of higher international oil prices.

Under Lula’s Workers’ Party, Petrobras lost an estimated $40 billion during the 2012-2014 oil price boom because of policies to make gasoline and diesel cheaper. Since the party lost power in 2016, two pro-business administrations have transformed Petrobras into a leaner, more profitable outfit. 

Eoin Treacy's view -

Cordial relations with much of the rest of the world favour Brazilian exports of raw commodities. That’s particularly true of its oil and iron-ore exports as geopolitical tensions with Russia are amplified.



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February 24 2022

Commentary by Eoin Treacy

EMs' Vulnerability to Rising Food Prices and Political Instability

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

Using these variables, our findings show that Kazakhstan and the Philippines are the most vulnerable credits in the IG universe.1 The massive protests that broke out in Kazakhstan earlier this year in response to soaring commodity prices serve as confirmation of our analysis, and it bears watching what happens in the Philippines as the May elections approach.  On the least vulnerable side, higher-income countries, including Hungary and Uruguay, unsurprisingly fare better. Meanwhile, HY credits are much more dispersed. Kenya and Nigeria appear to be the most vulnerable, and the months leading up to the Kenyan general election in August could be a volatile period, as they have in past elections. The least vulnerable HYs, from Serbia to Sri Lanka, are very diversified from a geographical point of view. It is somewhat reassuring that Brazil, a continental giant holding elections in October, is not in the most vulnerable group. We will continue to monitor these vulnerabilities closely as part of our credit selection process.

Eoin Treacy's view -

Nothing contributes to more social stress than surging food prices. The risks to food supplies remain skewed to the upside over the medium term. However, the initial surges for food commodities were not sustained today. That suggests we are likely to see at least some unwinding of short-term overbought conditions.



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February 23 2022

Commentary by Eoin Treacy

Saudi Al Dawaa Sees Profit Surge After IPO Draws Strong Demand

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

Saudi Arabian companies raised almost $9.3 billion from share offerings last year, making Riyadh the most active IPO market in the Middle East and Africa behind Israel, according to data compiled by Bloomberg.

The most recent IPO wave has already seen a digital security firm owned by the kingdom’s wealth fund draw about $57 billion in orders from institutional investors. Al Dawaa’s IPO attracted demand of more than $25 billion ahead of its retail offering.

The firm operates a network of pharmacies with over 800 outlets across 130 cities in Saudi Arabia. It posted a revenue of about 5 billion riyals ($1.3 billion) and profit of 246 million riyals in 2020 compared with 4 billion riyals and 233 million riyals year ago, respectively.

More from the CEO:

Estimates Al Dawaa’s profit to rise by “not less than 15-20% a year” after 2022
“Will continue paying dividends of around 50%-60% of profit on a continuous basis”

 

Eoin Treacy's view -

One of the defining characteristics of Middle Eastern stock markets is companies are only allowed to list when they have three-years of continuous profits. When global interest rates are low and investors chase momentum in growth stocks, that’s not especially appealing. On the other hand, when rates rise and a premium is put on the predictability of cashflows, those characteristics make some emerging markets more appealing.



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February 17 2022

Commentary by Eoin Treacy

Margin-Growth Fatigue a New Pressure Point for S&P: Taking Stock

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

Analysts have cut their profit-margin expectations for 75% of industries and about half of companies in the S&P 500 for the first and second quarters, data compiled by Bloomberg Intelligence show. Companies’ wherewithal to defend profitability amid mounting pricing pressures is becoming a growing issue at a time when the hottest inflation in four decades and higher borrowing costs threaten to crimp growth.

Anxiety about a faster-than-expected wind-down to the Federal Reserve’s asset-buying program and a quicker pace of rate hikes has pushed sell-side analysts to cut their first-quarter profit growth expectations to 5.4% last week from 6.7% in the first week of January. That figure, too, looks set to drop further to 3.5%, according to a Bloomberg Intelligence model that tracks the correlation between analysts’ pre-season forecasts and actual profit growth in the past two years.

“Negative revision momentum may remain a weight on stocks in the weeks ahead,” said Gina Martin Adams, chief equity strategist at Bloomberg Intelligence. “Improving top-line growth views are still offset by inflation pressure.”

More than 70% of S&P 500 companies are done with their earnings announcements. Among those that have already reported, 76% have outpaced analysts’ profit estimates, the lowest rate of beats since the first quarter of 2020.

Eoin Treacy's view -

Over the last few quarters companies have been comfortable passing on costs to consumers. Many have also taken the opportunity to increase margins at the same time. Politicians taking to social media and blaming inflation on record high corporate profits strikes a chord with the personal experience of many consumers. It suggests companies have seen the easy part of raising prices, continuing from here is going to be more difficult.



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February 17 2022

Commentary by Eoin Treacy

The rise of private markets

This report from the Bank of International Settlements may be of interest to subscribers. Here is a section: 

External financing is increasingly intermediated outside traditional channels. Banks and other institutions active in public capital markets, such as equity and corporate bond mutual funds, remain key financing sources for large and mature corporates. That said, “alternative asset managers” (AAMs) have become pivotal for smaller firms globally, including in emerging market economies (EMEs). Many AAMs were established as private equity firms that later expanded into credit, thus turning themselves into one-stop capital providers for firms less able or willing to access traditional sources.

Private markets have three features that distinguish them from public markets. First, there is limited liquidity transformation because investors commit capital for extended periods. Second, these investors tend to be large and sophisticated entities such as pension funds, whose focus on long-term returns enables target companies to confront significant earnings volatility. Third, the regulation of private market investment vehicles is relatively light, partly reflecting the lesser degree of liquidity mismatches and also the limited presence of retail investors.

Eoin Treacy's view -

The lack of regulation in the private markets is seen by many investors as a positive aspect. The challenge for the future is large pension funds are highly active in the sector. They might have long-term liabilities but they also have a long-term need for yield. The private sector has been particularly attractive because they have gained both portfolio diversification and higher returns. 



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February 16 2022

Commentary by Eoin Treacy

Shopify Plummets Most Since 2020 on Slowing Growth Outlook

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

Shopify Inc. plunged the most in almost two years after giving a weaker outlook for growth this year, as online spending resets after the Covid-19 induced boom and consumers face higher inflation. 

“The Covid-triggered acceleration of ecommerce that spilled into the first half of 2021 in the form of lockdowns and government stimulus will be absent from 2022,” the Canadian ecommerce giant said in a statement on Wednesday. “There is caution around inflation and consumer spend near term, for the full year.”

As a result, Shopify said full year revenue growth will be lower than the 57% increase in 2021. The U.S.-traded shares tumbled as much as 16% as the market opened in New York. It was the biggest intraday decline since March 2020. 

Shopify, which provides software and other services that underpin the websites of many small businesses, grew dramatically during the early stages of the pandemic, with sales jumping 86% in 2020. Investors, however, fear the company can’t sustain its growth as shoppers return to more normal buying patterns. Those concerns intensified last month when Shopify said it had terminated contracts with several warehouse and fulfillment partners, sending shares to a 16-month low. 

Eoin Treacy's view -

The justification for Shopify’s heady valuation was that it would become a true competitor for Amazon. The folly of that has been exposed by the pullback from fulfilment centres. From a broader perspective the big question is about a central hub versus distributed model.



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February 10 2022

Commentary by Eoin Treacy

Insurance executive says death rates among working-age people up 40 percent

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

“We’re seeing right now the highest death rates we’ve ever seen in the history of this business,” said Scott Davison, the CEO of OneAmerica, a $100 billion life insurance and retirement company headquartered in Indianapolis.

“The data is consistent across every player in the business.”

Davison said death rates among working age people – those 18 to 64-years-old – are up 40 percent in the third and fourth quarter of 2021 over pre-pandemic levels.

“Just to give you an idea of how bad that is, a three sigma or 200-year catastrophe would be a 10 percent increase over pre-pandemic levels,” Davison said. “So, 40 percent is just unheard of.”

He said the data shows COVID deaths are greatly understated among working age Americans.

Davison says OneAmerica expects to pay out more than $100 million in short- and long-term disability claims due to the pandemic.

“Whether it’s long COVID or whether it’s because people haven’t been able to get the health care they need because the hospitals are overrun, we’re seeing those claims start to tick up as well,” he said.

Because of this, insurance companies are beginning to add premium increases on employers in counties with low vaccination rates to cover the benefit payouts.

Eoin Treacy's view -

Middle aged people have been dying at an increasing rate in the USA over the last decade. Poor lifestyle habits, suicide, and an opioid epidemic contributed to that condition. Now the pandemic has resulted in an acceleration of the trend.



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February 09 2022

Commentary by Eoin Treacy

Ryanair CEO O'Leary Sees 'Dramatic' Jump in Ticket Sales

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

Ryanair Holdings Plc has seen a “dramatic recovery” in bookings over the past two weeks as the easing of pandemic travel curbs across Europe encourages people to fly again.

The Irish low-cost carrier’s planes are flying about 75% full and could reach 90% of capacity by the peak of the summer high season, Chief Executive Officer Michael O’Leary said at a briefing in Milan Wednesday.

Ryanair expects fares to remain “very low” through May before rising for summer, by which point it’s possible that a combination of strong demand and limited capacity could see them climb above pre-coronavirus levels, O’Leary said. Trends for next winter are difficult to predict, he said.

Eoin Treacy's view -

Most people are hungering for a traditional vacation. I know I am. As the omicron variant flares out, demand for travel and other opening-up sectors is likely to continue to improve. There have been several times when it looked like a full recovery was possible, only for a new variant to pop up and create delays. The good news is the last one was much less serious, albeit much more transmissible, than its forerunners. That suggests the bounce back in demand will be stronger this time.



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February 07 2022

Commentary by Eoin Treacy

Email of the day - on gold, governance, trading, and uncertainty

A bad back currently prevents me golfing, walking the dog, or driving the car and, in my opinion justifiably, I am feeling a grumpy.

So here are a few gripes for you:

First gold:
For several years you taught us that the gold price follows an approximate 35-year cycle between highs, although the gold price could outpace stock indexes for short periods in between those highs. We’ve not heard too much about the 35-year cycle for a while, the message now being that it is not unusual for gold to trade in a boring range for up to 18 months or so before breaking out conclusively up or down. You believe it will break to the upside taking out previous highs (which runs contrary to your 35-year cycle theory). I hold a fair chunk of gold and silver miners in ETFs but regard the holding as a hedge rather than representing a belief that gold will imminently break to the upside. It might and it would be nice if it did but I doubt it. As David said, investment options are similar to a beauty parade and for the foreseeable future, many options are likely to look superior to gold.

Second India v China:
You are very hard on China and its political system. Having lived most of my life in Asia I take a less severe view. Like most observers I was disappointed to see that XI, the reformer, had no intention of political reform but on reflection, I think he’s probably right to opt for political stability at a time when China is still struggling to bring modernity to all its people and regions; when lightening-speed technological change is taking place across the globe and when it finds itself in an inevitable struggle to assert what it regards as its rightful influence on global institutions and practices. On a smaller scale in Singapore Lee Kuan Yew did much the same thing and while there is now a little more political tolerance in Singapore than there was, the Government – and most of its people – believe that full-throated democracy would lead to economic and societal break-down. That would be Xi’s worst nightmare.

My grouse is not so much with your view on China but with your uncritical view of India. I agree with you that India should do well given its demographic advantage and talents of its people. However, I think the Modi government is quite repugnant in its covert – and not so covert – support of extremist Hindu nationalism represented by terrorisation of the Muslim and Christian communities, and by its appalling failure to do much about the abuse of women, also fuelled by Hindu extremists. In the medium term, I fear this, together with over-dependence on coal, will limit India’s investment appeal and therefore its economic potential.

To declare my investment positions, I have reduced my exposure to India and wait for an opportunity to reinvest in China. My favourite Asian market currently is Vietnam.

Third, the purpose of your ‘service’:
Under David’s direction, Fuller Money provided objective macro oversights together with some trading suggestions/recommendations and some investment suggestions/recommendations. He often put his money where his mouth was and invested in his recommendations. Towards the end of his career, he stopped publishing his investment portfolio which I regarded as a pity. Under your direction, Fuller-Treacy Money continues to provide objective (if sometimes convoluted and long-winded) macro oversights, but I find it difficult to work out whether beyond that you are offering trading hints or investment hints. I use the word ‘hints’ rather than ‘suggestions’ because in this aspect you are far more non-committal on specifics than was David. The details you provide of your own investment activities suggest that you are a trader with long(ish) term investments in gold bullion, gold miners and Rolls Royce. I made several profitable purchases based on David’s recommendations but so far have identified none under your watch.

Fourth Daily Audio and Video:
From emails you have referred to from other subscribers, I am confident that I am not alone in being irritated by several of your constant refrains. Three which particularly annoy me are ‘The big question is ….’ (to which we never get an answer); ‘[Gold (for example) has a lot of work to do’ (which is a nonsense, better to identify factors which might influence buying/selling decisions) and; ‘I can’t talk and chew gum at the same time’ (which sounds quite catchy heard for the first time, but grates increasingly after many repetitions).

So, getting that off my chest makes me feel slightly less out of sorts. I shall be renewing my subscription in March. It’s been part of my routine for too long.

Eoin Treacy's view -

Thank you for this detailed email, your long-term support and I hope you back feels better soon. If it is muscular, rather than a herniation, I strongly recommend Yunnan Baiyao. I’ve pulled muscles in my lower back on several occasions either playing tennis or lifting. If it is taken quickly after injury, it provides a powerful, quick solution with no side effects I have experienced. 

I began questioning the wisdom of relying on the Dow/Gold ratio during the early stages of the pandemic. Here is a link to Comment of the Day on April 24th 2020. It includes a large number of long-term ratios and concluded that the Dow Jones Industrials Average is no longer the best way to look at the long-term ratio, confirmed concentration of attention in the growth sector, predicted the recovery in oil prices, higher wages, and the return of inflation.



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February 04 2022

Commentary by Eoin Treacy

Secular Themes Review February 4th 2022

Eoin Treacy's view -

In 2020 I began a series of reviews of longer-term themes which will be updated going forward on the first Friday of every month. These reviews can be found via the search bar using the term “Secular Themes Review”.

The biggest trend in the world isn’t bitcoin or the FANGMAN stocks. It’s bonds. Yields peaked in 1980 and the cost of borrowing has done nothing but decline since.

That’s enabled the steady rise of leverage, debt accumulation, asset price appreciation, speculation in all manner of public and private assets and every other bull market too.

The exact mix of where the debts have accumulated most is different in each country. For the USA, fiscal excess and unfunded liabilities are the biggest debt issue. The large number of companies surviving with no profits is the second biggest debt issue.

In Australia, Canada and the UK, consumer debt ratios, household debt and property debt are the pain points. The Reserve Bank of Australia’s reluctance to raise rates, despite inflation, is a symptom of the economy’s reliance on property prices.

For China, the accumulation of debt in the property sector has been epic. The sector represents 30% of GDP. At least in Japan, the massive quantity of debt is held domestically but it is a significant hurdle to raising rates.



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February 02 2022

Commentary by Eoin Treacy

Mega-cap Influence

This note from a Bloomberg blog helps to put today’s price action into perspective.

Alphabet Inc.’s brisk rally on Wall Street on Wednesday is giving a boost to the Nasdaq 100 Index, still reeling from last month’s selloff in tech stocks. Shares in the Google parent are surging after it announced a stock split and posted quarterly sales and profit that topped analysts’ projections, signaling the resilience of its advertising business. The gains in Alphabet shares -- the third biggest stock on the Nasdaq 100 with a weighting of 7.4% -- account for most of the rise on the index on the day.

Eoin Treacy's view -

Apple warned about its ability to fulfill orders before Christmas and subsequently was able to beat that projection. The share jumped on the news but guidance was for slower growth in Q2.



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February 01 2022

Commentary by Eoin Treacy

Email of the day on Saudi Arabia

Your rather surprisingly positive reportage from Saudi Arabia awakened my interest in their stock market.  I found to my surprise that it is nearly perfectly correlated with a broad commodities index. This is not because it is just the oil price, as that takes up only a small part of the commodities index, and oil companies take up only a small part of the Saudi stock market.  The two markets I am comparing are IKSA and COMF, both in London.  Do you have any ideas about why this correlation is so tight?

It would be nice if you would revisit the market from time to time and give us your opinions on it.

Eoin Treacy's view -

Thank you for this email which highlights an important aspect of the Saudi market. The SASE Index is predominately weighted by banks. This being Saudi Arabia they are run on Islamic principles so loans are less leveraged relative to deposits than one might see elsewhere. Additionally, companies are not allowed to list until they have posted profits for three consecutive years.



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January 31 2022

Commentary by Eoin Treacy

Brazil Analysts See Inflation Further Above Central Bank Target

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

Brazil analysts raised their 2022 inflation expectations further above target for the third week in a row as the central bank prepares to lift its interest rate into double digits at Wednesday’s policy meeting.
Inflation will hit 5.38% in December, above the prior estimate of 5.15%, according to a weekly central bank survey published on Monday. Analysts also lifted their 2023 year-end consumer price forecast to 3.50% from 3.40%. 

Policy makers led by Roberto Campos Neto are expected to deliver their third consecutive 150-basis point rate hike this week, lifting the benchmark Selic to 10.75%. Inflation slowed less than expected in mid-January, as factors including global supply-chain disruptions pressured prices of transportation and
durable goods. Analysts see borrowing costs at 11.75% in December. 

The central bank risks missing this year’s inflation target of 3.5%, which has a tolerance of plus or minus 1.5 percentage points.

Eoin Treacy's view -

Brazil has some of the highest short-term interest rates in the world and they are about to get even higher. Emerging markets do not have the luxury of time to wait and see what happens. They have much more recent history of inflationary problems and have tended to act much quicker to curtail growth opportunities to bring inflation under control. That’s exactly what Brazil is doing with its aggressive hikes.



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January 28 2022

Commentary by Eoin Treacy

Email of the day on the green revolution

Thanks for the great service pulling the noise out of market trends for us. We especially enjoy what my wife affectionately calls the “Big Picture Long-Winded” Friday recordings. Regarding the possible rotation into the renewable/green economy do you have any ideas on Industries/companies that could benefit from the build out? Or would the safer play be directly in the commodities needed for the grid, vehicles, batteries, and such? Hoping to get to another Chart Seminar before too long.

Eoin Treacy's view -

Thank you for your kind words. A former delegate at The Chart Seminar once described my sense of humour as “impish” and I can’t argue with that. Your better half’s turn of phrase certainly tickled me. The Friday broadcasts are often a delicate balance between trying to be pithy and attempting to cover the relevant arguments. I’m looking at a late May/early June date for a London seminar and I hope to see you there.

The question of the future of the zero carbon/green revolution/energy transition is a big one. On one hand we have high minded projections of a utopian future where the air is pristine and no economy is dependent on carbon emissions for growth. Promises of hundreds of trillions being spent to achieve that goal were a major feature of international conferences in 2021.



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January 28 2022

Commentary by Eoin Treacy

January 28 2022

Commentary by Eoin Treacy

January 26 2022

Commentary by Eoin Treacy

London Gets Vote of Confidence From Big Finance Firms, EY Says

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

Most global finance firms are planning to establish or expand operations in the U.K. in 2022, according to a survey of 40 key decision-makers in the industry.

Around 87% of global financial services investors expect to invest in the U.K. next year, EY’s latest poll found. That’s the highest since the professional services firm started tracking sentiment toward the country in 2016, the year of the Brexit vote, and compares to 50% in early 2021 and a low of 11% in 2019. 

The data is a boost for the City of London, whose credentials as an international finance center are being questioned since the U.K. left the European Union. Meanwhile, 90% of respondents said the U.K. offers the right conditions to invest in assets with environmental, social and governance attributes.

“This is testament to the stability and resilience of the mature U.K. market which continues to ably withstand the material challenges and uncertainty of both the pandemic and Brexit,” said Anna Anthony, EY’s financial services managing partner for the U.K.

Eoin Treacy's view -

There was a lot of fear that Brexit would result in London being denuded of financial firms. The reality is the Eurozone represents only a portion of the business done in one of the world’s great financial centres.



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January 26 2022

Commentary by Eoin Treacy

The New Agri-Giant Invading the U.S. Heartland

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

Viterra is already the world’s largest wheat trader, thanks to its investments in major exporting regions including Canada, Australia, Argentina, and the former Soviet Union. If Gavilon in the U.S. is added to that impressive portfolio, it will be the kind of concentration — and power — that governments worry about. Indeed, Beijing may be even more concerned about the deal than Washington. China, which is spending billions of dollars to build its own state-owned agricultural trading house, is unlikely to welcome further consolidation in an industry it relies on to feed more than one billion people.

Regulatory concerns aside, the deal is a steal. Glencore, founded by the late U.S. fugitive Marc Rich in the 1970s, built its agribusiness through acquisitions. In 2012, it beat out ADM and purchased Canadian grain trader Viterra Inc. for 6.1 billion Canadian Dollars ($4.8 billion). Today, Glencore controls just under 50% of the enlarged Viterra business, with 49% owned by two Canadian pension funds and a residual percentage controlled by the staff.

Eoin Treacy's view -

Most investment banks closed their commodity trading desks during the 2011-2016 bear market. They sold their ships and warehouses too so getting back to dominant positions is not going to be easy or cheap. That handed control of market making to private trading houses which now control the market regardless of whether Glencore’s bit for Gavilon is successful.



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January 12 2022

Commentary by Eoin Treacy

Partygate Fuels U.K. Tories Growing Alarm About Boris Johnson

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

But it is the reaction of his own Tories that will be of most concern to the prime minister. One Conservative member of Parliament privately described the mood among colleagues as sulfurous, while predicting the premier will survive because he’s prepared to brazen it out. Another, though, said the scandal will ultimately mean the end of the road for Johnson.

It’s a significant moment of peril at the worst possible time for Johnson, who had hoped to begin 2022 with a reset after a turbulent end to last year when support for the Conservatives plummeted in the polls.

A string of allegations about other rule-breaking gatherings in Westminster -- dubbed “partygate” by the U.K. media -- was compounded by a damaging loss in a special election and widespread criticism over how he had funded the refurbishment of his Downing Street flat.

Eoin Treacy's view -

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January 06 2022

Commentary by Eoin Treacy

The Fed Minutes That Shook the World

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

Why such angst? There’s a lot in the minutes, with much useful information for students of the economy and monetary policy. You can find the full version here. For those less interested in such studies, the passage of three sentences that accounted for more or less all of the market reaction read as follows:

it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated. Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate. Some participants judged that a less accommodative future stance of policy would likely be warranted and that the Committee should convey a strong commitment to address elevated inflation pressures.

This commits the central bank to nothing, but the notion that there were hawks on the committee who thought that the Fed should reduce the size of its balance sheet (in other words, start to sell off its huge bond holdings in a move that, all else being equal, should raise yields) came as an unpleasant surprise. Those words are there for a reason. The Fed thought it a good idea to plant a reminder of hawkish intent just as markets were ramping up again after the New Year break, and it seems to have worked.

Eoin Treacy's view -

The Fed Minutes were the catalyst for the sell-off in bonds yesterday which contributed to the weakness in the growth sector. I suspect talk of being more aggressive in quantitative tightening than the 2018/19 period was the primary reason investors took fright.



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December 31 2021

Commentary by Eoin Treacy

Our Market and Economic Observations Heading into 2022

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

Equity team co-heads Atul Narayan and Erin Miles on other equity markets catching up with the US: Looking ahead, it feels that things are primed for the equity markets that have lagged the US (China, Japan, the UK, Europe, etc.) to catch up. There are several factors at play. First, COVID has been a material relative support to US equities from all channels—favorable sector tilt, less virus economic impact, more support from falling rates (versus, say, Japan, where yields are pegged), and compressing risk premiums, given safe-haven appeal for US equities, especially the FAANMGs. We would expect the COVID impact to gradually fade in the coming year and this to be a relative support for the markets outside the US.

Second, China is showing early signs of moving toward easing after a year when the structural goals (deleveraging, rebalancing, common prosperity, etc.) were prioritized. This again will be a bigger relative support for economies like Japan, Europe, and EMs that are a lot more exposed to China. Finally, if you look back over the last 100 years, it’s almost always been the case that the winners of a given decade end up being laggards in the next one because of the degree of exuberance (and pessimism) that gets priced in following the winning (and losing) stretch. Given how stretched the relative positioning and pricing is today (for logical reasons), we expect the US versus rest of world diff to finally start to revert after a decade-long off-the-charts performance. The main things we are watching closely are the evolution of COVID globally, China’s policy stance, and the retail flows in the US, which were the biggest support for US equities over the past year and a half.  

Eoin Treacy's view -

Based on valuations alone, there is a strong risk-adjusted argument for favouring ex-US assets. I also find the argument that a recovery for China’s economy would have a more positive effect on the Ex-US basket to be reasonable. However, momentum remains a tailwind for Wall Street which has been supported by the relative strength of the Dollar all year.



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