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March 08 2023

Commentary by Eoin Treacy

Brazil May Speed Up Rate Cut as Credit Worsens: Ex-BCB Director

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

Brazil’s worsening credit outlook amid troubles facing local retailer Americanas SA raises the risk of a recession that could lead its central bank to change its balance of risks at the upcoming interest rate decision on March 21 and 22, Tony Volpon, a former director at the bank, said in an interview.

“At the very least, the central bank committee should change the balance of risks at the next meeting, which would be a signal to start cutting its rate in May”

NOTE: BCB said in the statement of Feb. 1 meeting, which maintained the Selic rate at 13.75%, that the risks to its inflationary scenarios remain in both directions, upside and downside

According to Volpon, high interest rates and worsening of credit in the midst of the Americanas case may reduce investment and increase the risk of a drop in economic growth

“If the BCB does nothing, it is almost certain that there will be a recession”

Volpon had written earlier on Twitter that “almost every recession needs a ‘snap’ and the Americanas case and the collapse of the credit market already set up an exogenous shock that, left unanswered, should lead to a recession”

Basic scenario is interest rate cuts starting in May, but BCB could cut it later this month if credit data show a more serious deterioration, says the former director

According to him, part of the market could react badly to an eventual Selic cut, which would lead to a greater rate curve steepening, but this would not prevent the positive effect of monetary relief on the economy

Possible negative investor reaction to an early interest rate cut could also be mitigated with announcement of the new fiscal framework, says Volpon

Eoin Treacy's view -

The Selic overnight rate is currently sitting at 13.65% and CPI is at 5.77%. The aggressive pace of hikes in 2021, a year ahead of developed markets, successfully capped inflationary pressures and the central bank has held rates at elevated levels for long enough to convince consumers they are serious about fixing the problem. 



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March 08 2023

Commentary by Eoin Treacy

Wheat Swings as Traders Weigh Ukraine Talks and Supply Outlook

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

Wheat futures in Chicago fluctuated just below $7 a bushel as traders assess progress in negotiations to renew the Ukrainian grain export deal through the Black Sea, along with global supply prospects. 

The food staple traded at $6.9675 a bushel, about half the level a year ago when the price hit a record on a supply crunch after the Russian invasion of Ukraine. UN Secretary-General Antonio Guterres is set to meet with Ukrainian President Volodymyr Zelenskiy on Wednesday in Kyiv to discuss the continuation of the Black Sea agreement.

 A wave of Russian wheat cargoes has pushed down global prices in recent weeks to around the lowest level since September 2021. Still, the US winter wheat crop has been suffering from dry weather and shipments from Australia, currently the world’s second-biggest exporter, may tumble 20% in the next financial year as the climate turns drier after three wet years.

Eoin Treacy's view -

The argument I was making a year ago was the only uncertainty was about Ukraine’s wheat crop. Russia’s was uninhibited because it has ample domestic supply of fertiliser. That suggested the panic about global food insecurity was unlikely to be systemic. As the war in Ukraine is concentrated in the eastern region, the rest of the country will have an interest in exporting this year either by rail or ship. 



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March 07 2023

Commentary by Eoin Treacy

Perth Mint sold diluted gold to China, got caught, and tried to cover it up

This article for ABC News May be of interest to subscribers. Here is a section: 

The historic Perth Mint is facing a potential $9 billion recall of gold bars after selling diluted or "doped" bullion to China and then covering it up, according to a leaked internal report.

Four Corners has uncovered documents charting the WA government-owned mint's decision to begin "doping" its gold in 2018, and then how it withheld evidence from its largest client in an effort to protect its reputation.

While the gold remained above broader industry standards, the report estimated up to 100 tonnes of gold sent to Shanghai Gold Exchange (SGE) potentially did not comply with Shanghai's strict purity standards for silver content.

One Perth Mint insider, who asked not to be named as they could face five years' jail if their identity is revealed, says it is a "scandal of the highest level".

"I don't know if I've ever seen one this big," they say.

The mint is the largest processor of newly mined gold in the world, one of Perth's top tourist attractions and well known for producing commemorative coins to mark everything from royal weddings to a new James Bond film.

Last year alone it sold $20.3 billion in gold. It is the only mint in the world that has a government guarantee.

Eoin Treacy's view -

I’m currently reading The Dawn of Everything: a New History of Humanity. It’s heavy going. They go through many proof points in an attempt to justify their view. The overarching theme is we are people and have always been people. Over the millennia nothing has changed in terms of human nature.

I was thinking about that this morning as I contemplated the Perth mint’s fraud. History is replete with examples of governments who have attempted to cover over holes in the budget by debasing the currency. This is not quite the same because the mint does not produce coinage. The difference is academic for Chinese buyers who prize purity.  



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March 07 2023

Commentary by Eoin Treacy

Email of the day on carbon emission trading

you are showing charts and talking a lot about carbon emission certificates in the EU. (MO2 generic future on Bloomberg). is there any tradeable or investable instrument out there? tkx a lot!

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. Carbon emissions are a new asset class with strong political backing. The prices series is increasingly being used as a benchmark to support investment in fossil fuel alternatives. As long as that remains the case, governments will restrict supply when prices fall to ensure a viable market. 



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February 21 2023

Commentary by Eoin Treacy

Biodiesel and Renewable Diesel: It's All About the Policy

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

Biomass-based diesel (BBD) production in the form of renewable diesel is undergoing a major boom.  What is not well understood is that the boom is entirely policy driven.  This is most directly evident in the fact that the price of BBD (as represented by FAME biodiesel) is about twice as expensive as petroleum diesel. The implication is that little or no BBD would be produced and consumed in the U.S. without substantial policy incentives. A further implication is that the renewable diesel boom cannot be understood without understanding the policies driving the boom.  In this article, we use a simple model of the BBD market to illustrate the impact of a variety of policy scenarios. When considered in isolation, the market impact of the policies considered are fairly straightforward.

The analysis becomes much more complicated when multiple policies are in effect at the same time.  In particular, the impact of a given policy may be heavily dependent on which other policies are in place at the same time.  In the U.S., all four of the following policies are presently in place and interact to determine the price and quantity of BBD: i) blenders tax credit; ii) RFS mandates; iii) carbon credits in California; and iv) import duties (tariffs).  The interactions between these policies can produce surprising and poorly understood economic outcomes.

Eoin Treacy's view -

There was a great deal of enthusiasm for biodiesel in the run-up to the 2012 peak in corn and soybean prices. At that point the upward pressure using food crops to produce fuel was having on consumers became evident and the sector contracted. At that point food commodity prices collapsed because demand growth from the fuel business evaporated.  



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February 15 2023

Commentary by Eoin Treacy

Britain's Easing Inflation Puts End of BOE Rate Hikes Into Sight

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

The concern is that inflation doesn’t tick down as quickly as the BOE anticipates. Prices increased 11.1% in October, the most in 41 years. That eased in each of the past three months, but the latest inflation reading at 10.1% remains five times the BOE’s target rate.

The BOE will be heartened by news that inflation in the services sector eased in January. It’s one of the key indicators being watched by policymakers, who see it as gauge of domestically generated inflation that is hard to shift once it takes hold.

The other red flag is wage growth, which is now running at the fastest pace on record outside of the pandemic as labor shortages hand workers unprecedented bargaining power. 

The BOE fears inflation could become entrenched as companies keep raising prices to cover their salary costs. There were some signs of hope in the latest data, however, with figures for December alone showing a slowdown in private-sector pay increases.

Eoin Treacy's view -

The bond market is signaling it is a little early to declare victory over inflation. Gilts yields continues to steady from the region of the 200-day MA and a sustained move below 3% would be required to question potential for continued upside. 



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February 10 2023

Commentary by Eoin Treacy

Dash for $10 Trillion of Metals for Energy Transition Starts Now

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

Getting to net zero could require almost $10 trillion of metals between now and 2050, according to BNEF, with annual demand peaking at close to $450 billion in the mid-2030s. While steel and aluminum are expected to see the most demand growth in terms of absolute volume, copper is set to be the most valuable opportunity, with an estimated $3.4 trillion of the red metal needed to avert climate disaster.

In total, a whopping 5.2 billion metric tons of metals will be necessary to underpin a net-zero transition, with nearly four times as much metal due to be consumed in 2050 versus today.

 

Eoin Treacy's view -

I continue to be amazed at how the word trillion is bandied about when it comes to spending plans for renewable energy. In 2020 total global copper consumption was 23.6 million tonnes and is probably around 25 million this year. 



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February 06 2023

Commentary by Eoin Treacy

Newmont offers to buy Australia's biggest miner amid gold merger spree

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

Yamana’s outgoing executive chair Peter Marrone told The Financial Post last month that he expects a wave of gold mergers as executives and investors seek to maintain margins amid higher production costs and declining grades of the metal.

Resource industries are on the front lines of the climate challenge, whether it be coping directly with extreme weather, or indirectly through rising costs associated with adjustment and policies such as carbon taxes. Gold miners face an additional layer of difficultly because their deposits are yielding less ore that’s dense with gold. Lower grade mines can still be profitable, but only if extraction costs are lowered.

Aside from the sale of Yamana, which has properties and mines in Canada, Brazil, Chile and Argentina, there have been at least eight notable combinations since 2018, when Barrick Gold Corp. and Randgold Resources Ltd. announced an $18-billion, zero-premium, all-share merger.

Eoin Treacy's view -

Finding new large-scale mining projects is a fraught with difficulty. That leaves little option for major miners than to pay up for competitors. Newcrest has tried to focus on tier-one assets, led by the Cadia mine in New South Wales. The low cost of production at that mine has funded international expansion. No doubt, Newmont views the security of production as a sound investment. 



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February 03 2023

Commentary by Eoin Treacy

Dollar Soars After Jobs Surprise Reignites Higher Rates Bets

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

A broad gauge of dollar strength jumped after the jobless rate in the US hit a 53-year low as traders amped up bets on a higher policy rate.

The Bloomberg Dollar Spot Index extended gains for its biggest two-day climb in four months after data highlighted the resilience of the labor market and another report showed resurgence in consumer demand, suggesting even more tightening may be in store from the Federal Reserve. 

The greenback gained as much as 1.2%, climbing against all of its peers in the Group of 10, with the Japanese yen, the Australian dollar and New Zealand dollar falling the most. 

“The headline number for nonfarms was shocking, and the US dollar is clearly reacting to that,” said Bipan Rai, a currency strategist at Canadian Imperial Bank of Commerce. “We still have plenty of data to comb through before the picture is complete.”

Eoin Treacy's view -

The simple logic is you cannot have a recession without unemployment rising. That suggests the Federal Reserve is under no pressure to cut rates and may even continue to raise them. That lent considerable support to the Dollar Index and it is working on a large upside weekly key reversal which marks a lot of at least near-term significance. 



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February 01 2023

Commentary by Eoin Treacy

China's CATL Is Said to Pick Banks for $5 Billion Swiss GDR Sale

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

CATL accounts for the largest share of the global electric-vehicle battery market, according to data from Seoul-based SNE Research. It sold a total of 165.7 gigawatt-hours of batteries in the January-November 2022 period, almost three times as much as second-placed BYD Co., a Chinese automaker that also manufactures batteries.

CATL’s market share was about 35% in the first 10 months of last year. The Fujian-based company supplies carmakers including Volkswagen AG, Geely Automobile Holdings Ltd., Nissan Motor Co. and Tesla Inc., which delivered fewer EVs than expected last quarter, despite offering some price cuts. 

In 2017, CATL raised about $822 million in an initial public offering in Shenzhen. The company raised another 45 billion yuan ($6.7 billion) in a private share placement last year. China Securities was the lead sponsor, while CICC, Goldman Sachs and UBS were among the co-lead underwriters.

Shares of CATL have fallen about 18% in the past year, valuing the company at about $172 billion.

Eoin Treacy's view -

The opportunity to buy CATL shares will be welcomed by the global investment community since not everyone has the opportunity to trade in domestic Chinese stocks. The challenge is CATL has appreciated significantly since its IPO so in buying today one is betting both the company retains its dominance as a battery manufacturer and market growth approaches optimistic forecasts. 



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January 31 2023

Commentary by Eoin Treacy

GM to help Lithium Americas develop Nevada's Thacker Pass mine

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

GM would supplant China's Ganfeng Lithium(002460.SZ) to become Lithium Americas' largest shareholder. GM has also agreed to buy all the lithium from Thacker Pass when it opens in 2026 - roughly 40,000 tonnes per year.

Under the agreement, GM will buy $650 million of shares in Lithium Americas in two equal parts, with the first tranche coming only if Lithium Americas prevails in an ongoing court case. A U.S. judge earlier this month said she would rule "in the next couple of months" in the case, which centers on whether former U.S. President Donald Trump erred when he approved the mine just before leaving office in 2021.

Eoin Treacy's view -

The automotive industry appears to be getting back to its roots. Fifty years ago it was common for bid industrials to control mines, processing, fabrication and manufacturing in a vertically integrated business model. The 1970s ushered in offshoring and just in time manufacturing and inventory was suddenly considering a balance sheet liability. In the aftermath of the pandemic and now war in Ukraine, the merits of controlling the supply chain are being viewed with fresh perspective. 



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January 30 2023

Commentary by Eoin Treacy

Zero-emission Steel Won't Happen Without Trade-offs, Scientists Say

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

The steel industry is working on solutions. According to the Leadership Group for Industry Transition, at least 73 green steel projects are in progress. But the researchers say the technology just isn't there yet.

"These technologies still face serious technical, economic, and social challenges, and have yet to be implemented at scale," said Takuma Watari, a researcher at the National Institute for Environmental Studies in Japan and the paper's first author, in a news release. It's still unclear whether enough electricity will be available in the future to power these innovations, he said.

Better processes for recycling steel scraps into high-quality materials are needed, the researchers write. They call for partnerships between the steel industry and users in a variety of sectors. But the current system "is incompatible with a zero-emission future," they write.

Eoin Treacy's view -

Electric arc furnaces rely on scrap steel and the major steel producers in developed countries have been busy securing scrap supplies over the last decade. If global steel production is to grow, then relying on scrap to provide carbon content is not going to be sufficient. That means either production new steel is going to have to become much more carbon efficient or the global sector will need to contract significantly to meet carbon emissions targets.



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January 26 2023

Commentary by Eoin Treacy

Australia's 4Q CPI Gives More Reason to End Hikes in Feb

This note from Bloomberg may be of interest. Here it is in full:

Australia's surprisingly strong 4Q inflation isn't likely to phase the Reserve Bank of Australia. The headline outcome exceeded consensus estimates, but undershot the central bank's forecasts - and isn't a threat to our view that a February rate hike is likely to be the last of this cycle.

The economy’s inflationary pulse largely reflects temporary shocks, centered on utilities and airfares in 4Q. A number of other categories showed continued signs that pressures are set to subside in 2023. The central bank’s expectation for a lift in wage growth - necessary for inflation to be sustained in the target band - looks increasingly vulnerable given emerging signs of a softening labor market. Click on the Text tab for the full report.

Eoin Treacy's view -

The Australian Dollar has broken the two-year sequence of lower rally highs against the US Dollar. This is the 7th time since 1985 that the Australian Dollar has rebounded from the $0.60 area. The only time it has sustained move below that level was a brief period between 2001 and 2002. I’ll never forget that time because I felt well off from my success in door to door selling in Melbourne and only got £1 for every A$2.60 when I got to London in the spring of 2000. 



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January 24 2023

Commentary by Eoin Treacy

The Future of Uncertainty

Thanks to a subscriber for this transcript of 3rd Atal Bihari Vajpayee Memorial Lecture delivered by Ambassador Bilahari Kausikan of Singapore in New Delhi yesterday. Here is a section: 

First, no country can avoid engaging with both the US and China. Dealing with both simultaneously is a necessary condition for dealing effectively with either. Without the US there can be no balance to China anywhere; without engagement with China, the US may well take us for granted. The latter possibility may be less in the case of a big country like India, but it is not non-existent.

Second, I know of no country that is without concerns about some aspect or another of both American and Chinese behaviour. The concerns are not the same, nor are they held with equal intensity, and they are not always articulated – indeed, they are often publicly denied -- but they exist even in the closest of American allies and in states deeply dependent on China.

Eoin Treacy's view -

This perspective gels very well with the reality on the ground I observed in Saudi Arabia on my last two visits. The simple reality is China is the country’s biggest customer and the USA the country’s greatest geopolitical ally. There is no way to play favourites the greatest risk for any country is to be taken for granted because that greatly enhances the scope for one’s interests to be trampled. 



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January 14 2023

Commentary by Eoin Treacy

Futures Minerals Forum Update Part 2

Eoin Treacy's view -

I posted the first part of this update on Wednesday and saved the second part of today. The number one theme in emerging markets is governance. That’s where Saudi Arabia is clearly attempting to make an impression.

In speaking with the junior minister for investment, the decision to give opportunities to young people is very intentional. They know the only way to achieve the progress they need is through harnessing the productive capacity and thirst for invention of the young.

It’s incredibly refreshing to meet so many tenacious young people with ambitious dreams for the future. The fact they have a route to achieve their goals is even better.



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January 12 2023

Commentary by Eoin Treacy

Saudi Arabia Says $3 Billion Mining Funds Are Moving Target

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

Saudi Arabia’s 11.95 billion riyals ($3.2 billion) of funding for a joint venture that will invest in mining assets internationally is “going to be a moving target,” Mining Minister Bandar Alkhorayef said in an interview with Bloomberg TV.

“We are establishing a governance between this JV with the ministry to make sure that this JV allows the country to get the right minerals needed for our industrial strategy and our needs in general,” he said

In 2022, Saudi Arabia saw as much as $32 billion of investments in the mineral sector, a 50% growth in revenues from 2021, the minister said in a separate interview

Saudi Arabia had previously estimated its mineral wealth at $1.3 trillion, but that’s now considered conservative because discoveries have been better than expected, he said

Eoin Treacy's view -

Maaden is now one of the largest industrial metal miners in the world and is only beginning to invest beyond Saudi Arabia’s borders. That represents a significant source of new competition for world-class mining opportunities and suggests bidding wars will be more common.



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January 10 2023

Commentary by Eoin Treacy

Who is the Mystery Gold Buyer?

Thanks to a subscriber for this report from TD Ameritrade. Here is a section:

The rally in gold prices over the past two months has defied analyst expectations for continued weakness, including TD Securities'. Yet, we see little evidence that the rise in gold prices is associated with a changing macro narrative. Given the bearish macro backdrop, speculative interest in gold has remained exceptionally lackluster as the world barrels towards a recession, especially after accounting for recent shifts in CTA positioning. Still, gold prices have continued to firm, retracing more than 50% of their significant drawdown from 2022 highs. • This begs the question: who in the world is this mystery buyer driving prices higher? Armed with a flows-based approach, we present strong evidence that behemoth Chinese and official sector purchases may have single-handedly catalyzed a $150/oz mispricing in gold markets. What is less clear is what has driven these massive purchases. • We investigate whether a sanctions-evasion war chest associated a potential invasion of Taiwan, China's reserve currency ambitions, massive pent-up demand associated with the Chinese reopening, or Chinese New Year demand could be consistent with this extreme buying activity. Chinese demand appears unrelenting for the time being, but barring a grandiose geopolitical regime change, we find that it would likely subside towards normal levels in coming months. This would leave gold prices vulnerable to a steep consolidation lower, given gold's lack of alternative buyers and its current mispricing relative to its recent historical relationship with real rates. We turn to our tracking of positioning for the top ten gold traders in China to scour for nascent signs of peaking Chinese demand, which could present a tactical signal for a noteworthy repricing lower.

Eoin Treacy's view -

Since China is the world’s largest gold producer it begs the question why they would be buying on the international market in size. There is the potential that they wish to lend credence to the Renminbi as a reserve asset in order to sway Middle Eastern governments to accept it in payment for oil.



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January 09 2023

Commentary by Eoin Treacy

Brazil Asset Selloff on Protests Likely Short-Lived, Citi Says

This note by Maria Elena Vizcaino for Bloomberg may be of interest. Here it is in full:

Any pullback in Brazilian asset prices should revert quickly as the protests should be short-lived and not have major direct implications, Citigroup strategists led by Dirk Willer wrote in a note Monday. 

The Brazilian real was the worst performer among 23 emerging market peers tracked by Bloomberg, weakening 1.2%

The protests have been publicly criticized by far-right leaders, including former President Jair Bolsonaro, and they lack support from leaders in the executive, legislative and judiciary branches

Eoin Treacy's view -

David long ago observed “governance is everything”. That is as true to today as in the past, but there is no getting around the fact that standards are deteriorating. Peaceful hand-off of power, following a free and fair election, is the basic starting point for liberal democracies.



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January 04 2023

Commentary by Eoin Treacy

Mining Stocks Rally as Gold Advances to Highest Level Since June

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

Kinross Gold and Pan American Silver are among the gold and silver miners getting the biggest boost Tuesday, as gold rose to the highest in six months.

Gold rose 1% to trade over $1,840 an ounce as the precious metal continues to gain momentum
The Bloomberg Americas Mining Index gains as much as 3.2% led by Kinross’s 7.5% rise and Pan American’s 7.4% climb, Newmont climbs 3.7% and is one of the top performer in the S&P 500 Index

Other miners rallying include: EQX CN +11%, ARIS CN +10%, SVM CN +4.3%, BTO CN +3.3%, ABX CN +3.8%, FR CN +2.8%, LUN CN +3.9%, YRI CN +3.1%

Eoin Treacy's view -

The gold price rallied in tandem with bonds yesterday, despite the relative strength of the Dollar. That suggests at least a temporary reorientation of investor focus towards the view gold is a perpetual zero-coupon bond. The implication is inflation has peaked and could easily surprise on the downside and the lagged effect of central bank tightening becomes clear in Q2/Q3.



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December 20 2022

Commentary by Eoin Treacy

Bank of Japan Decision Will Affect the World

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

The BOJ has been the last holdout on negative rates, so these tentative signs that it might be buckling will heighten expectations we may be in for more unsettling volatility in 2023. Markets really don't like uncertainty, and even a suggestion that Japan might be forced into letting bond yields soar higher is enough to get risk managers heading for the exit. Fixed income isn’t quite the haven some commentators had convinced themselves it might be in the new year.

BOJ Governor Haruhiko Kuroda was at pains to downplay any implications for official rates, but this sudden move after implacable denials speaks louder. The BOJ did increase its QE bond buying ammunition to 9 trillion yen ($68 billion) per month from 7.3 trillion yen — all to defend its new line in the sand, the 0.5% 10-year yield. But this is merely a symbolic delaying tactic. Kuroda steps down in April, so Tuesday’s decision increases the expectation that his replacement will usher in further monetary tightening. This is no longer an impenetrable negative interest rate fortress. It might make foreign speculators meditate on the perils of shorting both Japanese government bonds and the yen simultaneously.

Eoin Treacy's view -

Bull markets thrive on liquidity. The Bank of Japan’s efforts to depress the 10-year yield and devalue the Yen were a significant source of liquidity that is now dissipating. There has been scant evidence that the Yen carry trade has done anything to support markets over the last six months but the removal of support is certainly being felt.



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December 19 2022

Commentary by Eoin Treacy

National Bank of Canada Neutral On i-80 Gold's Assays From Hilltop Corridor Discovery

This article from MT Newswires may be of interest. Here it is in full

National Bank of Canada said Monday that it ascribed a neutral bias on i-80 Gold Corp. (IAU.TO)'s Hilltop corridor discovery at the Ruby Hill property that showed elevated zinc mineralization.

Drill highlights include 12.3% zinc over 39.6 meters, adding to the high-grade polymetallic discovery in the Hilltop zone announced in November.

The bank said the results were limited to a single hole although it reinforces Ruby Hill's optionality as well as potential host to oxide and sulfide gold as well as skarn base metal mineralization, all within proximity of the underground infrastructure planned in 2023.

"Results add a high-grade datapoint to the broader Hilltop area, while expanding the region of prospectivity, still open in all directions," the bank said.

National Bank gave i-80 an outperform rating with a $4.25 price target. Price: 3.58, Change: -0.18, Percent Change: -4.79

Eoin Treacy's view -

I-80, named for the highway the mine sits near, has been reporting impressive drill results for over two years. The promise of a major new resource with easy access to transportation links, and in close proximity to established mines, suggests the aim of the management team is to be acquired.



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December 14 2022

Commentary by Eoin Treacy

China's Covid Pivot Set to Worsen the Global Energy Crunch

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

China’s pivot away from Covid Zero is poised to boost natural gas demand in the world’s biggest importer, potentially curbing supply to Europe and other Asian nations.

China National Offshore Oil Corp. is now looking to secure more shipments of the super-chilled fuel for next year. The return to the market of one of the nation’s largest liquefied natural gas buyers follows a period of subdued demand, due to virus curbs suppressing economic activity, and may herald a rebound in imports. 

Beijing’s move to reopen its economy and live with Covid-19 has seen most internal restrictions being dismantled over the last few weeks. Provided that’s not rolled back as cases surge, that will increase the challenge for Europe next year as it prepares for the winter of 2023/24 with little or no natural gas from Russia. 

Chinese gas imports are likely to be 7% higher in 2023 than this year, according to Wang Zhen, president of Cnooc’s Energy Economics Institute.

The forecast belies still-weak industrial demand. Many factories will send workers home earlier-than-usual for the Lunar New Year holidays, while local production and Russian pipeline flows are rising.

There are already signs China will need to increase LNG purchases to prepare for next year, however. Inventories at northern ports are depleting faster than normal amid cold weather and have dropped to the mid-to-low level, according to ENN Energy’s research group, while domestic LNG prices are trending higher.

Eoin Treacy's view -

The Chinese economy is going to experience significant issues as COVID cases ramp higher. The sheer volume of ill people will mean lower productivity over the first quarter. However, peak infections will likely be reached within 10 weeks. After that, there is clear scope for the fiscal measures already introduced to support the property market will become evident.



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December 13 2022

Commentary by Eoin Treacy

Stocks Pare CPI-Fueled Rally With Fed Set to Hike

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

“While the war against inflation is turning, we are a long way off declaring victory and the Fed will keep its hawkish stance for a while longer, even if it does potentially force a recession,” said Richard Carter, head of fixed interest research at Quilter Cheviot.

The CPI-fueled stock rally fails to recognize that corporate earnings are just starting to see the impact of tight monetary policy, James Athey, investment director at Abrdn.

“As the full effects of the Fed’s aggressive actions this year play out next year, it seems inevitable that we will see a significant repricing lower in EPS forecasts and thus the broad market,” Athey said.

Eoin Treacy's view -

The stock market has been pricing in the likelihood Inflation has peaked since October. Now is the time to start thinking about the knock-on effects of inflation peaking. Economic activity will slow as the race to overtake inflation with purchase subsides and as savings are eroded. Corporate profits will inevitably slow in response and unemployment will likely rise from Q2 onwards.



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December 12 2022

Commentary by Eoin Treacy

EU Nears Deal on Landmark Carbon Levy as Trade Tensions Rise

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

A deal on the carbon measure would be a major victory for one of the EU’s more controversial proposals, when it was announced last year as part of the bloc’s package to cut emissions by 55% by the end of the decade. The proposal tabled by the European Commission in 2021 envisaged that the importer would be entitled to account for the pollutions costs paid in country of origin if it has carbon pricing.

The EU plans have already caused diplomatic unease in China and India and there’s concern that Russia may not comply with it. The EU mechanism also comes amid growing tensions over the US government’s Inflation Reduction Act, the country’s $369 billion green package, which provides subsidies only to American manufacturers to develop some clean technologies, including electric vehicles. The EU sees that as a possible contravention of WTO rules.

For its part, the EU argues that the CBAM is in line with international trade rules as an environmental measure, designed to stop industry from moving carbon emissions outside of the bloc as it imposes stricter climate measures on industry. A potential preliminary deal among negotiators on Monday would need the endorsement of ministers from national governments and the full EU Parliament to enter into force. That may be done only after policy makers iron out the details of a link with a broader carbon market reform.

Eoin Treacy's view -

For European bureaucrats climate change is a religion and adherence to its tenets borders on zealotry. From their perspective, there is an acute need to reduce all forms of carbon emissions as quickly as possible to avoid the worst effects of climate change.



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December 10 2022

Commentary by Eoin Treacy

Angry Rebel Farmers Have Become the World's Latest Climate Enemy

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

Farmers are “ordinary people but they feel treated like criminals. Everything farmers do is bad; poison sprayers, environmental polluters, mistreatment of animals,” says Caroline van der Plas, leader of the populist Farmer-Citizen Movement, which stormed onto the Dutch political scene in 2019. “They feel undervalued and have no space to expand or develop their business and are very worried about their future.

Eoin Treacy's view -

The Netherlands is one of the most densely populated and space-constrained countries in the world. That means the farming sector has significant pressure to be efficient and not least to provide food at an affordable cost. Talking about the Netherlands and deforestation in the Amazon in the same breadth is a clear logical inconsistency.



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December 10 2022

Commentary by Eoin Treacy

Turquoise Hill Holders Endorse Rio Tinto $3.1 Billion Deal

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

Turquoise Hill Resources Ltd. shareholders endorsed a C$4.24 billion ($3.1 billion) takeover offer by Rio Tinto Group, paving the way for the London-based miner to gain control of one of the world’s largest copper mines.

About 60.5% of Turquoise Hill’s minority investors voted in favor of Rio’s C$43-a-share cash offer, the Canadian company said following a shareholders’ meeting in Montreal on Friday. The result clears the way for Rio Tinto to take over Turquoise Hill and gain majority ownership in its massive Oyu Tolgoi project in Mongolia, which is expected to become the world’s fourth-largest copper mine.

Shares of Turquoise Hill rose 0.9% to C$42.93 at 2:43 p.m. in Toronto. Rio shares closed almost 1% higher in London before the vote results were announced.

“This transaction will deliver significant benefits for all shareholders, and allow us to progress the Oyu Tolgoi project in partnership with the government of Mongolia with a simpler and more efficient governance and ownership structure,” Rio’s copper head Bold Baatar said in a statement.

Eoin Treacy's view -

This acquisition is a testament to how rare new truly world-class copper mines are. The fact Mongolia is sandwiched between Russia and China is a handy geographical accident that means supply will be a buyer regardless of what else happens.



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December 01 2022

Commentary by Eoin Treacy

Gold Climbs to Highest Since August as Inflation Misses Estimate

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

The Personal Consumption Expenditure Deflator, a measure of inflation based on changes in personal consumption, rose 0.3% in October from the month before, below economists’ median forecast. It follows two other inflation gauges that indicated price pressures were easing, boosting bets on a slowdown in monetary tightening. 

Rate hikes to curb inflation have weighed on non-interest bearing gold throughout the year by pushing up bond yields and the dollar. Bets on a slowdown and China’s Covid loosening saw bullion rise 8% in November as the greenback retreated the most since 2009.

Other data showed the jobs market gradually cooling, a welcome sign for the Fed as it tries to tame inflation. Wage gains driven by labor tightness have been a major driver of price increases.

Eoin Treacy's view -

The swift pace of Fed tightening was a major tailwind for the US Dollar. Now that the Fed is slowing the pace of hiking it reduces that tailwind and the Dollar is now trending lower. That’s a significant tailwind for gold.



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November 30 2022

Commentary by Eoin Treacy

Email of the day on the big turn:

Since returning from the Chart seminar in London I have spoken to several people who work in the Israeli high-tech industry, They all tell me that about 10% of their colleagues have lost their jobs recently. Today you referred to your MIIN index. How can we invest in these countries?

Eoin Treacy's view -

Thank you for this additional insight. The market for big ideas ballooned with the delivery of free money. Suddenly, no idea was too grand, or time to delivery/commercialization too long. That trend was looking tired in 2019, as the Federal Reserve’s quantitative tightening was siphoning liquidity from the global economy.



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November 28 2022

Commentary by Eoin Treacy

China Protests Fuel Some Bets for an Earlier Covid Zero Exit

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

Swelling protests against China’s virus-induced curbs may end up supporting asset prices by encouraging President Xi Jinping to accelerate the nation’s exit from Covid Zero, according to some market watchers.

“I don’t expect Xi to publicly admit error or show weakness, but this wave of protests could cause the leadership to decide privately that the exit needs to proceed more quickly than previously planned,” said Gabriel Wildau, managing director at advisory firm Teneo Holdings LLC in New York.

Most risk assets slid in early Asian trade Monday on concern the unrest in China, coupled with surging daily infections, may convince the authorities to introduce further Covid restrictions. At the same time, the country’s focus after last month’s Communist Party congress has been on supporting the economy on a wide array of issues from reopening and the property crisis to relations with the US.

Eoin Treacy's view -

There are two big questions at the heart of the Chinese protests against COVID-zero. The first is how long they will be tolerated for before remedial action is taken. The second is how swiftly the COVID-zero mechanism will be dismantled.



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November 25 2022

Commentary by Eoin Treacy

HSBC Gold Special

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

We believe the likelihood that the USD has peaked and expected further strong official sector and coin & bar and jewellery demand present compelling arguments for higher gold prices in 2023 and beyond. That said, until the end of the Fed’s rate hike cycle is complete, and institutional demand for gold increases, prices may be constrained. This leads us to look for weakish prices in early 2023 with increases more likely as the year unfolds.

Eoin Treacy's view -

Generally speaking gold requires a series of catalysts to spur a significant uptrend. The first is negative real interest rates. That’s when interest rates are deliberately held below inflation for a prolonged period to denude savers of the opportunity to profit from conservative investments. That policy also inflates asset prices and decreases the purchasing power of cash. However, negative real rates are not a sufficient catalyst for outsized performance by gold.



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November 25 2022

Commentary by Eoin Treacy

World's Best Shot at Fusion Power Shows Cracks in Silver Lining

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

At issue are two South Korean-made components: thermal shields built by SFA Engineering Corp. and vacuum vessel sectors made by Hyundai Heavy Industries Co. Neither company responded to Bloomberg requests for comment outside of business hours. 

The thermal shield, which is lined with 5 tons of pure silver and designed to contain heat 10 times hotter than the sun, showed cracks along cooling pipes, ITER reported. The vacuum vessel sectors, each weighing the equivalent of 300 cars and as tall as a telephone pole, show slight differences in manufacturing that complicates the welding process used to put them together. 

So far, ITER’s governing board has taken the setbacks in its stride. At an extraordinary meeting convened this month, it ordered Barabaschi to come up with a new budget and time line to be presented next year. 

“What was remarkable at the ITER council was the lack of finger pointing,” ITER spokesman Laban Coblentz said Friday in an interview. “It has been a very solutions-oriented discussion.”

 And

“Companies have been learning enormously from this first-of-its kind project,” said ITER’s Coblentz, dismissing suggestions that the delays could dampen enthusiasm. “The goal here isn’t to build just a single machine but to show that fusion power is feasible and to make that happen.”

Eoin Treacy's view -

The quantity of money being poured into fusion continues to grow. Companies hope to repeat the success of private companies in beating the Human Genome Project to the prize of completing the first sequence of the human genome. The primary technology innovation is the shrinking of superconductors which means new reactor designs can be much smaller and therefore cheaper. The range of challenges that still need to be overcome is still quite high so while this is an exceptionally interesting sector, it is not going to provide the abundant cheap energy we require for quite some time.

Meanwhile the 5 tons of silver required for the ITER experiment suggests a new source of demand for the metal in future designs too. 



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November 22 2022

Commentary by Eoin Treacy

Inside a Crypto Nemesis' Campaign to Rein In the Industry

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

“There were a lot of entrepreneurs that grew up in this field and chose to be noncompliant,” Mr. Gensler said in an interview last month at the S.E.C. headquarters in Washington. “We will be a cop on the beat.”

Mr. Gensler’s central claim is simple: For all their novel attributes, most cryptocurrencies are securities, like stocks or other investment products. That means the developers who issue cryptocurrencies must register with the U.S. government and disclose information about their plans. In Mr. Gensler’s view, exchanges like Coinbase and FTX, where customers buy and sell digital coins, should also have to obtain S.E.C. licenses, which come with increased legal scrutiny and disclosure obligations.

The crypto industry has fought the government’s efforts to classify digital assets as securities, arguing that the legal requirements are overly burdensome. Even before FTX’s collapse, the debate was reaching an inflection point: A federal judge is expected to rule in the coming months in a lawsuit brought by the S.E.C. that charges the cryptocurrency issuer Ripple with offering unregistered securities. A victory for the government would strengthen Mr. Gensler’s hand, establishing a precedent that could pave the way for more lawsuits against crypto companies.

Eoin Treacy's view -

The tech sector has an aspiration to “move fast and break things”. In practice that means ignoring regulations until sufficient scale has been achieved to shape them. For example, that is exactly what Uber did in ignoring taxi laws. China’s ANT Financial was allowed to prosper in a very grey area of banking regulation until it was eventually neutered by the government.



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November 21 2022

Commentary by Eoin Treacy

Gold, Copper Slip as Traders Favor Dollar on China Covid Worries Bloomberg

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

Gold fell to the lowest in over a week as the dollar advanced amid concern China may reverse its lighter-touch approach to the coronavirus. Copper also fell.

Worsening Covid-19 outbreaks across China and the first deaths in Beijing for six months are stoking concerns that authorities may again resort to harsh restrictions. That would be bearish for the copper market, where a squeeze in global supplies just appears to be easing. US equities declined, while the dollar rose on haven buying, pressuring gold and copper as they’re priced in the greenback. 

Commodities have been pressured in recent months by the Federal Reserve’s aggressive monetary tightening to fight inflation, with a gauge of the raw materials recording two consecutive quarterly losses by the end of the third quarter. 

Traders are now waiting for fresh clues about the Fed’s interest-rate hiking path from the central bank’s minutes due on Wednesday. 

San Francisco Fed President Mary Daly said that officials will need to be mindful of the lags with which monetary policy work, while repeating that she sees interest rates rising to at least 5%. Her counterpart at the Cleveland Fed, Loretta Mester, said she has no problem with slowing down the central bank’s rapid rate increases when officials meet next month.

Spot gold slipped 0.7% to $1,739.10 an ounce as of 4:06 p.m. in New York. Copper for three-month delivery on the London Metal Exchange fell 2.4% to settle at $7,880.50 a metric ton. All other main LME metals declined. The Bloomberg Dollar Spot Index gained 0.7%. Silver and palladium spot prices dropped, while platinum gained.

Eoin Treacy's view -

The big question circling about China is how willing they are to tolerate deaths from COVID. The government has successfully instilled a deep sense of caution in the population about the threat represented by COVID and easing up on quarantine rules may not result in a large increase in mobility. As cases and deaths rise, the potential for a significantly slower return to economic activity is a base case scenario.



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November 16 2022

Commentary by Eoin Treacy

Investor-Darling Brazil Faces Key Test as Lula Optimism Dims

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

Lula said that he won’t give any details on his cabinet before returning from an international trip to attend COP27 in Egypt.

“The stakes are high in terms of fiscal uncertainty, in terms of cabinet composition, in terms of key appointments in the economic team,” said Joel Virgen Rojano, director for Latin America strategy at TD Securities. “All of that for now has a really big question mark and the markets are becoming impatient.” 

Emerging-market investors from Neuberger Berman LLC to Franklin Templeton had bet on the South American nation ahead of the election as they saw little distinction between Lula and President Jair Bolsonaro’s fiscal agenda. Neuberger wasn’t immediately available to comment on its current recommendations in Brazil.

“Markets tend to hate uncertainty,” Dina Ting, head of global index portfolio management for Franklin Templeton exchange-traded funds, wrote in an emailed response to questions. “From a long-term perspective, the fundamentals and macro factors have not changed. Brazil is still trading at a discount to historical averages and helped by both elevated commodity prices and favorable demographics, including its young workforce.”

Eoin Treacy's view -

Brazil faces many of the same issues as everywhere else. There is a clear need to enact some type of fiscal control but the population are already impatient with the pace of economic recovery. Those are two opposing perspectives and the new administration will need to tread very carefully if the currency is to remain stable.



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November 11 2022

Commentary by Eoin Treacy

Euphoria Sweeps China Stocks as Signs of Covid Zero Pivot Emerge

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

Traders who have for long been seeking clear signals of a pivot away from the staunch Covid Zero policy cheered the slew of changes announced on Friday, which included a cut in the amount of time travelers and close contacts must spend in quarantine, and a pullback on testing. The decisions by the National Health Commission followed a meeting by the nation’s top leaders on Thursday, where a more targeted approach was encouraged to tackle outbreaks.

“This is a huge positive for the market,” said Wang Yugang, a fund manager at Beijing Axe Asset Management Co. “Of course how much efficacy these measures have for the economy we will need to observe.”

In a display of broad market optimism, every stock on the 50-member Hang Sang China gauge was up on Friday. On the mainland, the CSI 300 Index ended 2.8% higher.

Eoin Treacy's view -

The Chinese government is wrestling with the opposing challenges of rising cases and the slowdown in the economy. The reality is quarantines cannot stop the spread, only slow it down, when COVID is endemic everywhere else. At some stage China will have to grasp the nettle and tolerate higher numbers of infections for longer. How willing they will be to tolerate millions of cases a day remains an open question. Of course the answer, supplied by India’s experience, would be to simply stop counting.



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November 04 2022

Commentary by Eoin Treacy

China Said to Prepare Plan to End Covid Flight Suspensions

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

The focus now appears to have moved to step two, with senior leaders recently asking regulators to draw up a game plan for easing the circuit breaker rule. The third step would be facilitating a full return to normal aviation traffic, the people said. It’s unclear what the timeline is for the implementation of these two steps.

The State Council and CAAC didn’t immediately respond to requests for comment. Evidence China is even considering changes that would ease its global isolation would be scrutinized by investors, with Chinese equities near multi-year lows because of the economic damage wrought by Covid Zero’s snap lockdowns, testing drives and border restrictions. 

Shares of airlines, including China Eastern and China Southern, extended gains in Hong Kong on the flight ban news, while the yuan climbed in offshore trading. 

An unverified screenshot circulating on social media claiming a broad reopening plan was being considered sparked a $450 billion speculative rally in stock markets this week. Soon after, China’s top health body reaffirmed its commitment to the zero-tolerance virus approach. 

Eoin Treacy's view -

Investors are interpreting the commitment to ZERO-COVID as “zero-covid” or at least they really want to reach that conclusion. Valuations are so attractive that people are latching onto any sign of reopening to repeat the rebounds seen in Western assets post March 2020. That’s particularly true of Hong Kong shares where the acceleration lower is giving way to a short covering rally.



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November 02 2022

Commentary by Eoin Treacy

Central banks haven't bought this much gold since 1967

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

Turkey was the biggest buyer of gold during the quarter, followed by Uzbekistan (26.13 tons) and India (17.46 tons). Not all countries report their gold purchases regularly, so it’s difficult to know how much, for example, China and Russia bought during this same period.

India is also shoring up its gold reserves.

Indian consumers habitually purchase gold jewelry ahead of the festive season every October. But that aside, the Reserve Bank of India (RBI) bought 13 tons of gold in July and 4 tons in September, pushing its reserves to 785 tons, according to the WGC.

Eoin Treacy's view -

Any foreign exchange and gold reserves Russia had overseas have been confiscated. That’s a big lesson for every country that is suspicious of NATO’s motives now and in the future. It is therefore reasonable for countries to favour gold over holding foreign currency because at least the gold is a physical entity that can be held internally. Nuclear weapons are now also a must have to defend against invasion for any country that holds opposing views to NATO.



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October 31 2022

Commentary by Eoin Treacy

Wheat Surges as Russia Warns on Ship Safety After Ditching Deal

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

Crop traders have been focused for weeks on the approaching deadline of Nov. 19 for renewing the grain-corridor agreement, particularly as senior Russian officials repeatedly criticized the deal, suggesting that any extension would require difficult negotiations. Exports have also been slowed by a swelling backlog of vessels waiting to be inspected as part of the agreement -- Ukrainian President Volodymyr Zelenskiy said some ships had been waiting for three weeks. 

Vessel and insurance rates to Ukraine stand to rise, said Michael Magdovitz, a senior commodity analyst at Rabobank. New deals from the country had already been drying up as traders didn’t want to risk getting caught short of the deal’s deadline, said Matt Ammermann, commodity risk manager at StoneX. 

Russia, which leads global wheat exports, stands to offset some of the lost sales. Still, it will be key to watch how shipping costs across the entire Black Sea region are affected by the latest developments, Ammermann said.

Eoin Treacy's view -

At best this is a fresh example of brinksmanship by Russia in seeking to extract maximum benefit from the uncertainty around secure supply of wheat. At worst it is a prelude to intensifying the unconventional war effort by holding the world hostage with food insecurity.



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October 26 2022

Commentary by Eoin Treacy

Fed's Yield-Curve Barometer Starts Flashing Recession Risk

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

Inversions of this segment of the Treasury curve typically occur late in Fed tightening cycles as three-month bills track the policy rate while longer-term borrowing costs reflect expectations for economic growth and inflation. While other widely-watched yield curve segments such as the two- to 10-year and five- to 30-year have been deeply inverted for much of this year, the Fed follows this one more closely.

“We are certainly in territory with the Fed’s official barometer of the yield curve that will raise concerns,” said Gregory Faranello, head of US rates trading and strategy at AmeriVet Securities. “The Fed will definitely watch this, and there is a sense in the bond market that they will soon throttle back the pace of rate hikes and take a step back.”

Eoin Treacy's view -

The 10-year – 3-month spread spent part of today inverted following an 11.65 basis-point contraction. The spread was at 223 basis points in May so this tightening has been the fastest in decades. The fact there was such a wide divergence between the 10-year – 2-year and the 10-year – 3-month was regarded as an oddity but reflected the stresses in the bond market.



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October 26 2022

Commentary by Eoin Treacy

Copper Buyers Want Longer-Term Deals on Supply Concerns, Codelco Says

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

Copper buyers are so worried about future availability of the metal that they’re seeking to secure longer-term deals than normal, according to top miner Codelco. 

The Chilean state-owned company recently signed some contracts for three to five years with customers in Europe, in contrast to the more standard annual deals, Chairman Maximo Pacheco said in an interview. 

Eoin Treacy's view -

With battery metal prices like lithium still making new highs, the question of where to source affordable component materials is a pressing concern for many companies. Signing long-term offtake agreements is desirable from that perspective but it also represents hedging on behalf of the miners. That’s not a bad idea at this stage since prices are falling and the global economic outlook is uncertain, particularly with China slowing down.



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October 21 2022

Commentary by Eoin Treacy

'Strikingly Tight' Copper Market Belies Price Drop, Miner Says

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

It’s “striking how negative financial markets feel about this market and yet the physical market is so tight,” said Richard Adkerson, chief executive officer of Freeport-McMoRan Inc.

“We’re not seeing customers scaling back orders. Customers are really fighting to get products,” Adkerson said Thursday during a conference call with analysts after the miner reported adjusted third-quarter per-share profit that exceeded estimates. 

The decline in copper prices this year reflects investor concerns about the global economy, weak economic data from top consumer China, the European energy crisis and a strong dollar, he added.

Such a pricing environment will defer new copper projects and mine expansions just when the world’s epic shift to electrification requires a massive amount of the metal, according to Adkerson.

Eoin Treacy's view -

The mining sector is expecting demand from the electrification sector to explode over the coming decade with the result that copper demand will double. That goal is impossible to achieve with investment in new mining infrastructure on a massive scale.



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October 20 2022

Commentary by Eoin Treacy

Lula Losing Brazil' Biggest State Forces Urgent Campaign Rejig

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

Inside Lula’s campaign, the result in Brazil’s most populous state — the birthplace of his political career, and containing about 25% of the entire electorate — was compared to a plane crash, where a confluence of small factors leads to catastrophe. At his team’s first post-election meeting, the talk was of frustration and failure. 

Edinho Silva, the former president’s campaign coordinator, may have had an inkling of what was to come, saying in an interview on the eve of polling that Sao Paulo had become a center of hard-core support for Bolsonaro’s brand of right-wing identity politics. 

“We have a percentage of Brazilian society that, unfortunately, is racist, homophobic, sexist, xenophobic, and doesn’t accept the social ascent of the lower classes,” he said. “And a significant part of Brazil that thinks in this way lives in Sao Paulo.”

Eoin Treacy's view -

Here is a novel idea. Perhaps Brazilian voters are not prepared to install a man who squandered the bounty from the last commodity boom on vanity projects. As if that were not enough, he  led an administration that was the most corrupt in the country’s history, and that is saying something. Lula was jailed for corruption and was only allowed to run because he was offered a politically motivated dispensation.



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October 19 2022

Commentary by Eoin Treacy

FBI misled judge who signed warrant for Beverly Hills seizure of $86 million in cash

Thanks to a subscriber for this article from the Los Angeles Times which may be of interest. Here is a section:

Eighteen months later, newly unsealed court documents show that the FBI and U.S. attorney’s office in Los Angeles got their warrant for that raid by misleading the judge who approved it.

They omitted from their warrant request a central part of the FBI’s plan: Permanent confiscation of everything inside every box containing at least $5,000 in cash or goods, a senior FBI agent recently testified.

The FBI’s justification for the dragnet forfeiture was its presumption that hundreds of unknown box holders were all storing assets somehow tied to unknown crimes, court records show.

It took five days for scores of agents to fill their evidence bags with the bounty: More than $86 million in cash and a bonanza of gold, silver, rare coins, gem-studded jewelry and enough Rolex and Cartier watches to stock a boutique.

The U.S. attorney’s office has tried to block public disclosure of court papers that laid bare the government’s deception, but a judge rejected its request to keep them under seal.

The failure to disclose the confiscation plan in the warrant request came to light in FBI documents and depositions of agents in a class-action lawsuit by box holders who say the raid violated their rights.

Eoin Treacy's view -

The war on cash is an ongoing program by governments to control and tax every Dollar, Euro, Pound, Yen, Renminbi and Rupee in existence. The Reaganism “If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” It is as true today as ever. In an effort to further that aim, governments want to know exactly where every unit of currency resides and to control how it moves. 



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October 18 2022

Commentary by Eoin Treacy

Guide to the Markets Australia

Thanks to a subscriber for this chartbook from JPMorgan which may be of interest.

October 18 2022

Commentary by Eoin Treacy

White House to Tap Oil Reserve Again Amid High Fuel Prices

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

The Biden administration is moving toward a release of at least another 10 million to 15 million barrels of oil from the nation’s emergency stockpile in a bid to balance markets and keep gasoline prices from climbing further, according to people familiar with the matter.  

The move would effectively represent the tail end of a program announced in the spring to release a total of 180 million barrels of crude from the Strategic Petroleum Reserve. About 165 million barrels has been delivered or put under contract since the program was put into effect.

The Biden administration also is set this week to provide details on plans to replenish the emergency stockpile. The Energy Department announced in May it was planning a new method of buybacks to allow for a “competitive, fixed-price bid process,” with prices potentially locked in well before crude is delivered.

Eoin Treacy's view -

The mid-term elections are in exactly three weeks. The incumbent party generally does not do well in the mid-terms but this year with inflation running rampant and a slim majority, the majority in both houses is at stake. Getting gasoline prices down was central to the effort to appease consumers’ inflation fears ahead of the election.



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October 17 2022

Commentary by Eoin Treacy

Email of the day on name changes and courier services

It seems Royal Mail changed its name to International Distributions Services plc (IDS.L). I would be grateful if you would kindly share your views on the implications of this change to the price of the share and the health of the company. As always thanks for your great service.

Eoin Treacy's view -

The official name change was announced several months ago but went into effect on the 5th. The main reason posted was to highlight that Royal Mail has two businesses, domestic and international. At the time the name change was announced the company said there would be no transfers between the international and domestic businesses. In other words, they are intent on pushing through significant rationalization of the domestic mail and package service which is still called the Royal Mail.



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October 11 2022

Commentary by Eoin Treacy

Social Security COLA update coming this week - and it could be huge

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

Should Social Security beneficiaries see an 8.7% increase in their monthly checks next year, it would mark the steepest annual adjustment since 1981, when recipients saw an 11.2% bump. An increase of that magnitude would raise the average retiree benefit of $1,656 by about $144 per month or roughly $1,729 annually, the group said.

"A COLA of 8.7% is extremely rare and would be the highest ever received by most Social Security beneficiaries alive today," Mary Johnson, a policy analyst at the Senior Citizens League who conducted the research, said. "There were only three other times since the start of automatic adjustments that it was higher."

However, the decades-high benefit increase is not always good news for recipients, according to Johnson.

Higher Social Security payments are a bit of a Catch-22. They can reduce eligibility for low-income safety net programs, like food stamps, and can push people into higher tax brackets, meaning retirees will pay more taxes on a bigger share of their monthly payments.

Eoin Treacy's view -

There is a lot of complication in the US tax code but one thing is certain, if you make more you pay more. That both increases compliance costs and ticks people off when they believe they should not have to pay taxes. It’s likely to become a political factor in coming elections.



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October 03 2022

Commentary by Eoin Treacy

JPMorgan Is Worried About Who's Going to Buy All the Bonds

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

Even if new buyers step into purchase these bonds, they’re likely to demand a higher yield for doing so — potentially adding to government deficits and mortgage rates at a time when they’re already soaring.

“All this points to a somewhat higher resting level for the mortgage/Treasury basis—and potentially for other related assets like IG corporates, which finally caught up with some of the mortgage widening over the past few days,” the analysts conclude.

Eoin Treacy's view -

2-year yields at over 4% are sufficient incentive to drag cash into the sovereign markets. When the alternative is to lose double digits in the stock market and see cash eroded by inflation, the allure of a guaranteed 4% is reason enough to invest.



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October 03 2022

Commentary by Eoin Treacy

China Offers Rare Tax Rebate to Spur Home Purchase in Crisis

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

China’s central government offered a rare tax incentive for residential purchases, ramping up support for the country’s embattled real estate sector. 

Residents who buy new homes within one year after selling old homes will enjoy refunds for personal-income tax on the sale, according to a statement on the finance ministry website. The tax refunds will take effect from October till the end of 2023. 

The novel tax policy comes after a yearlong slump in the housing market. To spark a turnaround, the central government is allowing nearly two dozen cities to lower mortgage rates for purchases of primary residences, while the central bank vowed to speed up delayed homes with more special loans. 

“The measure may help restore some confidence,” said Xu Xiaole, a property analyst at Beike Research Institute. “It’s another demand-side policy targeting homebuyers after mortgage rate cuts.” 

The tax break suggests the central government is ramping up support for people seeking to upgrade their homes. Previously, most incentives focused on first-time buyers, echoing President Xi Jinping’s mantra that “houses are for living in, not for speculation.”

Unless the person has held on to the home for at least five years, most big cities charge personal tax income on property sales when there’s a gain in value, usually 1% of the full amount or 20% of the gain. 
Under the new policy, people who buy more expensive apartments will enjoy a full refund in this area. The tax break only applies to home upgrades in the same city.  

Eoin Treacy's view -

The range of measures China is putting in place to support the housing market continue to increase. That’s good news for the domestic property sector and commodity demand in general. By limiting the tax cut to those also selling a property, the government is attempting to avoid stimulating property speculation but more money for the sector is certainly a positive.



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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

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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

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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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