Investment Themes - Precious Metals / Commodities

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September 28 2022

Commentary by Eoin Treacy

Fertilizer Maker Mosaic Says Some Florida Sites Evacuated

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

Fertilizer maker Mosaic Co. has evacuated some of its Florida operations as Hurricane Ian prepares to make landfall.

All of our Florida locations have been secured with some “fully evacuated,” Mosaic spokesman Bill Barksdale said Wednesday in an email. The state is home to Mosaic’s phosphate rock assets, where they mine product, and to facilities where they turn that rock into crop fertilizers.

Ian’s current trajectory has it passing near Tampa, through the bulk of Mosaic’s facilities. The facilities are expected to remain closed for at least a week due to the hurricane, a hit that could see third quarter revenue fall by $240 million to $300 million, Bloomberg Intelligence said Wednesday in a note. Ammonia imports from Yara International and CF Industries at Tampa may also slow. 

The storm is on a path similar to Hurricane Irma in 2017, when Mosaic lost about 400,000 metric tons of finished phosphate products, according to Bloomberg Intelligence.

Eoin Treacy's view -

One of Mosaic’s primary phosphate mines is between Tampa and Orlando. There is clear  flooding risk in the region. The defining characteristic of recent hurricanes has been slow movement and elevated rainfall totals. The supply chain for fertilisers is already under stress so this hurricane is unlikely to be good news.



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September 21 2022

Commentary by Eoin Treacy

Top Banks Pull Back From China Metal Financing After Crises

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

JPMorgan Chase & Co. and ICBC Standard Bank Plc are cutting back on financing to China’s troubled metals trade, adding pressure to a sector already hit hard by a struggling economy. 

At least three Chinese metal trading companies have had credit lines frozen or reduced by either of the banks in recent weeks, according to people familiar with the matter. The lenders have pulled back after a liquidity crisis emerged at top copper trader Maike Metals International Ltd., said the people, who asked not to be identified discussing private information. 

Both JPMorgan and ICBC Standard Bank have financing relationships with Maike. It’s not clear whether the banks’ pullback from the Chinese metals market is a temporary freeze while they assess their situation, or a more permanent retreat. 

Maike’s admission last month that it asked for government help with liquidity issues is further shaking confidence in the industry, coming after the nickel short squeeze that almost bankrupted Tsingshan Holding Group Co. in March, and two recent cases of missing metal used as collateral for financing deals.

Eoin Treacy's view -

Copper is a difficult market. We have clear narrative on the case for growth in demand over the next decade. What we do not have is clear visibility on current demand. China’s economy is slowing down and demand growth is unlikely to return to its pre-economic reorientation trajectory anytime soon. That suggests more weakness now and a possible stiff recovery later.



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September 20 2022

Commentary by Eoin Treacy

Email of the day on graphene

Excellent reflexions in this long term view.

Have you ever talked about investing in the Graphene potential?

I have a friend convinced that the cost of producing it will come down with some innovation. And it could substitute or complement copper supply.

Eoin Treacy's view -

Thank you for this question which may be of interest to the Collective. I have been thinking a lot about the genesis of bull market themes. Good ideas often don’t come from nowhere. It takes a long time for product ideas to reach fruition.

For example, Mark Cuban’s first venture was Broadcast.com in 1998. Then Enron signed a deal with Blockbuster video to begin a video on demand service in 2001. Both ventures failed in epic fashion.

Netflix began by mail ordering in 1997 and only adopted streaming in 2007. That was nine years between the first attempt at streaming and the big success story everyone is familiar with. However, the model was only possible because of the growth of the internet and improving connection speeds and accessibility.

Today, every broadcaster has embraced some form of streaming which highlights that it is the interest is the enabler and no company has a defensible moat without killer content at an acceptable cost.



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September 19 2022

Commentary by Eoin Treacy

Tycoon Running a Quarter of China's Copper Trade Is on the Ropes

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

 

Much as He’s rise was a microcosm of China’s economic boom, his current woes may mark a turning point for commodity markets: the end of an era in which Chinese demand could only go up.

“In some ways Maike’s story is the story of modern China,” said David Lilley, who started dealing with Maike in the 1990s, first as a trader at MG Plc and later as co-founder of trading house and hedge fund Red Kite. “He has skillfully ridden the dynamics of the Chinese economy, but no one was prepared for the Covid lockdowns.”

This account of He’s rise to the pinnacle of China’s commodities industry is based on interviews with business associates, rivals and bankers, many of whom asked not to be named because of the sensitivity of the situation. 

Eoin Treacy's view -

“Never mistake a bull market for brains” is one of the most useful adages in the markets. The challenge is that to make truly life changing money in a bull market one has to act as if it will never end. That implies loading up on leverage, making big bullish bets and never giving into doubt. In bull markets that last for a decade or more, the biggest gamblers look like prophets and are treated as such by the market. When liquidity conditions eventually change, that business model experiences significant duress.



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September 15 2022

Commentary by Eoin Treacy

Email of the day on silver's outperformance

With the ongoing downdraught in gold prices, silver seems to be holding its ground very well. Could this be partly due to its industrial uses?

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. There are a couple of important points to consider in understanding silver’s recent outperformance and not least because of the tendency of silver to outperform during the 2nd and 3rd stages of a secular bull in precious metals.



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September 14 2022

Commentary by Eoin Treacy

Eskom on the brink as outages again spiral to record levels

This article from Moneyweb.co.za may be of interest to subscribers. Here is a section:

A bigger looming problem is where Eskom is going to find another R7 billion for diesel for the rest of the year. It was provided with ‘fiscal support’ (read: a bailout) of R21.9 billion in Finance Minister Enoch Godongwana’s February budget.

By July, Eskom’s debt owed by municipalities stood at R49.1 billion – an R8.2 billion increase since September 2021. The total amount was ‘only’ R9.5 billion in 2017.

Shoddy maintenance = unavailability
Oberholzer also admitted on Monday that the work done by Eskom and its contractors’ maintenance team is simply not up to standard. He said that units will often break down shortly after undergoing maintenance. This is due to a “lack of skills” both internally and at contractors. One might describe this skills crisis at the utility as ‘acute’.

The coal fleet has not been able to generate more than 19 500MW sustainably since Friday morning, and last achieved over 21 000MW on Thursday morning.

Eoin Treacy's view -

Electricity availability is becoming a factor in a host of locations. In some areas its because of less snowmelt. In others its because of a reluctance to build new sources of supply. In South Africa, it is unfortunately a story of corruption forced ineptitude.



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September 13 2022

Commentary by Eoin Treacy

Crop Prices Touch Two-Month High as Food Supply Concerns Mount

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

A US crop report Monday showed a surprisingly large cut in the country’s soybean stockpiles following a hot and dry summer. Drought also is sinking the French corn harvest to its smallest in three decades and has curbed sugar supplies from South America.

“The damage has been done,” said Peter Collier, market analyst at UK-based CRM AgriCommodities. “It’s now beginning to be quantified.”

The weather challenges, combined with Russian President Vladimir Putin’s recent criticism of the Black Sea crop-export deal, highlight how fragile global supplies are. The Bloomberg Agriculture Spot Index, which tracks crops including wheat, sugar and soy, climbed for a second straight day Tuesday to its highest level since late June.

Eoin Treacy's view -

From 2002 to 2008 there were concerns the world was heading toward peak oil. That created a boom in biofuels which created a new source of demand for food commodities like corn, sugar and palm oil. Prices spiked and the world decided maybe it wasn’t such a good idea to rely on food for fuel.



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September 13 2022

Commentary by Eoin Treacy

Gold Slides as Hotter US Inflation Keeps Hawkish Fed on Track

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

“A shockingly hot inflation report pulled the rug for gold as investors are now starting to price in more Fed tightening. A 75-basis-point rate increase is a done deal for September and it is starting to look like we might not see a downshift in November,” said Ed Moya, senior market analyst at Oanda.

Gold fell 1.1% to $1,706.18 an ounce at 9:42 a.m. in New York, after slumping as much as 1.6% earlier. The Bloomberg Dollar Spot Index rose 0.7% after falling 0.4% on Monday. Spot silver, platinum and palladium also fell.

Eoin Treacy's view -

We have had negative real interest rates for a decade. In that time gold has gone through significant periods of strength and weakness. Intuitively, negative real interest rates should support gold because inflation is outpacing the return from cash for a prolonged period. However, that is not a sufficient condition to support a bull market.



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September 02 2022

Commentary by Eoin Treacy

Billionaire Forrest's Hydrogen Unit to Speed Expansion Plans

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

The unit expects to begin output of green hydrogen from 2024 at a small scale in the hundreds of thousands of tons, before quickly ramping up to hit its 2030 goal, he said. Fortescue has announced agreements over future supply deals with companies including Germany-based E.ON SE and JC Bamford Excavators Ltd. in the UK. 

“When I think about how big this market is, it’s as big as replacing the entire fossil fuel market in the world, and it’s real now,” Hutchinson said, speaking on the sidelines of a government-hosted jobs and skills summit.

Forrest told investors earlier this week he’d been approached by fund managers over a potential $20 billion separate listing of FFI, though the firm argues there’s better value in retaining the hydrogen developer alongside the world’s No. 4 iron ore exporter.

“Once we get going at scale and just looking at the projects we have, it’s enormous,” according to Hutchinson.

Eoin Treacy's view -

7% of global natural gas supply is devoted to the production of ammonia. Decarbonising the production of fertiliser is a major aim of the green movement. Hydrogen is also a major intermediate product for the hydrocarbons industry. 



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August 30 2022

Commentary by Eoin Treacy

The 2022 euro area supply crisis

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

The price of Germany’s electricity over the next year has climbed over $1000pb in Brent oil energy equivalent terms. This is far from normal. It’s a crisis that stems not only from restrained energy supply from Russia but a series of unfortunate issues elsewhere too. In addition to energy restraints, the euro area is facing the full brunt of climate change with flash floods and record droughts, combined with slowing trade with China and US recession risks. However, we think the bigger challenge Europe will face this winter is not inflation, but stagflation. Altogether it’s why we expect EUR/USD to fall to 0.90 this winter, inflation to climb further to multi-decade highs before peaking, GDP to decline over the coming year and the ECB to first raise rates in response to higher inflation, and then cut next year as the energy-induced recession continues. Will Germany run out of gas? Probably not. That's due to LNG supply, but even more due to falling industrial demand. High prices and falling demand of an essential such as energy is not good for growth, but it gives hope that blackouts in Germany won't be the story of early 2023.

Eoin Treacy's view -

This report shares the downbeat consensus view that Europe is going to endure a profound winter of discount. There is no doubt the challenges are immense but so have been the efforts to overcome them. For example, the EU has reached its November target for natural gas reserves. That suggests some slowdown in demand following indiscriminate buying over the last few months.



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August 30 2022

Commentary by Eoin Treacy

Copper and Aluminium Pace Metals Retreat on China Lockdown Fears

Copper and aluminium futures tumbled along with other industrial commodities on concerns that virus lockdowns in China will hurt demand and as supply constraints in the Asian powerhouse eased.

Beijing’s ongoing battle to contain virus outbreaks is damaging confidence in the nation’s economy, with the Covid Zero policy causing many US companies to delay or cancel investments. That’s on top of a property crisis that’s taken a hefty toll on metals demand in the top consumer. 

Prices of copper, seen as a bellwether for economic growth, have wavered in recent weeks after recovering from a 20-month low in July as traders weigh supply constraints against a darkening outlook for demand. Outside China, Europe’s energy crisis is set to undercut consumption, while higher US Federal Reserve interest rates are pressuring non-yielding assets like metals.

Eoin Treacy's view -

Predictably, China is having just as much difficulty containing the new more transmissible strains of COVID-19 as everywhere else. There are lockdowns in place in every Chinese province at present. Meanwhile the Communist Party Congress is now slated for mid-October. Between now and then we can expect much tighter controls on movement which will have a knock-on effect on the wider economy.



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August 26 2022

Commentary by Eoin Treacy

Email of the day on when gold does best:

Your stated position on Gold, is that it did well in a low interest rate environment but is struggling now in the face of rising interest rates and strong US Dollar.

But surely with inflation hard wired into system, we are still in a relatively low interest rate environment, as interest rates should be around about 11% to effectively reduce inflation.

I have bought more gold today, regardless of outcome of the FED meeting today.

Eoin Treacy's view -

Thank you for this email which may be of interest to the Collective. My stated position is gold does well in a negative real interest rate environment and when the Dollar is trending lower. Incidentally, that is also when the emerging markets also tend to do best.



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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 18 2022

Commentary by Eoin Treacy

Layoffs Are in the Works at Half of Companies, PwC Survey Shows

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

That’s a key finding from a survey released Thursday by consultant PwC, which last month polled more than 700 US executives and board members across a range of industries. Half of respondents said they’re reducing headcount or plan to, and 52% have implemented hiring freezes. More than four in ten are rescinding job offers, and a similar amount are reducing or eliminating the sign-on bonuses that had become common to attract talent in a tight job market. 

At the same time, though, about two-thirds of firms are boosting pay or expanding mental-health benefits. The most common move: making remote work permanent for more people.

Eoin Treacy's view -

The primary argument being used to say a recession has not already begun is the Purchasing Manager’s Index and the low unemployment rate. It is reasonable to say a recession is not underway if companies are buying more on a month over month basis and unemployment is close to a record low.



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August 16 2022

Commentary by Eoin Treacy

Zinc Surges as Trafigura-Owned Smelter to Halt Production

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

The decline in European zinc production has seen local LME stockpiles fall close to zero this year, while global inventories remain near the lowest in more than two years. 

“There will be a bit of capacity juggling going on,” said Tom Price, an analyst at Liberum Capital. “If the EU needs their metal, they will probably have to import more semi-refined material or the metal itself.”

Supply concerns are still being balanced by the impact of the energy crisis on demand, which has caused many economists to predict a recession in Europe. Economic data on Monday from China, the world’s top metals consumer, added to those fears as the nation struggles to mitigate the impact of Covid-19 curbs, the property slump and the recent heat waves.

China is also facing an energy crunch which could hit metals output. Soaring temperatures are stretching power supplies and drying up water for hydro-electricity, forcing key aluminum-hub Sichuan to vow it will prioritize electricity production for residential use.
 

Eoin Treacy's view -

The soaring cost of natural gas in Europe is contributing to demand destruction as well as impacting the ability of companies to supply products. That’s a recipe for a great deal of volatility.



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August 16 2022

Commentary by Eoin Treacy

Carbon Capture Could Get $100 Billion in Credit from US Climate Bill

This report from Bloomberg New Energy may be of interest to subscribers. Here is a section:

The new legislation raises the credits for captured CO2 that is used and stored to $60/tCO2 and $85/tCO2 respectively. However, project owners must meet prevailing wage and apprenticeship requirements in order to qualify. If they do not, they will be paid a lower credit than the existing 45Q payment. Projects must be under construction by the end of 2032 to receive the credit

A new, much higher credit is available to direct air capture (DAC) projects. DAC currently costs around $600/tCO2. The credit pays $130/tCO2 for gas that is used, say, for enhanced oil recovery or to make synthetic fuels, and $180/tCO2 for CO2 that is stored permanently.

 

Eoin Treacy's view -

Regulatory arbitrage will ensure that some areas will continue to benefit from having less strict regulations than either North America or Europe. Meanwhile there is little to be gained from arguing about the sense behind carbon credit trading. We can only deal with the reality provided by the market. The regulatory regime continues to support taxes on emissions. 



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August 15 2022

Commentary by Eoin Treacy

Beijing Faces 'Liquidity Trap' as Lending Collapses

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

Three things we learned last week: 

1. Shockingly weak Chinese credit growth shows that monetary policy is pushing on a string. Friday’s data showed aggregate financing, a broad measure of credit, was almost half of what economists expected. Bank loan growth slowed to 11%, near the historical low. That’s occurring at a time when the financial markets are flush with cash and interbank interest rates are falling well below the central bank’s benchmark.

In other words, money is aplenty, but no one wants it. It reflects weak confidence among businesses and households amid the housing slump and the Covid restrictions. It’s “a classic sign of a liquidity trap,” Craig Botham at Pantheon Macroeconomics remarked.

What’s more, Beijing is facing a fiscal cliff as the local governments have pretty much used up their special bond-issuance quota for the year. Unless Beijing makes more funding available, the fiscal support may be waning.

Eoin Treacy's view -

China’s exporters are feeling the pain from slowing demand in Europe and North America. That’s adding to the downward pressure on the economy from the emerging real estate crisis. The PBoC signaled last week they are keen to avoid the inflationary problems other major economies are dealing with. Over the weekend, political priorities led to the Medium-Term Lending rate being shaved by 10 basis points while the central bank withdrew liquidity to sanitise it.



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August 11 2022

Commentary by Eoin Treacy

BHP talk offtakes with OZ Minerals, returns with $8.4b bid

This article from the Australian Financial Review may be of interest. Here it is in full:

The companies' top brass only spoke last Friday, when BHP shot across its non-binding and indicative bid to OZ's Adelaide offices, and asked for six-weeks' due diligence and a friendly board recommended deal.

Instead of being flattered by the attention, OZ Minerals' board is playing it cool and defensive.

OZ Minerals' board, advised by Macquarie Capital and Greenhill, is understood to be staunchly against giving BHP a look at its books at a $25 a share offer, reckoning it's both invasive and disruptive to the business. It has said as much to investors in recent days.

Analysts who have spent the past few days canvassing the OZ Minerals register said the shareholders were on the same page as the board.

But at what price OZ would be willing to grant BHP due diligence, is pretty much anyone's guess at this point. Citi and Barrenjoey are in BHP's corner.

What's OZ Minerals worth

The approach and the retreat were so swift that investors haven't had time to think what the company's worth to a bidder.

But they are taking heart from three things: that OZ smacked the $25 a share bid really hard (so BHP must be way off mark) and that the two had been talking about offtakes (so BHP's interest isn't just tyrekicking).

Investors reckon they still need a week or so to come up with a number they reckon would be fair, and OZ's half-year results are due about the same time. But early talk is any suitor wanting to unlock OZ's data room would have to present it with a low-thirties bid.

The offtake revelations have also revived investors' early read of the approach: that BHP's after better performance for Olympic Dam and its copper operations, but is also thinking strategically about securing nickel concentrate for its WA smelters.

Eoin Treacy's view -

Building new mines is expensive and time consuming. Those challenges are becoming more burdensome as regulations tighten. OZ Minerals has the benefit of producing resources in a politically stable area, in relatively close proximity to existing mines so additional infrastructure requirements are minimal. That should command a premium and if BHP can get away with paying less than peak values it’s a good buy.



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August 10 2022

Commentary by Eoin Treacy

Global Supply Chains of EV Batteries

This report from the IEA may be of interest. Here is a section:

Pressure on the supply of critical materials will continue to mount as road transport electrification expands to meet net zero ambitions. Demand for EV batteries will increase from around 340 GWh today, to over 3500 GWh by 2030 in the Announced Pledges Scenario (APS). Cell components and their supply will also have to expand by the same amount. Additional investments are needed in the short term, particularly in mining, where lead times are much longer than for other parts of the supply chain – in some cases requiring more than a decade from initial feasibility studies to production, and then several more years to reach nominal production capacity. Projected mineral supply until the end of the 2020s is in line with the demand for EV batteries in the Stated Policies Scenario (STEPS). But the supply of some minerals such as lithium would need to rise by up to one-third by 2030 to satisfy the pledges and announcements for EV batteries in the APS. For example, demand for lithium – the commodity with the largest projected demand-supply gap – is projected to increase sixfold to 500 kilo tonnes by 2030 in the APS, requiring the equivalent of 50 new average-sized mines.

Eoin Treacy's view -

If the quantity of metal required from mining operations needs to increase 10-fold to meet projected demand there is going to have to be a serious reckoning between expectations and reality. Either we are going to have a mining boom larger than anything seen since the days of the California gold rush or expectations for the energy transition and decarbonisation will need to be scaled back/adapted in a very big way.



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August 08 2022

Commentary by Eoin Treacy

Gold Edges Higher With Lower Yields as Traders Eye US Rate Path

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

Gold inched higher as Treasury yields pared their recent surge, with traders temporarily looking beyond the Federal Reserve’s aggressive interest-rate hike path. 

Bullion rose as much as 0.8%, rebounding from the worst daily loss in two weeks in the previous session. On Friday, a stronger-than-expected US jobs report added to the case for more Fed monetary tightening, pushing up the dollar and bond yields while crushing gold since it pays no interest and is priced in the greenback. 

Still, a bigger rate hike isn’t a done deal, and investors are now waiting for a US inflation report later this week to gauge how hawkish the Fed may be at its September meeting. That allowed a pause for Treasury yields and the dollar, lifting gold prices on Monday.

A hike of 75 basis points at next month’s Fed policy meeting “is far from locked in,” TD Securities commodity strategists led by Bart Melek said in a note. For now, “the yellow metal has been able to hold firm.”

The precious metal has rallied for the last three weeks, as concerns over a global recession and heightened US-China tensions boosted demand for the haven asset.

Holdings of bullion in exchange-traded funds have remained under pressure, however, falling for an eighth straight week.

Spot gold rose 0.7% to $1,788.34 an ounce as of 10:49 a.m. in New York. The Bloomberg Dollar Spot Index and the 10-year Treasury yield edged lower. Silver, palladium and platinum all advanced. 

Eoin Treacy's view -

I spent a lot of time thinking about gold over the weekend. I’m not happy with how my trading of the metal has gone over the last year. Despite significantly offsetting my loss with success in other trades, I still feel the pang of failure in gold more acutely than with other instruments. This is the 2nd time in four years I have sold at the wrong time, so I am resolved to do better in future.



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August 02 2022

Commentary by Eoin Treacy

Fertilizer Giants Say Supplies Will Remain Tight Amid War

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

Fertilizer exports from Russia have largely returned to normal as trade flows have adapted, Bert Frost, CF’s senior vice president of sales, said in a quarterly call Tuesday. But there’s one exception: ammonia.

“The global nitrogen market is likely to be short the fertilizer it needs if product prices do not incentivize greater production in high-cost regions,” Frost said.

CF’s cost of natural gas used for production has more than doubled from last year, according to the statement. The company expects its own production to be down in the third quarter due to scheduled maintenance.

Mosaic Co., a major phosphate and potash company, sees both nutrients staying in short supply. Sanctions on Belarus, a top potash producer, have wreaked havoc on the market. And China has been restricting phosphate exports to keep supply in country.

The company expects Belarusian potash exports to be down 8 million tons this year, Chief Executive Officer Joc O’Rourke said in a quarterly call Tuesday. Belarus normally exports about 10-12 million tons annually, according to Green Markets data.

Eoin Treacy's view -

The natural gas crisis in Europe highlights just how vital the commodity is to all manner of industries as well as how spoiled we were by a decade of depressed prices. The creation of a globally fungible market for the commodity, as LNG export/import capacity is built out, suggests an active trading environment in the commodity over the next decade. That will last as long as it takes for wide arbitrages to be eventually ironed out.



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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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July 28 2022

Commentary by Eoin Treacy

US Economy Shrinks for a Second Quarter, Fueling Recession Fears

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

The drumbeat of recession grew louder after the US economy shrank for a second straight quarter, as decades-high inflation undercut consumer spending and Federal Reserve interest-rate hikes stymied businesses and housing.

Gross domestic product fell at a 0.9% annualized rate after a 1.6% decline in the first three months of the year, the Commerce Department’s preliminary estimate showed Thursday. Personal consumption, the biggest part of the economy, rose at a 1% pace, a deceleration from the prior period.

“The more important point is that the economy has quickly lost steam in the face of four-decade high inflation, rapidly rising borrowing costs, and a general tightening in financial conditions,” Sal Guatieri, senior economist at BMO Capital Markets, said in a note. “The economy is highly vulnerable to slipping into a recession.”

Eoin Treacy's view -

It is always dangerous to say this time is different in markets. However, on this occasion there really is some justification that claim. Two consecutive quarters of negative growth meets the technical definition of a recession. However, there are some important mitigating circumstances. For one, unemployment has not risen significantly. There has also never been a recession when the PMI was among 50. That suggests muddier perspective than we might be accustomed to.



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July 28 2022

Commentary by Eoin Treacy

Lucapa announces discovery of largest pink diamond in 300 years

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

Lucapa Diamond Company has announced the discovery of what is believed to be the largest pink diamond in 300 years, Associated Press reported on July 27. Named the 'Lulo Rose', the 170-carat gemstone was found in the Lulo alluvial diamond mine in the central African country of Angola, according to a statement on the company’s website.

“Only one in 10,000 diamonds is coloured pink. So you're certainly looking at a very rare article when you find a very large pink diamond,” Lucapa chief executive Stephen Wetherall told the Associated Press. It is expected to fetch a high value when auctioned, but Wetherall suggested its colour could give it an even higher premium.

Lulo is a 3,000km2 concession in Angola’s Lunda Norte diamond heartland, approximately 630km east of the Angolan capital of Luanda. Over the past decade, exploration by Lucapa and its partners Endiama (Angola’s national diamond company) and Rosas & Petalas has been successful in proving up one of the world’s most prolific alluvial diamond fields at Lulo, along with >100 kimberlite pipes, says Lucapa’s website. 

Eoin Treacy's view -

Pink diamonds are highly prized by both consumers and investors and a stone of this size is a very rare commodity. It could fetch a price in excess of the miner’s current market cap.



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July 27 2022

Commentary by Eoin Treacy

Rio Tinto Says Simandou Deal Close After Wrangles Over Railway

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

Simandou offers a potentially huge new source of supply for Rio, the world’s largest iron ore producer, while China sees the project as key to easing its steel industry’s dependence on Australian output. The world’s top steel-producing nation recently embarked on one of the biggest shake-ups of the global iron ore market in more than a decade by setting up a new state-owned group, designed to be a hub for huge overseas mine investments and buying the steelmaking material from international suppliers.

Eoin Treacy's view -

Simandou might be a big deal of Rio Tinto but it is much more strategically important to China who chaff at their dependence on Australian exports. If the Guinea project comes online they will have greater control over iron-ore supply and will no longer be held hostage to the oligopoly of Rio Tinto, BHP and Vale.



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July 22 2022

Commentary by Eoin Treacy

Gold Gains as Investors Weigh Growth Concerns; Palladium Jumps

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

“We are finally starting to see some weakness in the US dollar index, as gold bounces off an oversold level, recovering above $1,700 for now,” said John Feeney, business development manager at Sydney-based bullion dealer Guardian Gold Australia. “We now expect this initial flight to the US dollar to start rotating back into gold as investors search for a true and reliable hedge against inflation.”

Eoin Treacy's view -

The Federal Reserve’s willingness to increase rates has been the standout event this year. Their attempts to regain investor confidence following the failure to anticipate sticky inflation has resulted in a rare confluence of weak bond, stock and commodity markets at the same time. That has played havoc with returns for institutional investors.



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July 21 2022

Commentary by Eoin Treacy

'The US Is Not Prepared': Hot Temperatures Stress Rail Systems

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

"The US is not prepared,” said Paul Chinowsky, a professor of civil engineering at the University of Colorado Boulder. “While the rail system is incrementally being improved, there is significant work to do and what is being done is not being done fast enough.”

In Concord, California last month, triple-digit temperatures were the culprit behind a curve that emerged in a rail line that ultimately derailed a train, according to the Bay Area Rapid Transit Authority. And in Portland, Oregon, last year, temperatures that reached over 100°F wreaked havoc on the city’s public transport, MAX Light Rail, melting the overhead cables that power its trains. City officials had to suspend all train services for almost two days.

Eoin Treacy's view -

UK consumers are familiar with services coming to a halt because of leaves on the track or more recently heat related issues. Covering Hammersmith bridge in London with foil insulation and installing air conditioning units for the cast iron stretches the argument for preserving industrial revolution era infrastructure to the point of incredulity. At some point, it’s time to put utility ahead of sentimentality. One way or another there is going to have to be infrastructure development.



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July 20 2022

Commentary by Eoin Treacy

Canopy Growth Leads Pot Stocks Up Amid Decriminalization Hearing

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

Canopy Growth jumps as much as 16% to a three-week high ahead of a US Senate committee meeting to explore decriminalizing marijuana next Tuesday.

The Subcommittee on Criminal Justice and Counterterrorism scheduled a hearing to “examine decriminalizing cannabis at the Federal level, focusing on necessary steps to address past harms,” set for July 26

Shares of cannabis companies jumped, including; Tilray Brands Inc. up as much as +8.8%, Cresco Labs +9.2%. Aurora Cannabis Inc. +8.2%, Curaleaf +4.5%, Green Thumb Industries Inc. +6.2%, Sundial Growers Inc. +7.2%

The ETFMG Alternative Harvest ETF rose as much as 5% to its highest point in three weeks

Pot stocks have rallied on news that Senate Democrats plan to introduce a bill to decriminalize marijuana, known as the Cannabis Administration and Opportunity Act, as early as this week

Eoin Treacy's view -

I have mixed emotions about cannabis. My libertarian instincts lead me to favour supplying people with all the information they might need and letting them do as they please. Any trouble they get into is at their own risk and personal responsibility should imbibe individuals with a sense of risk aversion.



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July 15 2022

Commentary by Eoin Treacy

Gold: Dividing up our forecast

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

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

Eoin Treacy's view -

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



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July 14 2022

Commentary by Eoin Treacy

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

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

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

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

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

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

Eoin Treacy's view -

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



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July 13 2022

Commentary by Eoin Treacy

Email of the day on beneficiaries from a recession:

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

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

Eoin Treacy's view -

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



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July 12 2022

Commentary by Eoin Treacy

Anger in Shanghai as Covid Return Spurs Fear of New Lockdown

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

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

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

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

Eoin Treacy's view -

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



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July 11 2022

Commentary by Eoin Treacy

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

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

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

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

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

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

Eoin Treacy's view -

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



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July 07 2022

Commentary by Eoin Treacy

Ruble Halts Longest Series of Losses Since April: Inside Russia

This note from Bloomberg may be of interest. 

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

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

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

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

Eoin Treacy's view -

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



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July 07 2022

Commentary by Eoin Treacy

Email of the day on holding gold miners

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

Eoin Treacy's view -

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



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July 06 2022

Commentary by Eoin Treacy

EU parliament backs labelling gas and nuclear investments as green

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

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

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

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

Eoin Treacy's view -

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



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July 05 2022

Commentary by Eoin Treacy

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

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

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

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

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

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

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

Eoin Treacy's view -

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



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July 05 2022

Commentary by Eoin Treacy

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

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

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

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

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

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

Eoin Treacy's view -

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



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July 01 2022

Commentary by Eoin Treacy

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

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

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

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

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

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

Eoin Treacy's view -

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

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



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July 01 2022

Commentary by Eoin Treacy

Aussie Leads Commodity-Currency Selloff as Recession Risk Rises

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

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

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

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

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

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

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

Eoin Treacy's view -

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



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June 24 2022

Commentary by Eoin Treacy

Markets Are Losing the Anchor of a Generation

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

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

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

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

Eoin Treacy's view -

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



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June 23 2022

Commentary by Eoin Treacy

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

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

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

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

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

Eoin Treacy's view -

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



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June 23 2022

Commentary by Eoin Treacy

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

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

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

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

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

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

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

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

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

Eoin Treacy's view -

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



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June 21 2022

Commentary by Eoin Treacy

Global Food Inflation Gets Reprieve as Wheat and Oilseeds Tumble

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

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

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

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

Eoin Treacy's view -

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



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June 17 2022

Commentary by Eoin Treacy

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

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

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

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

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

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

Eoin Treacy's view -

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



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June 16 2022

Commentary by Eoin Treacy

Traders Bet Dovish Bank of Japan to Capitulate After Swiss Shock

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

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

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

Eoin Treacy's view -

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



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June 15 2022

Commentary by Eoin Treacy

Fed Hikes Rates 75 Basis Points, Intensifying Inflation Fight

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

Federal Reserve officials raised their main interest rate by three-quarters of a percentage point -- the biggest increase since 1994 -- and signaled they will keep hiking aggressively this year, resorting to drastic measures to restrain the rampant inflation they failed to forecast.

Slammed by critics for not anticipating the fastest price gains in four decades and then for being too slow to respond to it, Chairman Jerome Powell and colleagues on Wednesday intensified their effort to cool prices by lifting the target range for the federal funds rate to 1.5% to 1.75%.

They projected raising it to 3.4% by year-end, implying another 175 basis points of tightening this year.

The median official saw a peak rate of 3.8% in 2023, and five officials forecast a federal funds rate above 4%; the median projection in March was for 1.9% this year and 2.8% next. Traders in futures markets were betting on a peak rate of about 4% ahead of the release.

The Fed reiterated it will shrink its massive balance sheet by $47.5 billion a month -- a move that took effect June 1 -- stepping up to $95 billion in September.

Eoin Treacy's view -

The Fed expects to raise rates above 3% by the end of the year. That’s a higher high. The only time the Fed Funds rate posted a higher high in the past was in 1999 and it was quickly reversed. This time around, the big question is how long that level will be sustained and where the next low will be.



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June 14 2022

Commentary by Eoin Treacy

US Natural Gas Slumps as LNG Plant Shutdown Strands Supplies

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

US natural gas futures plummeted and European prices surged after the operator of a key Texas export terminal said it may take three months to partially restart the facility following a fire last week. 

Gas for next-month delivery in New York tumbled as much as 19% to $7.008 per million British thermal units as the shutdown threatens to leave supply stranded in US shale basins. European futures on the Title Transfer facility hub in Amsterdam jumped 18% to $30.14.

Eoin Treacy's view -

The role of LNG in smoothing out the arbitrage between the North American and European gas is probably under appreciated by investors. The transatlantic LNG market did not exist five years ago. Today it is expected to compensate for Europe’s reluctance to continue to buy Russia supply. The loss of one plant, even temporarily highlight just how tenuous that plan is.



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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 20 2022

Commentary by Eoin Treacy

US Set to Block Russian Debt Payments, Raising Default Odds

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

Russia has started the process of paying holders of two foreign-currency bonds before a key carveout in restrictions expires next week.

The money isn’t due for another week, but the settlement date for both payments is two days after a temporary exemption for US bondholders to receive Russian bond funds is set to end. 

That loophole has allowed the government to get payments through the plumbing of the international financial system to US investors, staving off a foreign default. But Treasury Secretary Janet Yellen characterized the carve-out as “time-limited” last week.

Payments of $71.25 million on a note maturing 2026, and 26.5 million euros ($28 million) on debt due 2036, were transferred to the National Settlement Depository, or NSD, Russia’s Finance Ministry said Friday. It added that its obligations on the debt have been met “in full.” 

Previous fund transfers have been delayed or blocked by financial institutions amid the sweeping international sanctions imposed on Russia since its invasion of Ukraine. About $650 million of payments were made just days before a grace period was due to expire earlier this month.

Russia Dodges Default for Now as Investors Get Dollar Funds

From the NSD, the payments go to international clearinghouses, which distribute the funds to the various custodian banks where foreign bondholders have their accounts.

If that all goes smoothly, attention will turn to almost $400 million of coupons due toward the end of June. 

Without the Treasury loophole for US investors, and no alternative options arranged, the question will be whether bondholders elsewhere can still receive the funds. 

The first two coupons due June 23 have clauses that allow payment in euros, pounds sterling or Swiss francs. Their terms also stipulate that the funds will land with the local paying agent, the NSD.  

One day later, $159 million comes due that can only be paid in dollars, via a unit of JPMorgan as foreign paying agent.     

Eoin Treacy's view -

Engineering a Russian debt default is obviously part of the economic warfare the West has launched in response to the invasion of Ukraine. The impact of those measures is significantly reduced by the fact Russia has one of the lowest debt to GDP ratios in the world.



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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 13 2022

Commentary by Eoin Treacy

Oil Climbs as Global Refining Crunch Drives Record Fuel Cost

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

Oil climbed as a global squeeze on refined products continued to pull fuel prices higher with Russian diesel exports falling sharply.  

West Texas Intermediate traded near $110 wrapping up another week of tumultuous trading where lowered liquidity exacerbated price moves. Diesel exports from Russia dropped in April from their prewar level as oil buyers seek to punish one of the world’s biggest suppliers. Investors have also been keeping a close eye on China as authorities in Beijing denied rumors that the city will go into lockdown even as new Covid-19 cases climbed.

Fuels are currently the bullish driver for crude, especially as Russian diesel exports drop, said Dennis Kissler, Senior Vice President of Trading, BOK Financial. “The path of least resistance still looks higher for all petroleum products as demand continues to outstrip supplies.”

Eoin Treacy's view -

Diesel and jet fuel prices have been making headlines this year because they are at record levels. The war in Ukraine and Europe’s reliance on Russia for 70% of its diesel have been blamed for this development. However, there is an additional consideration I have not seen mentioned elsewhere.



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May 13 2022

Commentary by Eoin Treacy

Email of the day on my leveraged gold positions

I was interested to see today that gold hit just below $1800 and your average buying price so far is at that level. You have had bids in the market for some time ...I wondered if they have been triggered with the $200 drop in the gold price in the last month. It feels like March 2020 when gold was swept up in the stock market declines in the rush to cash. Are we seeing a repeat now...in which case gold could make a swift recovery like it did then perhaps?

Eoin Treacy's view -

Thank you for this question which I’m sure will be of interest to the Collective. I also apologise for not speaking more about gold in yesterday’s audio commentary. It occurred to me last night that I had not mentioned gold in the broadcast and that was a glaring omission.



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May 12 2022

Commentary by Eoin Treacy

Wheat Prices Spike as US Sees War, Adverse Weather Hurting Crops

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

From war to extreme weather, the world’s wheat crops are under threat, a view that’s being bolstered by a US report.

Production in Ukraine, one of the biggest growers, will fall by one-third compared to last year, according to a U.S. Department of Agriculture forecast. Other major producers are battling drought, floods and heatwaves. In all, global stockpiles in the coming season will dwindle to a six-year low. 

The smaller wheat harvests and a slow start to the US planting season is risking more food inflation ahead. Hunger is already on the rise in many parts of the globe.

Eoin Treacy's view -

Food stockpiles are low after two years of pandemic lockdowns. The war in Ukraine is an additional complication and prices are already high. The wildcard in terms of supply is Russia where farmers have access to fertilizer and oil from domestic sources. No one is going to broadcast they are buying Russia grain but that supply will reach market as prices rise.



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May 11 2022

Commentary by Eoin Treacy

Dollar Won't Be Haven Currency of Choice for Long

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

This in turn takes us to an interesting observation by George Saravelos, Deutsche Bank AG’s global head of currency research, who says that “we are perhaps now reaching the tipping point where further financial conditions tightening will start to place more severe headwinds to how much more we can reprice the Fed.” This will result in the dollar becoming less responsive to risk-off due to more dovish implications for the Fed path. And while it’s still early stages, Saravelos argues that “the market is starting to behave as if we may be approaching this tipping point.”

Now, even if inflation does peak this year, that won’t mean central banks will exit their tightening path, but will adjust it accordingly. Just look at the Bank of England’s latest forward guidance and the divide within the voting committee. At the same time, and if we talk stagflation or recession, we should consider that the yen may attract haven flows once again given its low inflationary readings, Japan’s current surplus and so forth.

Eoin Treacy's view -

Today’s month over month CPI figure was 0.3%. Analysts expected 0.2% but the prior reading was 1.2%. That’s still a moderation in near-term inflation, even if it is still rising. Year over year the rate is still 8.3% which is in the middle of what was expected and the last reading.



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May 03 2022

Commentary by Eoin Treacy

Rba Rate Rise Knocks the Wind Out of ASX

This article from the Sydney Morning Herald may be of interest to subscribers. Here it is in full: 

The Australian sharemarket hit a downdraft when the Reserve Bank of Australia raised interest rates by a surprisingly large 25 basis points yesterday, as the markets digested the implications of rising debt costs.

The ASX 200 dropped 0.4 per cent, or 30.8 points to close at 7316.2 with tech stocks, the health care and industrials the only sectors to close in the black. Miners like BHP, Fortescue and Rio sunk after iron ore prices slumped overnight. Fortescue led the declines with a 4.8 per cent share price drop and Rio Tinto closed 1.5 per cent lower.

Finance stocks also took a hit with ratings agency Standard & Poor's saying home loan arrears are likely to drift up from historically low levels following yesterday's increase in interest rates.

Russel Chesler, head of investments at VanEck, said higher credit costs are likely to dent big bank profits.

"Locally, we are likely to see the big banks come under pressure in the month ahead as higher rates dent the banks' earnings from mortgages and bad debts could jump on higher credit costs." He expects companies which act like an inflation hedge, like gold and infrastructure, are likely to outperform. And despite the drop yesterday, rising commodity prices are expected to support the big miners through 2022.

"In this environment, with inflation running hot and interest rates rising, companies, including cyclical stocks, that can increase their prices and keep their customers at the same time, are likely to outperform," he said.

In other news, the chief executives of Australia's two largest private employers, Woolworths and Wesfarmers have thrown their support behind an increase in workers' wages amid persistently rising inflation and a tightening labour market.

There was also good news about the pandemic recovery, Transurban chief executive Scott Charlton said toll-road traffic has fully rebounded in Australia and is almost at normal levels in the US as businesses and consumers emerge from the pandemic.

Eoin Treacy's view -

This is the first Australian interest rate hike since 2011. With CPI at 5% and testing the upper side of a 30-year base formation, the RBA can be expected to continue to hike but perhaps not as quickly as other developed markets.



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April 29 2022

Commentary by Eoin Treacy

Bank of Russia Rejects Ruble-Gold Peg Idea, Differs With Kremlin

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

Bank of Russia Governor Elvira Nabiullina dismissed the idea of pegging the ruble to gold after the Kremlin said it was a proposal under consideration.

“It is not being discussed in any way,” Nabiullina told reporters at a briefing Friday after the central bank cut the key interest rate by 300 basis points. The ruble must continue to have a floating exchange rate, she said, though volatility of the currency will be higher amid capital controls imposed after Russia began its invasion of Ukraine.

Her comment appeared to contradict President Vladimir Putin’s spokesman, Dmitry Peskov, who said earlier Friday that “this question is now being discussed.” Peskov pointed to comments by Security Council Secretary Nikolai Patrushev on linking the currency to gold and other commodities in an interview with a state-run newspaper this week, while offering no further details.

Unprecedented sanctions on Russia’s central bank over the invasion of Ukraine deprived it of access to about half of its holdings, leaving it in possession of only gold and yuan. Before the war, Putin repeatedly argued that Russia needs to cut dependence on the dollar as a global reserve currency.

Speculation has been rife that sanctions on Russia may herald a far-reaching shift that could bolster bullion. Analysts like Credit Suisse Group AG’s Zoltan Pozsar predict that the seizure of the central bank’s foreign exchange reserves will result in a new monetary paradigm where gold plays a greater role.

Speaking with Rossiyskaya Gazeta, Patrushev said experts are examining proposals to back the ruble’s value with gold and other goods as part of an alternative system of finance that guarantees a measure of sovereignty and reduces the link to the dollar.

Continuing a multi-year effort to reduce exposure to the U.S. currency, the Russian central bank cut the share of dollars in reserves to 10.9% as of Jan. 1 from from 21.2% a year earlier. Gold was down slightly at 21.5%.

Until the invasion of Ukraine forced Nabiullina to enact capital controls, the ruble was allowed to trade freely since 2014, its value determined by the market. 

Eoin Treacy's view -

Demanding payment for commodity exports in Rubles is a major escalation of the stress Russia is imposing on the EU and the rest of the world. China speaking of its relationship with Russia as a new model for world order is an additional signal that conditions are not about to go back to the pre pandemic equilibrium



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April 27 2022

Commentary by Eoin Treacy

GS, Doosan and Samsung to Cooperate in SMR Power Plant Business

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

A signing ceremony was held at GS Energy Headquarters in Gangnam-gu, Seoul, on April 26 with the presence of representatives from the four companies. They included GS Energy president Huh Yong-soo, Doosan Enerbility vice president Na Gi-yong, Samsung C&T vice president Lee Byung-soo, GS Energy vice president Kim Seong-won, and NuScale Power president John Hopkins.

NuScale’s SMR is the only one of its kind to receive design certification from the U.S. Nuclear Regulatory Commission (NRC). It is regarded as the most advanced SMR in the world. It can be used for hydrogen production, seawater desalination, and heat supply to industrial complexes in addition to electricity generation.

The MOU is expected to generate huge synergies by combining NuScale’s SMR technology, GS Group’s power plant operation capabilities, Doosan Enerbility’s expertise in nuclear power plant equipment production, and Samsung C&T’s power plant construction capabilities.

A power plant using NuScale SMRs will be built and put into commercial operation in Idaho of the United States in 2029.

Eoin Treacy's view -

Last month Samsung also signed a memorandum of understanding aimed at building Seaborg’s modular self-contained molten salt reactors for nearshore power production. In addition to taking a minority stake in NuScale last year, this represents a significant bet on small scale nuclear construction. It’s not an exaggeration to think South Korea is aiming to dominate the construction of small modular reactors.



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April 26 2022

Commentary by Eoin Treacy

Email of the day on industrial metals miners

“All the big mining companies coming down 20-25 pct in 4 to 5 days. pretty scary to me. what am I missing? Beside talk about the Fed raising interest rates in May with 0,5 pct and a growth scare or the lockdowns in China? Any other reasons? Should we now buy the miners again with the positive future ahead? Gold and copper also look attractive now. your opinion please”

Eoin Treacy's view -

Thank you for this question which may be of interest to the Collective. Ultimately, the question can be distilled down to whether we believe the rest of the world is going to invest in enough infrastructure to outpace a significant economic slowdown in China. The answer is not necessarily binary. We probably get one first, then the other.  



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April 26 2022

Commentary by Eoin Treacy

Russia to Halt Gas to Poland on Wednesday in Major Escalation

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

Moscow appears to be making good on a threat to halt gas supplies to countries that refuse President Vladimir Putin’s new demand to pay for the crucial fuel in rubles. Europe has said that doing so would breach sanctions and strengthen Russia’s hand. Poland has been particularly vociferous in its criticism of Russia and has refused to comply with the new terms.

Eoin Treacy's view -

The energy volatility from the Russian invasion will continue to be a source of worry for the global economy for as long as sanctions are in place. That’s likely to be at least a few years and will weigh more heavily on countries lying close to Ukraine.  



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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 22 2022

Commentary by Eoin Treacy

Email of the day on commodity prices

if we are at peak inflation now, as some suggest, do you believe it's time up for the commodity trade? Freeport, Anglo, Alcoa has vicious pull backs this week from highs, with some of those having key week reversals. If you've made money, take shelter and come back another day, or stick it out because the longer-term structural story is intact?

Eoin Treacy's view -

Thank you for a topical question. The big question at present is whether we are in a cyclical or secular bull market for commodities and industrial resources in particular.  

The cyclical argument runs that the current conditions are similar to the post credit crisis rebound. From early 2009 commodities rallied from depressed levels to new highs inside of three of years. Then monetary conditions tightened as balanced budget measures were imposed in both the USA and Europe. As monetary conditions tightened, and the Dollar strengthened, commodities peaked went through a crushing bear market for the next five years.



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April 21 2022

Commentary by Eoin Treacy

Freeport Slumps as Inflation Counters Bumper Copper Haul

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

The company lowered its sales guidance for this year to 4.25 billion pounds of copper from a previous call of 4.3 billion, and raised its annual cash cost forecast to $1.44 a pound from $1.35 and ahead of the average analyst estimate.

Freeport sees the kind of dramatic cost inflation that is affecting miners now as temporary, although “time will tell,” Chief Executive Officer Richard Adkerson said on a call with analysts.  

For now, cost increases are being offset by higher output and surging prices, translating into bumper profits. Adjusted earnings more than doubled to a better-than-expected $1.07 a share. 

Freeport produced 1 billion pounds of copper in the first quarter, exceeding the 996 million-pound average estimate of six analysts tracked by Bloomberg. The result was well ahead of the same period last year, although slightly below a three-year high clocked in the fourth quarter. Freeport also produced more gold than expected in the quarter.

Eoin Treacy's view -

Reporting bumper production but rising costs is symptomatic of the challenge facing miners. They will be reluctant to spend the money necessary to radically increase supply when they do not have visibility on inflation and interest rates. That’s particularly true when rising production threatens to put a lid of the appreciation in metal prices.



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April 20 2022

Commentary by Eoin Treacy

Sahara solar could soon rescue Britain's broken energy system

Thanks to a subscriber for this article by Ambrose Evans Pritchard for the Telegraph. Here is a section:

Such long cables would have leaked too much power to be viable in the past. Modern HVDC technology at 515 kilovolts has shaved the total loss to 15pc, including the conversion of electricity at both ends.

The coming generation of 800 or 1,000 kilovolts will shave the loss rate further. New methods of laying cables will open up the most direct deep-sea routes instead of having to hug the coasts, cutting transmission lines from Morocco by a quarter.

“We are going to see an explosion of long-distance interconnectors criss-crossing the seas. You could even link up the US and UK, since it is a similar cable distance,” said Mr Morrish.

Eoin Treacy's view -

Covering the Sahara in solar arrays has been discussed for years and very little progress has been made. It’s not exactly the most politically stable place in the world, even if Morocco is less volatile than some of its neighbours. European countries have also probably had enough of being beholden to the Middle East and oil. Transferring dependence to solar and North Africa was viewed as less than appealing. However, Russia’s invasion of Ukraine may change that calculus and introduce urgency into the discussion.  



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April 19 2022

Commentary by Eoin Treacy

Chinese Yuan Extends Drop to Six-Month Low as U.S. Yields Rise

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

The yuan slipped to its weakest level in six months, pressured by concern surrounding China’s growth outlook and a surge in U.S. Treasury yields.

China’s offshore currency weakened by as much as 0.7% to 6.4198 per dollar in New York trading, its weakest since October 2021. The decline comes as traders eye the risk that the world’s second-largest economy is becoming snarled in lockdowns, quarantine and testing rules. The yuan was also pressured by a rise in U.S. yields and the greenback on odds of even more aggressive Federal Reserve tightening. 

On Monday, China’s central bank unveiled nearly two dozen measures and promises intended to boost lending and support industries that have been beaten down by recent Covid lockdowns, including a pledge to guide banks to expand loan extensions.

“This is the strongest signal yet from Chinese authorities that they are concerned over growth conditions,” said Simon Harvey, head of currency analysis at Monex Europe. “Coupled with regulatory tightening in the tech sector, the increased level of concern over domestic growth suggests a poor year for Chinese equity returns. Today’s currency reaction is reflective of this.”

Although first-quarter GDP data showed a pick-up in growth, a deceleration in production and retail data in March as economists further worried about China’s growth outlook amid damage from lockdowns. 

In the U.S., meantime, investors are ramping up bets for the size of the Fed’s next interest rate hike. While markets are generally pricing in a 50-basis-point hike, St. Louis Fed President James Bullard said Monday that hikes of as much as 75 basis points shouldn’t be ruled out. Treasury yields surged across the curve on Tuesday, with the benchmark 30-year bond rising above 3% for the first time in three years.

That likely deepened losses for the yuan, which on Tuesday breached the key support level of its 200-day moving average. Japan’s yen also plunged, set to extend its longest losing streak in more than half a century.

Eoin Treacy's view -

Slowing consumer spending is beginning to weigh on the Chinese economy and not least as house prices post negative performance. The Chinese government has been very slow to act because they are aware of how overt stimulative action inflates asset bubbles, and prices are already high. Nevertheless, they probably fear social unrest from high unemployment and negative growth more.  



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April 12 2022

Commentary by Eoin Treacy

Stocks Rise as CPI Bolsters Bets on Inflation Peak

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

While the U.S. consumer-price index climbed by the most since late 1981, excluding volatile food and energy components, the gauge increased 0.3% from a month earlier and 6.5% from a year ago -- due in part to the biggest drop in used vehicle prices since 1969. The March CPI reading represents what many economists expect to be the peak of the current inflationary period, capturing the impact of Russia’s invasion of Ukraine.

Comments:
“There were some green shoots in the data that suggest March could potentially be the peak for inflation,” said Lindsey Bell, chief markets and money strategist for Ally. “When you couple this with the recent retreat in oil prices, improving shipping costs, a potential reduction in demand from higher prices, and the cycling of higher inflation comparisons, it’s possible that inflation could be topping out.”

“While today’s inflation print hit a four-decade high, there was a sigh of relief as some components of core inflation weakened,” said Charlie Ripley, senior investment strategist for Allianz Investment Management. “Regarding peak inflation, we have been at this juncture before where subtle shifts within the data make it appear that the level of inflation has reached its peak for the cycle only to keep marching higher.”

“It’s a red-hot number, but the market’s reaction for now suggests it’s priced in, especially with the month-over-month core read coming in below expectations,” said Mike Loewengart, managing director of investment strategy at E*Trade from Morgan Stanley.

Eoin Treacy's view -

The above headline was a bit premature as early rises were later reversed.

Used car prices have an outsized effect on the USA’s official inflation measure because they don’t look at either food or energy. The Index rallied 57.3% between June 2020 and January 2022. It is now declining. Used cars cost about the same as new vehicles with the only difference being you can get a used car today but wait for a new one. The wait is increasingly preferrable to consumers as monetary conditions tighten.



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April 11 2022

Commentary by Eoin Treacy

Two Oil Supertanker Giants Combine to Form World's Largest Fleet

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

Frontline Ltd. and Euronav NV are considering an all-stock merger that would produce the world’s biggest tanker fleet, just as Russia’s invasion of Ukraine drives a recovery in the market.

The creation of a tanker behemoth -- capable of carrying the equivalent of about 100 days of German daily oil demand -- would come at an opportune moment. With shippers shunning Russian vessels, demand for other carriers is increasing, boosting a market that’s languished for more than a year.

Shares of both Frontline and Euronav have rallied this year, valuing a combined tanker company at more than $4.2 billion.

“A combination of Frontline and Euronav would establish a market leader in the tanker market and position the combined group for continued shareholder value creation in addition to significant synergies,” John Fredriksen, who owns a 39% stake in Frontline, said in a joint statement on Thursday.

Eoin Treacy's view -

The Baltic Dirty Tanker Index remains on a recovery trajectory since Russia’s fleet is having difficulty moving around. The Index hit a new 14-year high on Friday. Meanwhile Brent crude oil prices are back below $100 and likely to fall further as China’s demand outlook worsens. That begs the question how long the surge in tanker prices will last.  



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April 06 2022

Commentary by Eoin Treacy

Copper: Supply meets demand concerns

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

Eoin Treacy's view -

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

Ranging prices contribute to analysts hedging their bets of which direction prices are likely to breakout and how much they are likely to move. Nevertheless, by suggesting a strike on put options of $9750, which coincides with the trend mean, they are effectively saying give the benefit of the doubt to the upside provided it continues to hold that level.



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April 05 2022

Commentary by Eoin Treacy

Email of the day on gold, gold shares and Rolls Royce

Today, there is an unusual discrepancy between GDX (-1.43%) and GDXJ (-0.27%), usually it is the other way around. Gold futures are up 0.64%.

Is there something the "big money" (presumably in GDX) knows about upcoming developments in Gold or miners?

You have not talked about your position in RR? Just keeping indefinitely?

Eoin Treacy's view -

Thank you for this email which may be of interest to subscribers. Gold continues to pause around the psychological $1900 level. In any range the bullish and bearish arguments return to equilibrium.

At present the competing arguments are that gold should do well because central banks have been backed into a corner by rampant money printing and will be unable to raise rates enough to fix the inflation issue. The competing negative view is gold faces an increasing headwind for rising yields.



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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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April 01 2022

Commentary by Eoin Treacy

California Wants to Pay Farmers to Not Farm This Year

This article from Modern Farmer may be interest to subscribers. Here is a section:

This year, California farmers have been given a financial incentive to not plant crops.

Much of the state is already experiencing extreme drought conditions. As part of a $2.9-billion plan to try to keep water flowing in California rivers, the state will pay farms to keep thousands of acres vacant this growing season. 

Both state and federal officials, as well as some major water companies in the region, signed the plan on Tuesday. Their hope is to keep upwards of 824,000 acre-feet of water every year in the Sacramento-San Joaquin River Delta. The Capital Press explains that one acre-foot of water adds up to around 325,000 gallons of water—or typically enough to supply water to two households for a year.

The most impacted sector will be the rice industry, as the plan would leave 35,000 acres of rice fields in the northern Central Valley—adding up to about six percent of the yearly crop—unused.

Eoin Treacy's view -

The conversion of acre feet quoted above doesn’t appear to be accurate but reducing the acreage of rice planted by 6% is a significant event.



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March 30 2022

Commentary by Eoin Treacy

Gold Climbs From One-Month Low After Strong U.S. Jobs Data

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

Gold climbed from its lowest in a month as real yields declined following a strong U.S. jobs report that underlined inflationary pressures in the economy.

ADP Research Institute data indicated higher wages are helping fill a near-record number of vacancies in America, potentially stoking price pressures. Market-based measures of inflation expectations climbed after the report, trimming real bond yields and supporting gold.

The Federal Reserve’s increasingly aggressive approach to curbing inflation is still weighing on the non-interest bearing precious metal. Philadelphia Fed Bank President Patrick Harker said Tuesday that he expects a series of “deliberate, methodical” rate increases this year, but is open to a half-point move in May if inflation accelerates.

Eoin Treacy's view -

The yield curve inverted during yesterday’s trading session. That started the clock on the beginning of the next recession. It’s a reliable lead indicator for future trouble with anything from a six to eighteen-month timeframe.



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March 30 2022

Commentary by Eoin Treacy

Taliban eye investment by Chinese

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

But the project got tied up in logistical and contract problems, and it never got past some initial test shafts before it ground to a halt when Chinese staff left in 2014 because of continued violence.

Months after the Taliban seized Kabul in August, consolidating power over the country, the group’s newly installed acting Minister for Mining and Petroleum Shahbuddin Dilawar urged his staff to re-engage Chinese state-run companies.

Ziad Rashidi, the ministry’s director of foreign relations, approached the consortium made up by MCC, China Metallurgical Group Corporation and Jiangxi Copper Ltd. Dilawar has had two virtual meetings with MCC in the last six months, according to company and ministry officials. He urged them to return to the mine, terms unchanged from the 2008 contract.

A technical committee from MCC is due in Kabul in the coming weeks to address the remaining obstacles. Relocating the artifacts is key. But MCC is also seeking to renegotiate terms, particularly to reduce taxes and slash the 19.5% royalty rate by nearly half, the percentage owed to the government per ton of copper sold.

“Chinese companies see the current situation as ideal for them. There is a lack of international competitors and a lot of support from the government side,” Rashidi said.

China’s ambassador to Afghanistan has said talks are ongoing, but nothing more. Acquiring rare minerals is key for Beijing to maintain its standing as a global manufacturing powerhouse. While stopping short of recognizing the Taliban government, China has stood out from the international community by calling for the unfreezing of Afghan assets and has kept its diplomatic mission running in Kabul.

For Afghanistan, the contract at Mes Aynak could bring in $250 to $300 million per year to state revenues, a 17% increase, as well as $800 million in fees over the length of the contract, according to government and company officials. That’s a significant sum as the country grapples with widespread poverty, exacerbated by financial shortfalls after the Biden administration froze Afghan assets and international organizations halted donor funds. Some have since resumed.

Eoin Treacy's view -

The Taliban needs cash and China needs resources. That suggests there is room for an agreement. China’s treatment of the Uighur minority is unlikely to get in the way of real politik. China has the capital, market and will to do what is necessary to get projects done.



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March 30 2022

Commentary by Eoin Treacy

Tesla Dodges Nickel Crisis With Secret Deal to Get Supplies

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

“What Tesla has done with nickel is a hidden competitive advantage,” said Gene Munster, managing partner of Loup Ventures. “Tesla continues to be a couple of steps ahead of the rest.”

Musk has repeatedly flagged nickel supply as the company’s biggest concern as it boosts output, and the metal’s availability is a source of anxiety throughout the EV sector.

Battery-sector demand for nickel is expected to jump to about 1.5 million tons in 2030 from 400,745 tons this year, according to Bloomberg NEF.

“Please mine more nickel,” Musk urged producers on an earnings call two years ago. “Tesla will give you a giant contract for a long period of time if you mine nickel efficiently and in an environmentally sensitive way.”

Eoin Treacy's view -

Tesla’s management deserves credit for ensuring they have access to the resources needed to make production targets. Tesla’s vertically integrated business model is what the conventional auto sector used to do. Ford closed its last steel plant nearly thirty years ago. Selling steel to the major US automakers now represents the bulk of Cleveland Cliffs’ revenue.

As the geopolitical environment grows progressively more complicated, and competition for access to supply of copper, nickel, lithium, manganese and cobalt intensify, inventory management is going to become more important for major industrial companies.



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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 24 2022

Commentary by Eoin Treacy

The Oil Crisis is Unfolding in Slow Motion

This article from Goehring & Rozencwajg which may be of interest to subscribers. Here is a section:

If an EROEI of 10:1 resulted in de minimis economic growth, what can we use this 10:1 number to infer about how high oil prices can go today? An EROEI of 10:1 means that 10% of all energy goes to sustain the energy supply. If energy is a good proxy for general economic activity, then an economy should stagnate once 10% of its GDP goes towards producing (and by extension consuming) energy. Evidence backs this up. Many academic studies suggest an economy will fall into recession once energy takes up 10% of total GDP – an empirical result that agrees with our theory.

In 2008, energy prices were approximately 10% of GDP right before the global financial crisis. If oil represents about half of all energy consumed, this means an economy will stall when oil represent about 5% of GDP. In 2008, the US consumed 18.8 m b/d. At $120 per barrel that equated to $823 bn or 5.6% of the $14.7 tr US GDP. The economy fell into recession shortly thereafter. In 2012-14, oil consumption never exceeded 3.5% of US GDP and prices stayed between $90 and $100 per barrel with no impact on either demand or economic activity.

Today, oil represents less than 3.3% of US GDP and would have to rise to $140 per barrel before approaching the critical 5% threshold. Why do we focus only on the US? Demand is the most elastic in wealthy countries with high energy intensities and the least elastic in developing countries that need energy to fuel their ongoing development. In 2008, prices spiked as high as $145 per barrel albeit temporarily. In this cycle, we believe oil prices will at some point reach, and potentially significantly exceed the previous $145 per barrel peak before we begin to see evidence of demand destruction.

Eoin Treacy's view -

How high do prices have to go to limit demand might not be the correct question. It’s well understood that oil spikes are one of the leading causes of recessions, because energy is a tax on consumption. That suggests the speed of the price rise is at least as important as the headline rate.



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March 23 2022

Commentary by Eoin Treacy

Putin Demands Ruble Payment for Gas, Escalating Energy Conflict

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

“Gazprom would need to ask buyers to agree to change the payment terms in contracts,” said Trevor Sikorski, head of natural gas, coal and carbon at Energy Aspects Ltd. “It reopens the contracts, and buyers could ask for shorter-terms for instance.”

Some 58% of Gazprom’s gross gas sales abroad were in euros as of the third quarter of last year, according to the producer’s most recent bond prospectus. Another 39% were in U.S. dollars. The press office of gas giant Gazprom PJSC declined to comment on whether its long-term supply agreements allow a switch to ruble payments.

Russia announced earlier this month a list of 48 states deemed hostile. They included the U.S., Japan, all European Union members, Switzerland and Norway. As a result, the bulk of Russian gas exports now go to “unfriendly” nations.

“At the same time, I want to emphasize that Russia will definitely continue to supply natural gas in line with the volumes and prices and pricing mechanisms set forth in the existing contracts,” Putin said.

In the first 15 days of March, Gazprom exported an average of 500 million cubic meters per day to countries outside the former Soviet Union, including those in the EU, China and Turkey. Of the total, flows toward Europe averaged 384 million cubic meters per day, the producer’s data showed.

Eoin Treacy's view -

This change of policy serves the short-term requirement of creating demand for the Ruble which will make enforcing sanctions even more difficult. That suggests the recent low of the Ruble near RUB120 is likely to be a medium-term nadir.



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March 22 2022

Commentary by Eoin Treacy

Ray Dalio's Bridgewater reportedly backing a crypto fund means the world's largest hedge fund and one of Bitcoin's former skeptics is taking it seriously

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

“It has been an amazing accomplishment for Bitcoin to have achieved what it has done, not being hacked, having it work and having it adopted the way it has been,” he told MarketWatch in December. 

“I believe in the blockchain technology. … It has earned credibility.”

Eoin Treacy's view -

This might be a case of “if you can’t beat um, join um”. The reality is as bond prices decline, money is pulling out and is looking for a home where its value will hold versus the declining purchasing power of fiat currencies.



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March 21 2022

Commentary by Eoin Treacy

Email on the day on world hunger

*Almost certainly widespread famine within a year*: _15% of world’s calories come from wheat. 1/3 of all wheat comes from Russia and Ukraine…_

Russia has banned export of wheat; a lot of wheat supply blocked. Whole planet earth operates on a 90-day food supply. Once we stop making food the world runs out in 90 days. Most vulnerable nations lose the supply first; very quickly a massive bifurcation. Already have 1bn living on under 1200 calories…

The even bigger problem is the future planting season. Wheat spring planting season is right now; not a lot of planting going on…

This is because of the fertilizer problem. All fertilizer is made up of nitrogen, phosphorus, or potassium. All farmers must use this. Without fertilizer crop does not grow. Nitrogen is made from natural gas. Nat Gas prices have doubled. The price of nitrogen-based fertilizer has gone from 200 per ton to 1000 per ton. 10% of world phosphate and 25% pf potash is from Russia and that has been banned for export. Prices on phosphate and potash have sky-rocketed too. Now it is so expensive to grow crop that farmers are pulling out of production.

The world is “scrambling” for food right now, corn, soybeans etc. skyrocketing. Strategic reserves of food being released now…

A bad weather year can be disastrous. Regardless, it will be a humanitarian disaster within 12 months and we will see hundreds of millions will go starving (think famine)

We just don’t have enough food. The way supply chains are set up just don’t work.

Eoin Treacy's view -

Wheat prices accelerated to test the 2008 peak near 1200¢ and paused over the last week. War in Ukraine and the slow start, or potential absence, of a planting season are obviously major considerations for its customers. Russia’s efforts to capture the entire Black Sea coast are an additional obvious headwind to exports.



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March 17 2022

Commentary by Eoin Treacy

Trafigura Seeks PE Funding as Commodity Surge Triggers Margin Calls

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

Trafigura Group, one of the world’s top oil and metals traders, has been holding talks with private equity groups to secure additional financing as soaring prices trigger giant margin calls across the commodities industry.

Trafigura has in recent weeks stepped up efforts to seek new funding from beyond its traditional group of bank lenders, according to people familiar with the matter.

The trader held talks with Blackstone Inc. for an investment of around $2 billion to $3 billion in preference shares or a similar hybrid instrument, but those talks ended without a deal, said the people, who asked not to be identified as the discussions were private. Trafigura has also approached Apollo Global Management Inc., BlackRock Inc. and KKR & Co., the people said.

The discussions with private equity firms have been broad-based, ranging from financing for specific projects to raising funding at a company level, the people said. There’s no certainty any of the discussions will progress to a deal, they said.

Eoin Treacy's view -

Trafigura emerged from the last commodity bull market as the leader in commodity trading. As investment banks closed desks, sold warehouses and ships, the trading house stepped in and took market share. Today, most of the big trading houses for commodities are privately owned. They also do not have the balance sheets of banks. When volatility steps out to multiple standard deviations, models go awry.



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March 16 2022

Commentary by Eoin Treacy

Fed Lifts Rates a Quarter Point and Signals More Hikes to Come

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

“The American economy is very strong and well positioned to handle tighter monetary policy,” Powell told a press conference Wednesday following a meeting of the Federal Open Market Committee. “We are attentive to the risks of further upward pressure on inflation and inflation expectations.” He also said that officials could move faster on policy tightening if needed.

The hike is likely the first of several to come this year, as the Fed said it “anticipates that ongoing increases in the target range will be appropriate,” and Powell repeated his pledge to be “nimble.”

“I saw a committee that is acutely aware of the need to return the economy to price stability,” he told reporters, characterizing the mood around the table as policy makers debated the outlook. “It is determined to use its tools to do so.”

In the Fed’s so-called dot plot, officials’ median projection was for the benchmark rate to end 2022 at about 1.9% -- in line with traders’ bets but higher than previously anticipated -- and then rise to about 2.8% in 2023. They estimated a 2.8% rate in 2024, the final year of the forecasts, which are subject to even more uncertainty than usual given Russia’s invasion of Ukraine and new Covid-19 lockdowns in China are buffeting the global economy.

Eoin Treacy's view -

The market took the first hike in this cycle in its stride and not least because it has been fully priced in over the last four months. Remaining nimble is going to be essential. Uncertainties abound, not the least of which is China’s problem with containing the omicron variant is only just beginning. Predicting 1.9% by the end of the year implies at least a 25-basis point hike at every meeting. That seems ambitious in the extreme. 



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March 14 2022

Commentary by Eoin Treacy

ESG in practice: assessing Food and Beverage companies' externalities

This report from the Candriam Academy may be of interest. Here is a section:

The market of protein foods is witnessing two key developments. The first is the efficiency drive, through new technology, among existing producers of animal protein food, such as milk, meat, fish or eggs. Better efficiency comes with smaller carbon footprint; indeed, the top 10% best performing farming businesses reduce theirs by double digits by adopting new innovative solutions.

Even more good news for companies: because most of the innovations work alongside existing production systems, their implementation will not require additional capital expenditure. There are also some products that target specific issues, such as cows belching methane – a greenhouse gas more potent in causing global warming than carbon dioxide. We now have a remarkable innovative food supplement that can suppress the production of methane by 30% in dairy cattle, and up to 90% in beef.

The second type of innovations is about finding new sources of non-animal proteins. Everything from using canola to single cell proteins. Recent study reported that “considerable progress has been made towards the development and production of meat alternatives, including cultured meat, plant-based meat alternatives, microbial protein, edible fungi, microalgae, and insect protein.”

We expect a combination of advanced scientific expertise and investment will be required in the years to come not only to develop new sources of proteins but also test how safe they are for human health and well-being. In the meantime, the diet is not the only factor that impacts our climate and other sustainability factors, it is also the operation of the supply chains themselves.

Eoin Treacy's view -

Arguably, the ESG movement found its first target in Nestle. For years activists lobbied the public to stop consuming Nestle products because of labour and business practices they found distasteful and often with good reason. Today’s the carbon footprint of the food sector is under scrutiny and the ESG model is part of every corporate communication.



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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 10 2022

Commentary by Eoin Treacy

Fund Manager's Diary March 9th 2022

Thanks to Iain Little for his latest note which may be of interest. Here is a section:

Third, fixed income markets, largely reward-free risk pre-Ukraine, now face a further knock-out blow. The pressure for rate rises justified by existing 5%+ inflation will be ramped up by the commodity scarcity from sanctions on 12% of the world’s oil production and much of its strategic metals. Add a negative credit effect on bond yields derived from civil unrest in countries relying on imported wheat to feed youthful, volatile populations; Ukraine, at 30% of global total, is the world’s largest supplier. The only cure is a lighter hand on the rate rise tiller from central banks now wary of recession 12-18 months from now. This contradiction is negative for long rates.

Eoin Treacy's view -

With a supply shock, the only way to control inflationary pressures is by either quickly solving it or cutting demand. Companies are pulling out of Russia every day. The Russian government is putting together plans to take over abandoned positions in domestic companies. Russian billionaires are being both sanctioned and censured in almost every OECD market. We are not going back to normal anytime soon; if ever. The repercussions of this economic, financial, business, and social unwind are only beginning to be felt.



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March 10 2022

Commentary by Eoin Treacy

Israel's tortured choice on Russia

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

So, perhaps Jerusalem is right to walk a fine line with Moscow and prioritize strategic over moral concerns. Perhaps, but it’s distressingly difficult to watch. In essence, Israel has muted its voice as Russia slaughters Ukrainian innocents, while threatening the liberal order from which Israel greatly benefits.

Strategically, Israel is heavily dependent on Russia in at least two ways. First, Russia controls most of the airspace over Syria, and has permitted Israel to strike targets there, including Iranian weapons facilities, as well as weapons convoys designed for Lebanon’s Hezbollah terrorist group, which is positioned just over Israel’s northern border.

Second, Russia is one of five permanent UN Security Council members and, as such, is participating in negotiations in Vienna over reviving the 2015 global nuclear deal with Iran. While Washington seeks to resuscitate the deal in hopes of restraining Iran’s nuclear progress, Jerusalem fears that a new deal will pose the same problems as the original one – including sunset dates for restrictions on Iranian nuclear activities, a weak international regime for inspecting Iranian nuclear sites, and no curbs on Iran’s related and growing ballistic missile program.   

Eoin Treacy's view -

Most of the financial market commentary has focused on the strategic resources and oil exports Russia represented. That tends to ignore the fact Russia is a geopolitical heavyweight with stakes in most of the world’s pressure points for strife. Cutting it off from the financial and economic world will exacerbate its appetite to cause trouble in the geopolitical theatre.



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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 08 2022

Commentary by Eoin Treacy

Biden Says U.S. Will Ban Russian Fuels to Pressure Putin on War

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

President Joe Biden said the U.S. will ban imports of Russian fossil fuels including oil, a major escalation of Western efforts to hobble Russia’s economy that will further strain global crude markets.

“We’re banning all imports of Russian oil and gas and energy,” Biden said Tuesday at the White House. “We will not be part of subsidizing Putin’s war.”

The U.S. move will be matched in part by the U.K., which will announce a ban on Russian oil imports on Tuesday, though it will continue to allow natural gas and coal from the country. Other European nations that rely more heavily on Russian fuels will not participate. The scope of Biden’s action was not immediately clear, including exceptions and the impact on shipments already in transit.

Biden’s move is a significant step in his sanctions campaign against Russia after its invasion of Ukraine. While so-called self-sanctioning by the oil industry has limited some purchases of Russian barrels, an outright U.S. ban would further weigh on the market and increase volatility.

Eoin Treacy's view -

If sanctions are to work, they need to hit the target where it hurts. If Russia is to be chastened, more of the world needs to stop buying its products. That’s going to come with massive dislocations to the global economy. It’s a necessary sacrifice because appeasement does not work.



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March 08 2022

Commentary by Eoin Treacy

Satellite outage knocks out thousands of Enercon's wind turbines

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

Germany's Enercon on Monday said a "massive disruption" of satellite connections in Europe was affecting the operations of 5,800 wind turbines in central Europe.

It said the satellite connections stopped working on Thursday, knocking out remote monitoring and control of the wind turbines, which have a total capacity of 11 gigawatt (GW).

"The exact cause of the disruption is not yet known. The communication services failed almost simultaneously with the start of the Russian invasion of Ukraine," Enercon said in a statement.

The company said it had no further information on who or what may have caused the disruption.

Enercon has informed Germany's cybersecurity watchdog BSI and is working with the relevant providers of the satellite communication networks to resolve the disruption, which it said affected around 30,000 satellite terminals used by companies and organisations from various sectors across Europe.

Eoin Treacy's view -

Priorities change. When prices are low consumers value choice and comfort. When prices are high, they value efficiency. When supply is threatened, they will value resiliency.



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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 07 2022

Commentary by Eoin Treacy

Email of the day on lithium and rare earths

Just renewed my subscription for another year. Keep up the good work!

Reference your commentary on 25 Feb re Iain Little’s article on the effects of the Ukraine conflict and commodity supply, you may be interested in the attached research note by Maquarie on the growing strength of the lithium and rare earths supply/demand fundamentals.

Eoin Treacy's view -

Thank you for this insightful report and your long support of the service. Here is a section:

We estimate that 80% of the EVs used motors that contained rare earths, while 100% of PHEV used motors that contained rare earths. Our demand forecasts for rare earths assume one standard passenger PHEV consumes 4-6kg of rare earth magnets while a pure EV uses 5-10kg of rare earth magnets for its motors.

The demand for rare earth magnets would be supported by growth in accelerating offshore wind power capacity installation and higher penetration of inverter air conditioners, as the world is moving towards its climate change goals. We have forecast rare earth magnets intensity of 0.67 tons per MW for direct drive wind turbines and 0.1kg per unit for inverter air conditioners.

A widening deficit remains our base case in the medium-term, with the speed at which new entrants can enter the market presenting a key risk to our base case. In the longer-term the market deficit starts to widen significantly from 2027, suggesting that more new sources of supply will be required to meet the shortfall.



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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 02 2022

Commentary by Eoin Treacy

Email of the day on The Chart Seminar and a uranium ETF

hello Eoin 1) could you please suggest a trustworthy ETF on Uran, with a well balance geopolitical profile 2) I would very much welcome a chart seminar, I hope you will be able to organize one in the not too distant future.

Eoin Treacy's view -

We are currently looking at June 6th and 7th for The Chart Seminar in London. Sarah is in the process of securing a venue at present and as soon as the location is confirmed we will begin taking bookings. I am very much looking forward to meeting subscribers in person after an internval that has been far to lengthy. 



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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 25 2022

Commentary by Eoin Treacy

Where do Ukrainian economics matter, or is it 'matter' that matters?

Thanks to Iain Little for this edition of his Global Thematic Investors’ Diary. Here is a section: 

The proximate global economic effect will be on commodity supply (the complacent West taking much of the blame). Much has been made of Ukraine and Russia as the largest (30%) breadbasket in the world and the Russian Nord Stream 2 gas pipeline dilemma facing the EU/ Germany. But few would have predicted this week’s announcement by a Democrat President to expand domestic mining in strategic metals (lithium, graphite, rare earths, cobalt, rhodium, nickel, zinc etc). This points to a supply chain challenge where ESG objections now take 2nd place. The USA is dependent on Russia for much of its strategic supply chain: C4F6 gas and neon for chips, palladium for sensors, plating material and computer memory (MRAM), titanium for engines, fans, fighter jet disks, missiles, satellites. Russia needs high end chips, where the USA has edge, but where Russia is said to be able to obstruct the USA’s chip supply chain. These squeezes, offsets and stand-offs occur at a time when inflation is already above 5% for major economies.

Eoin Treacy's view -

It currently takes 7-10 years to get a mine permitted in the USA. In Canada and Australia, the average is 2. For the last forty years, outsourcing supply of raw materials, other than oil and gas, has been the de facto position of successive US administrations.



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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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