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This week, we saw a Fed rate rise, crude came back from the stratosphere, and Chinese equities came to life.

As we said last week:

– Sam said “watch the 5 and 7 year” bonds, where we saw serious action.

– Sam also said “grip it and rip it” with equity markets.

– Tracy said that dramatic spikes in crude markets were priced out of the market for now

– Albert called for a volatile week thru the Fed meeting, although we didn’t see the lows he’d expected.

Sam walked us through the Fed decision and what’s happening in the bond markets. He also explained a bit more about his “grip it and rip it” comment and where the leaves us.

LME is talking about banning Russian copper on the exchange. What does that mean for global copper markets, as explained by Tracy? We’re also coming off the nickel scandal at the LME. Are there bigger problems with at the LME – mixing politics with markets?

We saw China equity markets perk up this week. KWEB, the China tech ETF, is up over 40% since Monday. What happened, what is Albert watching and what’s coming for Chinese equity markets?

Listen on Spotify:

https://open.spotify.com/episode/1yFipmQCs7XNHEXwj20bZf?si=5310245ccd1545d1

This is the 11th episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Albert: https://twitter.com/amlivemon
Tracy: https://twitter.com/chigrl

Transcript

TN: Hi, and welcome to The Week Ahead. I’m Tony Nash. And I’m joined by Albert Marko, Sam Rines, and Tracy Shuchart. Before we get started, I’d like to ask you to like and subscribe to our YouTube channel.

So this week it’s been a really interesting week. We saw Fed rate rise. We saw commodities, especially crude, come back from the stratosphere and we saw Chinese equities come back to life. So it’s been kind of a really weird week.

Last Friday, Sam said to watch the five- and seven-year bonds where we saw some serious action. He also said rip it and grip it with reference to equity markets. So let’s dig into that a little bit today.

Tracy said the dramatic spikes in crude markets were probably priced out in the week before, which we saw bear out this week. And Albert called for an active week before the Fed. We didn’t see the low he expected, but I think very much in line with the volatility he expected this week.

So, Sam, to get started, can you walk us through the Fed’s decision and what’s happening in bond markets?

SR: Yeah. So I think the Fed’s decision is pretty simple to understand on a number of levels. It’s inflation, inflation, inflation and everything else is secondary. When asked multiple times what would knock them off of the call it the inflation war, they made it very clear there was very little that would knock them off that path. So you had a lot of action on seven-year, five-year and a little bit on 10? Not as much as I would have expected, really. But the basic reaction was the Feds going the Fed’s going very hard, very fast, probably would have done 50 if it weren’t for Ukraine and may do 50 at a coming meeting or two if the war in Ukraine doesn’t begin to really spiral into an employment issue in the US. It does not matter about a growth issue, matters about employment issue. So I think that’s really critical.

The two-year looks really well priced to me in light of that situation, quantitative tightening, whatever. That will happen in May. We know that.

TN: We’re convinced it’s happening in May.

SR: We’re convinced it’s happening in May. Yeah. The rhetoric from the Fed is pretty clear that they’re going to go early and they’re going to go fast on quantitative tightening. None of that is great for the longer end of the curve, starting at five s and ending at 30s.

If you want to kind of think about it in terms of ideal perspective, in terms of pricing, it’s probably pretty good. 5s, 7s, 10s, 30s have all priced a pretty interesting growth to inflation narrative that if you begin to have the growth narrative breakdown, if you begin to have the long term inflation embedded narrative breakdown, because the very fast, very good Fed, that’s going to change, and that’s going to push those yields down, prices up pretty dramatically, pretty quickly.

TN: Fantastic. So when you talk about QT in May, I think I bounced back and forth over the past, say month or two months where people are talking about QT, then they’re talking about the possibility of QE, then we’re talking about QT.

So the QT aspect of it, if that happens, which when you say I fully expect it to happen, the main point there is to take money out of circulation, is that right? What is the main point of QT?

SR: What is the main point of QT? Main point of QT is signaling.

TN: Okay.

SR: In my opinion. QE is a pretty big signal to go ahead and buy everything. QT is a pretty good signal that the Fed is serious, right. It’s a seriousness issue. It’s not as dramatic, I think, as it might be interpreted by the financial media in terms of an actual translation to financial conditions or to equity markets, et cetera.

It does tend to knock down multiples, and it probably adds another 25 to 50 basis points worth of tightening this year. But I wouldn’t say it’s a shredding of cash. It’s a shredding of reserves. So reserves never made it in to the market in terms of real usable high power cash. That’s a big difference.

TN: Okay. So when we look at the environment right now versus what you’re expecting for QT in May, are we in kind of an interim opportunistic equity market right now? Are people just kind of trading until the inevitable comes? What’s happening, especially in US equity markets?

SR: What’s happening in US equity markets? That’s a tougher question to answer than you might think. A lot of short covering. That’s the first thing. Second thing is most of the risk seem to be priced as we exited last week. Right.

If you’re going to price the world for World War Three or some sort of big tail risk, that was the time to do it. And you simply didn’t have any of that come to fruition. You had a hawkish Fed, but you didn’t have a Fed that seemed to want to break something really quickly. And it’s pretty obvious that they’re willing to break something at this point, but they didn’t want to break it with a 50 basis point hike or call it three or 3 or 50 basis point hikes. That is one of the reasons why equity markets get a little bit of relief here.

The other side is that the ten year yield dropped. The ten-year yield dropping took some pressure off the Nasdaq for rate increases or interest rate increases that side of things. So Nasdaq outperformed S&P, that’s a pretty important signal. There was some risk on this week.

TN: Great. Okay, Albert, what’s your rate on US equity markets in light of what Sam is talking about with Fed action?

AM: Sam’s right. They want to break something, but they don’t want to be seen as breaking something. I mean, I was dead wrong on the sub 4,000. I completely forgot that Opex was this week. They were not going to pay out $4 trillion and put up just the people. It was just that they probably spent 100 to 150 billion this week to pump this market up and keep it stable up in the stratosphere up here.

I guarantee they spent about at least $100 billion doing that this week. And they just annihilated people. They kept equities up. They are signaling that they’re going to hit inflation hard and fast, just like Sam said. They have to because things are just getting silly at this point.

TN: Okay. And Tracy, in light of what Sam is talking about with QT and more hikes later in the year, do you expect that to have a material impact on commodities over the short to medium term, or do you think they’re still on this strong trajectory that you’ve expected?

TS: Yeah. I think that unfortunately, the Fed cannot subside this with rate hikes because we have, again, real supply demand issues. And so I think the commodities markets, the trajectory is going to continue higher. It doesn’t matter, especially when we’re looking at now we have this Ukraine Russia war, and now we also have 50 million people locked down in China again. And they just closed one of their major ports and manufacturing hubs this week. So supply chains that were sort of beginning to mend, right, after 2020 just got thrown into an entire tail spin once again.

TN: I have a friend in the manufacturing sector who because of the Shenzhen Port close and city close, he got several force majeure letters this week. So that stuff is cascading through industry. We’re not necessarily seeing it in markets yet, but it’s really cascading through industry really quickly. And I think we’re going to start to see that appear in financial statements of companies in the coming months.

AM: That’s important, Tony, because my contention has always been that they’re allowing inflation to run wild because it reduces the amount of rate hikes they actually have to do come May, they might be done with their last rate hikes at that point and start QT just simply on the basis that the supply chains and the economy is struggling.

TN: Right. One thing I want to go back to, Tracy, when you say bullish market and this is my understanding of your statements, but you’re bullish on commodities, you’re not talking about crude going to $140 again next week. This is a medium term play. Is that fair to say?

TS: It’s a medium to longer term play, which I’ve kind of always stated, granted, we had the Russian Ukraine factor come in that push prices to 130 WTI, which was a lot faster than I anticipated. I really liked the fact that we pulled back from that, got some of that geopolitical risk air out of the market, but we’re still on the same trajectory of $150 a barrel over the course of the next year or two.

TN: Right. Okay. Now, while we’re on Russia Ukraine, the LME came out with some news about copper this week and we’re showing that on the screen right now talking about the LME potentially banning Russian copper on the exchange. Can you talk us through that? And what does that mean for global copper markets?

TS: All right, so this is, the LME Commission basically suggested that they ban Russian oil. This has to be presented to the internet. Copper. You said Russian oil.

TN: You meant copper, right?

TS: Copper, yes. Sorry. This has to be presented to the international community for this to actually go through. The problem here is Russia is the 7th largest producer of copper. They account for about 4% of global production. It’s a role on the LME exchange is more significant because they are the third largest exporter of refined copper metal and this is deliverable to the exchange. So this really would send LME markets into chaos. Literally.

TN: Okay, so let’s kind of somehow link that to the LME nickel issues that we saw last week. Okay? Could this, as an exchange, could actions like this impact the credibility of the LME or what does this mean kind of political actions and by “political actions”, I mean there was intervention on behalf of a Chinese entity for the nickel market last week.

There’s potential intervention as a result of geopolitical issues with Russia in the coming weeks. So will we see exchanges get more political and will that impact impact their credibility as an exchange?

TS: Well, that’s the problem, yes. And I do think that it will impact their credibility. The nickel market is essentially broken at the LME rights now, right. They reopened again on Tuesday. They set daily limits at 5%, limit down. They were limited down right away. They raised it to 8% on Thursday, limit down right away, 12% on Friday, limit down right away.

And basically, that’s not because of the fundamentals of the market. That’s because people are running for the hill. They just want out of that contract. Right. And so that is definitely going to be a problem for the LME market going forward.

TN: Are there dangers and we don’t necessarily need to name other markets, but are there dangers of other we’ll say developed market exchanges to kind of make these types? Could we see CBOT or CME or some of these guys start to play these games, too?

TS: I think that’s a difficult question to answer. I do not think that you will see CME do that unless you have some other foreign markets do that first.

TN: Unless a big Chinese state owned entity lose a lot of money.

TS: If we see SHFE do something like that, then I think the United States will. But I do not think you’ll see the CME market actually.

TN: Okay. Yeah. I mean, I’m not sure that some people understand that these exchanges are actually businesses and they have to make business decisions. Right. And some of these business decisions, they’re not completely neutral market participants. Right. In some cases, they get involved in these trades.

TS: They’re there to make money. Right.

TN: They are there to make money. But when politics inserts itself into markets, these exchanges that people think are kind of arms length to the trades, it starts some people wondering about the price. Are they actually getting the right price? Is there really a true market there?

TS: Well, exactly. And that’s exactly what we’re seeing at the LME right now. At the command, so far, we have not seen that at CME yet. But that is to be determined.

TN: Right. Albert, Sam, what do you guys have to say on this?

AM: From my perspective, I can’t really add much to what Tracy said. She’s right on the ball. When it comes to systemic issues, politics gets in the way and protects it. That’s just the way it works. And unfortunately, just seeing what you’re seeing today, which is undermining, it undermines the trust in the entire market overall.

TN: Yeah. It just seems like a problem that’s really hard to get over. Right. Like how long will it be broken and when it’s back, will it snap back? I just don’t know. Sam, do you have any thoughts on this?

SR: My only thought is very similar to Albert’s, in terms of I don’t think anybody’s going to actually trust the LME anytime soon. If you’re going to make a significant trade in a metal, I highly doubt you’re going to want to do it through the LME without having some sort of backup to that position.

TN: Okay, great. Let’s move on to Chinese equities. Albert, we saw China equity markets forgot this week, KWEB, for example, which is a China tech ETF, is up over 40% since Monday. So what happened and what are you watching?

AM: Again, the systemic issues that China is facing in the market, I mean, Hong Kong was about 5% away from just absolutely imploding. They had a new problem where it wasn’t just the foreign money that was leaving the system, but actually the mainland mainland Chinese investors were taking money out, which was something new. And it was to the point where the peg might have even broken. So they had to shore it up by liquidity injections. And the Xi had come out and made those comments citing Hong Kong twice. But I was on Twitter and I was saying, this just can’t happen.

China is completely about to fail market wise. So let’s start picking things, pick the best ETF, pick the best companies out of China. And I mentioned KWEB with you guys, GDS, Chindata, you can throw a dart and pick your Chinese name last week and it went up 40% to 80% at some point.

Same thing. Now I’m kind of trimming my position back, but Chinese housing is at that point right now, where the housing sector accounts for 75% of China’s wealth. They can’t just simply let it deteriorate into nothing where the banks are taking it over. That can’t happen. I mean, Xi would be out in his ass. Sorry about the commentary, but Xi would be out within months if that happens. So I’m going to pick top three Chinese housing names and go for it.

TN: It’s a brave call. It’s a really brave call.

AM: All right.

TN: Do you think there’s room to run with some of these Chinese tech companies or even the broader China market, or do you think the opportunity is really limited to real estate?

AM: Well, no, they can run. The problem that we have now is the Biden administration is starting to target China, assisting Russia and whatnot. So then now you have the geopolitical risks come into the equation and you see these things surge 40% one day, you can easily see a 20% retracement the next day or even more. So that’s why I’m just trimming you take your 60% and be happy with it.

TN: Right. So we talked about Chinese fiscal stimulus, Chinese monetary stimulus. We talked about devaluation. Do the events of the last week move up the time clock for the economic planners in China to get this stuff out the door?

AM: Absolutely. I think they have to even in conjunction with the US, because the US has no fiscal coming so the Chinese have to step up to simulate the economy. Otherwise the entire globe is going into a depression. It’s as simple as that.

TN: Yeah. It’s really. I remember over the past ten years, all the talk about coordinated economic stimulus and all this other stuff since 2008, 2009. And right now we’ve got the Fed pulling back and we’ve got China aggressively moving forward. It’s just a little bit strange. Sam, I guess from a macro perspective, can that work?

SR: It can work depending on how much stimulus is actually put into the system and how it is put into the system. The how is very important in terms of how impactful it will be. Not just domestically for China. But also how impactful it will be beyond their borders.

And what you’d be really concerned about from a macro perspective is how far beyond the borders does that stimulus actually get? That’s where I get interested in it, because if it does begin to move beyond the borders, it’s very positive for Europe. That’s very positive for some US companies. But you have to have a stimulus that isn’t just a transfer to businesses.

You have to have it actually hit the Chinese consumer and hit the Chinese consumer quickly.

TN: Okay. So we’re not just talking about a couple of RRR cuts, which is what they do all the time. It’s kind of the go to. This is the reserve requirement, right?

SR: Yeah. I don’t care if they do RRR cut.

TN: I don’t think many people do, although I think they kind of have to phone that in to show that they’re doing something. I would think it’s more aggressive on the fiscal side, on the TSF, the total social finance side, where they just need to churn the cash out to SMEs, SOEs, big multinational companies, that sort of thing to almost get them to the point where they’re exporting deflation again, of manufactured goods. Does that make sense as an approach, Sam?

SR: I mean, it makes a lot of sense as an approach, but at the same time, you’re locking down due to your COVID zero process or policy. So that process would be really interesting and intriguing. But it’s a question of whether or not it would be effective given the health policy on the other side. So, yes, it would be great, but it would be probably great in three to six months.

TN: Okay, so guys, this is a great point. The COVID zero policy, it feels like much of the rest of the world has come out of this. Right. And China has gone back into lockdowns. Do you think there’s a point at which other markets have an uncomfortable call with China and go, guys, you got to open up because you’re killing the rest of us.

SR: I think they had it. I think they had it. If you look at the way they’re handling the current lockdown, they’re busting people to factories.

There’s a closed loop factory policy. While you have a COVID zero policy and “these places are locked down,” they are busing people to the factories. So I think there’s been a little bit of a let’s move on here.

TN: Okay.

AM: And also want to point out is these lockdowns came suspiciously close to the talks with the US, both with Biden and our glorious blink or Sullivan, the genius Sullivan that we have. But I think it might have been a little bit of a negotiation tactics like if you decide to play hardball with us over Russia, we can just shut down and ding our economy. So I think there was a little bit of that also sprinkle in there, right. A little bit of real politics.

TN: Yeah. Okay, guys. So as we come out of this weird week, what do you expect for the week ahead? Tracy, what are you looking at for the week ahead?

TS: So I think in the commodity markets, we’re still at that point where we’re kind of coming down after that initial knee jerk reaction to Russia, Ukraine. So I expect a little bit of consolidation across markets. Depending. It’s kind of what we’re seeing. So I think the market still be volatile, but like less volatile. I think we’re kind of like at that ripple point where the ripples really big and then we kind of get smaller and smaller.

TN: I think you’re Right. I think the consolidation makes sense. Albert, what are you looking For? It seems to me on the geopolitical side, we’re almost going through almost a geopolitical consolidation a little bit. We’ve had so much drama over the past few weeks, but I almost feel like it’s coming down a bit.

AM: It has been coming down and that’s one of the reasons they’re able to sit there and pump the market so high. I think it was overbought, to be honest with you. I think this market even considering going back to 4500, you’re just going to have every fund out there shorting the heck out of it. So I would see them try to test 4470, 4480, 4490, maybe 4500, but after that, it’s probably downside from there.

TN: Okay. Great. Sam, what are you looking at?

SR: I’m looking at the five-year I think it’s a pretty interesting place to be and I think it’s going to be highly volatile. But that’s the one to watch with inflation and growth expectations beginning to be a little wobbly.

TN: Great. Guys, thanks so much. I really appreciate it. Have a great week ahead.

AM, SR, TS: Thanks.

This week, we saw commodities skyrocket then drop off. We saw crude oil hit levels not seen since 2008, with gasoline and home heating prices on everyone’s minds. The nickel market broke the LME. Chinese tech and real estate bloodbath. And – despite all of this – Janet Yellen assured us there will be no recession in the US. Quite a week.

As we said last week:

– Tracy called for commodity price volatility – across sectors

– Downside bias in equities with high volatility. Albert predicted 4200-4250 and pretty much nailed it.

– Sam said a Fed rate rise would become boring and talk of QT would disappear.

This episode we talked about mostly the energy commodities with the continuing Russia-Ukraine conflict. Can the US use other alternatives like the West African oil to replace Russian oil? What are the politics around Venezuelan oil and why is it the same as getting Russian oil?How about uranium — and can the US produce it and will the conflict affect rare earths? Is this war the reason for the US’s inflation? How will inflation actually play with voters in this year’s US election? Lastly, what’s happening in Chinese tech and real estate and why there’s a bloodbath and for how long will this continue?

This is the tenth episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.

For those who want to listen on Spotify:

https://open.spotify.com/episode/35aHRd7oVfj7zPvgZjyQXg?si=d74bba8f8d094e29

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Albert: https://twitter.com/amlivemon
Tracy: https://twitter.com/chigrl

Transcript

TN: Hi, everyone, and welcome to The Week Ahead. My name is Tony Nash. I’m joined by Tracy Shuchart, Albert Marko, and Sam Rines. Before we get started, I appreciate if you could like and subscribe to our YouTube channel. And also please know that we have a special offer for Week Ahead viewers for CI Futures, which is our market data and forecast platform. CI Futures has about 800 assets across commodities, currencies and equity indices and a couple thousand economic variables. We track our error. We have very low error rates. So we’re offering CI Futures to Week Ahead viewers at a $50 a month promotion. You can see the URL right now. It’s completeintel.com/weekaheadpromo. That’s a 90% off of our usual price. So thanks for that.

So these week, guys, we saw commodities skyrocket and then drop off. We saw crude oil hit levels not seen since 2008. With gasoline and home heating prices really on everyone’s minds. The nickel market broke the LME, Chinese tech and real estate. We saw a blood bath there. And despite all of this, Janet yelling assured of us that there will be no recession in the US. So it was quite a week.

So let’s look at last week. Tracy called for commodity price volatility across sectors. So it wasn’t just an oil call, it was across sectors. And we saw that in spades. We talked about a downside bias in equities and high volatility. Albert predicted a 4242 50 range, and he pretty much nailed that. And then Sam said that a Fed rate rise would become pretty boring and talk of QT would kind of disappear. And we’ve really seen that happen over the past week. So, well done, guys. I think we need to really focus on inflation this week. Inflation and quantity prices are on everyone’s mind. Energy is the first kind of priority, but it’s really come across, like we said, nickel and other things.

So, Tracy, let’s start there. We have a viewer question from At Anton Fernandez, Russian oil, if you don’t mind helping us understand the environment for Russian oil and what’s happening there and some of the alternatives, which we’ve covered a little bit before, but also West Africa. Is West Africa viable within that? So if you don’t mind talking to us a little bit about what’s happening in the crude market and also help us with a little bit of understanding of the context of West Africa.

TS: Yeah. So if we look at the crude market in general, what we have been seeing, we’ve seen sanctions from Canada, which is basically political. They haven’t bought anything since 2019. We also saw Australia sanctioned oil, but they had only bought a million barrels over the last year. It’s nothing. The US only 600,000 bpd. That is nothing. And UK is going to take a year to get off oil because it’s 11% of their imports as opposed to 2% of our imports. That said, what we are seeing in this market is a lot of self sanctioning. Right.

So we’re saying we have nine Afromax Russian oil tankers basically sitting aisle because they can’t get insurance and nobody wants to pick up oil right from them. Actually, what is most surprising right now, I have to say, is that looking at Asian buyers, everybody thought that Asian buyers because it would be offered at such a discount, they would be buying this stuff up like crazy. But there was just an auction for SoKo, which is a very popular grade with South Korea, China, Singapore and Hawaii, and there was literally zero bids.

TN: Really? Wow.

TS: The next auction that we need to be looking for is ESPO, which is the most popular grade for China refiners. But if we see a zero bid there, that would be indicative of saying that we’re taking a lot of brush and barrels.

TN: Chinese we’re not seeing any interest there, at least so far.

TS: Right. Which is quite incredible because the Chinese have always decided to be apolitical. Right. And they don’t recognize Unilateral sanctions and they have stressed that. So whatever sanctions that the west has, China says we don’t care about that. We saw that with Iran as well.

TN: Right.

TS: But it’s pretty incredible to see this particular auction go at zero bid. Right. In regards to looking at West Africa, I’ve been talking about this since 2020. Niama is a very interesting place. There’s been a lot of offshore activity there. And so I think that is a place to be looking for. The problem is that looking at offshore projects, they take it’s a seven to ten year timeline, as opposed to something like Shell, which is six months to 18 months. But yes, there’s definitely opportunity.

TN: So is West African crew substitutional with Russian crude?

TS: No, it is not.

TN: Okay. So is it lighter, that sort of thing?

TS: It’s lighter. It’s lighter crude oil, what we’re looking at right now. And this is exactly why the US went to Venezuela and said, we’ll be willing to lift sanctions with you as long as you only sell us oil.

TN: Right.

TS: And the funny thing is that they have a very good relationship with Russia. The problem with this sort of relationship is that we could inadvertently be buying from Venezuela that is actually Russian oil.

TN: Sure. Exactly. So it’s an interesting point on Venezuela. Albert, what are the politics around that we just pick up the phone. Does Lincoln just have a conversation with Venezuela? We send a deputy sect down there, do a deal. How does that work? And is that palatable?

AM: No, it’s not palatable. It’s an absolute joke. Like Tracy said, the Russians have their tentacles all over Venezuelan oil, that you would be self sanctioning yourself from Russian oil globally, but then buying from Venezuela, which is going to be mixed because everybody in the industry knows that if you want to mix oil, you do it in the Caribbean, especially from sanctioned oil from overseas. So it’s not palatable. It’s a joke. I don’t understand what they’re trying to do. It’s just a Wally world at this point.

TN: I guess the thing that I’m continually astounded by is the diplomatic actions of the US administration from Anchorage through this week with Venezuela. They just seem to be tripping all over themselves. What am I missing? Like they just seem to be eroding credibility by the day. Is that fair to say?

AM: It’s more than fair. They’re throwing spaghetti at the wall and seeing what sticks based only upon their little echo chamber of ideology. And it’s extremely naive ideology when it comes to geopolitics or what they’re doing right now.

You can try to erase Russia and go play and then think that you can go to Iran and cut a deal with Iran, not understanding that Russia is going to sabotage that deal. Right. Like they did just today.

TN: Tight diplomatically. While we’re on this this week, the headline said that the UAE and Saudi declined having talks with Joe Biden this week. Is that true? Is the headline the reality of it? And from the time Biden came into office, he was not friendly to Saudi Arabia. So is this payback from that?

TS: No, I don’t think so. Sorry.

AM: Actually, I think it is that it is payback because you have the Saudis and the UAE that have security concerns with the Houthis and the Iranians. And if you’re sitting there approaching the Iranians playing all nice with them, what do you think MBS is going to do?

TS: I agree with Albert on that respect. I just want to interject that the OPEC + Alliance has mainly tried to stay apolitical. Right. So just because the United States says OPEC produce this much more, Saudi Arabia and UAE, which are both the producers that can produce more than the rest, had come out this week and said no, we’re in this alliance and this is how it is, which is totally understandable.

AM: Yeah, but Tracy, but the problem is OPEC saying that is one thing but not taking his call.

TS: No, I agree with you. I agree with you that we have burned bridges. I’m not disagreeing with you here whatsoever. I’m just taking a different kind of look at this.

TN: Sam, what’s your view on that? I’m not hearing you.

SR: Can you hear me now?

TN: Yes, sir.

SR: I would say the naivety of believing that you’re going to have a JCPOA deal or you’re going to be able to have some sort of comeback in terms of Venezuela. So you add the two of those together and who cares relative to what you need to replace Richmond Oil? I mean, it would be great and fine, whatever, but it’s nowhere near enough simply. Right. But it’s also a political naivety to believe that you’re going to have that type of dialogue and you’re going to have it quickly.

TN: Right.

SR: On the front of Saudi and UAE, I would say it is both an OPEC Plus. We’re not going to blow this up before it blows up on its own from the call it the allies of OPEC. Plus.

It’s also the UAE and Saudi is saying, remember, you want to be friends with us, US.

TN: Yeah.

SR: Don’t pretend you don’t want to be.

TN: Right.

SR: So I would say it’s politics in the best possible way on that front. And on Iran, JCPOA, and Venezuela, it was wishful thinking to think that the Russians were going to say no on both fronts.

TN: Well, and the Chinese. Right. I think there are a number of Venezuela has relationships with both Russia and China.

TS: That’s all I was saying is that OPEC is not going to give up that plus alliance. They’re going to try to stay apolitical. Right. Whatsoever. Do I think that the United States is pushing OPEC to Russia and China? Absolutely. Do you see the huge deal that Saudi Arabia made today? Absolutely. Right.

So they’re looking at investing further into China because they are being pushed away from the United States. So agree on that aspect. But I’m just trying to say that they do try to stay apolitical. If you look at the history of OPEC, Iran and Saudi Arabia have been able to subsist cohesively in the OPEC alliance, regardless of the years of them being enemies and having proxy wars against each other. That’s all I’m saying.

TN: Okay. Let’s move on to the next thing. There are a couple of questions about commodities, Tracy, and let’s just cover these really quickly. We have a question about uranium from @JSchwarz91. Will the US ban or will Russia restrict its uranium and could the US actually start producing uranium on its own? Is that a possibility?

TS: The US won’t restrict uranium. It hasn’t restricted uranium because we actually buy a significant amount of uranium from them. It’s easy to say we can skip 600 barrels per day of oil, but not as easy to do with uranium. We’ve stayed away from that.

Will Russia decide to not sell to us? Again, it’s about money, so probably not unless we really push a button in there. Can we produce that amount of uranium in the United States? Absolutely not.

TN: Interesting. Okay. Let’s also move on to rare Earth. So we have a question from @snyderkr0822. He’s asking about the impact of Russia and Ukraine on the availability of rare earths. Is that a factor or is rare Earth more of a China thing?

TS: That’s more of a China thing. We all have to watch to see if China sides with Russia and see how that market ends up. But really, they’re the largest producer in the world, and that’s who we are largely dependent on for rare earths.

TN: Okay, great. Thanks for that.

Now let’s move on to kind of this war driven inflation narrative that we’ve seen over the past a couple of weeks. We had February inflation come out today, and I feel almost as if we’re being tested as a trial balloon for an inflation narrative that inflation is kind of Russia’s fault.

So, Sam, can you talk us through some of the economics of this? Is inflation a new thing like did it just happened two weeks ago?

SR: No. So the inflation narrative going forward, there’s some validity to Russia being the reasoning behind an increase over a base case. Whatever you want to decide that base case is. But in February, January. December and November, those are not in any way related to Russia generally.

What’s interesting to me is how many people are kind of forgetting that, we kind of had a little bit of a log jam breakup in supply chains beginning to occur. It looks like we were going to get a little bit of respite from that narrative. But now if you looked at what’s going on in the neon market, if you look kind of six to twelve to 18 months down the road, it looks a lot less like we’re going to have that log jam broken up and a lot more like we’re going to have somewhat persistent inflation that there is no way for the Fed to solve. There’s no way for the ECB to solve BOJ, et cetera. You’re just going to have to continue to have this hawkish language to try to tamp down those longer term expectations.

TN: Demand destruction.

SR: Demand destruction. But it’s really hard to destroy demand for semiconductors when they’re in everything from my daughter’s doll to my laptop. It is very difficult to destroy that much demand and create an inflationary environment that is less toxic to the Fed or to the ECB without breaking something.

So if the Fed isn’t willing to break something in the next call it six months. They’re not going to break inflation. And if you print out six months from now, you’re breaking something into a midterm election.

TN: Right.

SR: So I’m so much skeptical on the Fed’s ability to do anything at this point.

TN: Right. That’s a great transition to Albert. So how is inflation playing with voters?

AM: Oh, it’s absolutely nuclear football. Allowing inflation to go this high is just going to be devastating to the Democratic Party and Joe Biden. But I want to go back because I have a couple of contentious things to say. Right.

TN: Please do.

SR: Oh, God! Right.

AM: So everyone is pricing in five, six, seven hikes at the moment. Right. But inflation at the moment has probably taken three of them out of the equation because the money’s gone. It’s erasing money left and right at the moment, from the federal point of view, it’s like, why really get rid of it all? That why really attack it when it’s doing our job for us where we only now have to hike three times. Right.

And on top of that, something even more contentious is everyone knows that once the VIX gets to a certain price, somebody sells it off. Right. Somebody industry. Right. But everybody knows that. And when everyone knows that, the house casino usually moves to a different area. What about oil? What if somebody with a big account has bought oil futures and every time it gets to the 120s or 130s, they just crush it for $1015 and the market rallies again.

So this artificial inflation that obviously we have real inflation just because of wage inflation and supply chain. But there’s a little bit of artificial, artificial aspect to it that I think the Fed has been using. Politically, it’s going to be extremely damaging. But for their point of view is if they can get over it and then get the rate hikes out of the way and then maybe probably start QE later in the summer, They could suck their voters at the beginning of the economy back on track again. I don’t think it’s going to work.

TN: Let’s say a month or so ago there was suspicion that we would be doing QT in say June, July. That’s off the table now because of the money that inflation is taken out of the market, right?

AM: Absolutely.

TN: But we’ll do rate hikes and have QE potentially?

AM: That’s right. That’s my point.

TN: You’re in an insane phase of economic history.

AM: It’s just look around, Tony. What’s not insane at the moment?

TN: Undoing this.

TS: That’s 100% fact.

TN: Undoing this is going to be insane. Okay, speaking of undoing crazy stuff, the Chinese techs and real estate stocks really have some problems this week.

So Albert, Sam, can you guys talk a little bit about that? And we have a tweet showing some stocks from Tencent, Alibaba, JD, other ones down 50, 60, 80%. So what’s happening with the tech blood bath in China?

SR: I’ll just do a quick start. Did you see the numbers coming out of JD? They were horrible. I mean, they were absolutely atrocious. So, yeah, you’re going to get a sell off in tech broadly across the board in China. When your numbers are horrible, then you’re going to have additional pressure put on the potential for delisting in the US and the general call it risk off move in markets. So you’ve got the trifecta of horrible for Chinese tech in a nutshell.

But the JD numbers were absolutely atrocious on a revenue growth line. And there’s no way to save Chinese tech if you’re going to have numbers like that. If you continue to have numbers like that, guess what? Look out, because the bottom is not in.

On the Chinese real estate front, I think Albert has a much better view on this than I do. But I would say if you’re going to have a risk off in tech, good luck having a risk on in real estate.

TN: Sorry. Let me stop you before I move on to real estate. So the tech story, what I’m pulling away from there is that it’s potentially disposable income story at the retail level, at the consumer level, and tells me that China is way overdue with its stimulus. Is that fair to say?

SR: That’s harder to say.

TN: Okay.

SR: I would be very careful in saying that the Chinese consumer is not there. China is coming with stimulus. If you’re trying to hit 5.5 by the end of this year and you’re going into a plum, guess what? You got to hit the pedal.

TN: Well, they better hurry up.

SR: They’ve got time, but they’re going to hit the pedal. And the question is how do they hit the pedal? And it’s got to be the consumer because they’re not going to hit it on real estate.

TN: No, they’re not. Going through some of the real estate.

AM: Yeah, well, I have a couple of points to make on. I have a couple of points about the tech. China tech. What was interesting is Sam is right. JD numbers were horrible. Right. This SEC Delisting thing pointed out five companies. Right. Just five. And the big ones. Gamble is a big one. And whatnot. But why only five? It happened to be the only five that actually did their accounting and submitted their accounting numbers. Right. And would that actually let a snowball effect out to say, Holy crap, they will take down every single Chinese number, Chinese company in the market. That’s why a lot of this actually sold off harder than you think it would sell off.

Going to the real estate market. I mean, 75% of China’s fault is real estate. So unless Xi wants pitchforks and torches coming after him, he’s going to have to stimulate the economy, something to support the real estate market.

TN: Yeah. It seems like it’s going to have to come hard and fast. I could be wrong. But, you know, with.

AM: I think by June. I think by June he’s got to do something. He has to.

SR: Hit through the middle.

AM: Absolutely.

TN: Good. And do you guys have any ideas on what exact forms that’s going to take? I mean, of course they’re new triple R, of course, taking a new infrastructure spending. They do the stuff. They announce it every other year. Are there other forms that you have in mind that will take that?

AM: I don’t, to be honest with you, that is $64 million question. To be honest. That’s a big question. That’s very complex.

SR: Yeah. And if I had the answer to that question, I probably wouldn’t be on this call.

TN: Come on, Sam. We know you would.

SR: I would be on a yacht somewhere.

TN: Yeah, that’s right.

TS: It’s interesting about that. If you look at the energy perspective, they just had a meeting and they totally decided that they’re going back to coal other than anything else. So that to me that signifies we have stress in other markets. Right. We cannot spend the money in other places. So we’re going to go back to what we do best, what we know best. And they also offered, if you look at internal documents that are offering huge discounts for going back into the coal industry or whatever. I just like to.

TN: So there’s still 73% coal for their power generation, something like that?

TS: Yes. So for them, they backtracked on COP. They need the money right now, in other words.

TN: Right. So the whole Paris agreement is a convenient agreement, is that what you’re saying?

TS: Correct.

TN: Okay, very good. It’s good to know that we’re all committed to the future. Okay. So guys, speaking of the future, finally, what do you view for the week ahead? Albert, let’s start with you. Maybe with China. Do you think there’s more to come with the blood bath in China?

AM: I think there’s another week or two to come with China blood bath. And I think that’s going to obviously lean on our equities going into Fed week.

TN: Right.

AM: So yeah, I think we’ll be another down week.

TN: Okay. And guys, what about US equities? Are we on a steady decline down to some number 4300 whatever it is, or are we kind of about there? What do you feel is going to happen over the next week?

AM: I think we’ll be sub 4000 by the end of the week at some point.

TN: Okay.

SR: Yeah. I wouldn’t be anything other than market neutral until immediately following the Fed meeting and then you just rip it to the upside.

TN: Okay.

AM: Yeah. The only thing that I have a concern about is we still have this Ukraine war going on which is giving outrageous headlines and then if the Fed hikes 25 basis points and then extremely hawkish tones while Putin is shelling Kiev.

TN: Right.

AM: It’s hard to rip until after that’s all settled.

TN: So sorry, Sam, in your scenario, are you saying the first half up until say Wednesday we have a pretty quiet market, then Thursday and Friday, things are pretty active to the?

SR: Oh no, I am not saying that you have a quiet market until the Fed. I’m saying you don’t want to take a position period until the Fed and then you either want to grip it or rip it one or the other.

AM: I agree with that one wholeheartedly.

TS: These markets will continue to be volatile until we have some resolution with this Ukraine Russia situation just because of all every day we’re seeing new sanctions against Russia and against commodities within Russia, at least for the commodity sector. I think we’ll continue to see volatility, but over the long term I’m still very bullish commodity.

TN: Okay. So Tracy, Sunday night, futures open, crude traded very high. Do you think there’s a possibility of us seeing another dramatic spike like that in the next week or two?

TS: I think that mostly been priced out of the market. I think that was priced in right. We saw a lot of that risk premium come out of the market, which I was very glad to see. I would personally be happy if we saw it traded in the 90s again before going into high demand season because I do think that we will trade higher on fundamentals. But it scares me when we have these big kick ups due to headlines and geopolitical risk.

So for me right now I would like to see this market come down a little bit. I’d like to see it pull back some and hopefully things will resolve quicker than sooner with this situation. But still going forward, I’m still very bullish this market.

TN: Okay. We didn’t talk at all about nickel and metal’s markets, but we saw the LME close today because of a nickel trade supposedly. Will we see those markets reopen and will we see nickel trade? Is it scheduled to trade again on Monday and is there the potential for commodity specific disruption and markets closing over the next week or two because of the volatility.

TS: There’s been a very high contention discussion right now, especially within the commodities industry. I would just say that it was kind of unprecedented what we saw there and the fact that they canceled all the trades. I would say that hedge funds are kind of backing away from that market right now because they’re skeptical of that market right now. But again, it’s not like I don’t want to say this is going to be the norm or anything like that.

TN: Okay.

TS: I think this was a one off crazy thing. It happened in the aluminum market years ago and you can even look it up on Wikipedia, right.

TN: Okay. Last thing week ahead with bonds. Sam, what are you thinking about bonds? We’ve seen the ten year go back up to about two. Are we going to see that continue to take up?

SR: I don’t know. I think the ten year is a little less interesting than the five year and the seven year.

TN: Okay.

SR: The five year and the seven year are really what you want to watch because if the fed goes 25 and goes really hawkish, it’s the five and the seven that you’re going to get the juice from and the ten and the 30 you’re going to get a little less so watch the five and seven. I think the five and seven are really interesting here. If you want to take a bet on a really hawkish Fed.

TN: Fantastic. Okay, guys. Thanks very much. Really appreciated. Have a great week ahead. Thank you very much.

AM: Okay. Bye.

SR: Thank you. Bye.

Everyone’s eyes are on the Ukraine-Russia conflict in the past couple of weeks. How do traders make smart decisions in a geopolitically risky environment like this? Tracy Shuchart also explains why the fertilizer market is up 23% last week, what commodities are mostly impacted by the conflict, and how’s China’s energy relationship with Russia? Sam explains the effects on the emerging marketing of the different sanctions on Russia and why China’s exporting deflation is good for the US. Albert elaborates why the conflict is actually a “boom” for China.

This is the ninth episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.

For those who prefer to listen to this episode, here’s the podcast version for you. 

https://open.spotify.com/episode/4SIvGPktSKT7ezaVPEUNPf?si=fcb635574d0047ba

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Albert: https://twitter.com/amlivemon
Tracy: https://twitter.com/chigrl

Transcript

TN: Hi and welcome to The Week Ahead. I’m Tony Nash and I’m joined by Tracy Shuchart, Albert Marko, and Sam Rines. Thanks for joining us. Before we get started, I’d like to ask you to subscribe to our YouTube channel. And like this video helps us out to get visibility, helps you get notifications when we have a new video. So if you wouldn’t mind doing that right now, we would be grateful.

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So this week, guys, we saw commodities mooning. We saw exposure to Russia sovereign. Really a lot of sensitivity to that. Exposure to Russia commercial risk. A lot of sensitivity to that. Obviously the war in Ukraine is on the top of everyone’s mind. But we also had the removal of COVID restrictions in some key US States like New York. We had Joe Biden speak give the State of the Union address without a mask on. All this stuff, easing of national guidelines. So the risk aspect of COVID has gone in the US, but it’s largely gone unnnoticed. So while the war ranges on overseas, at home, we do have some regulation getting out of the way.

A few things we said last week. First, we said that Ukraine would get bloodier and the markets would be choppier. That’s happened. We said that equities would be marginally down. That’s happened and we said commodity prices would be higher and that’s really happened.

So in all of this, guys, the S&P 500 is only down about 15 points over the past week. So when you guys said it would be down marginally with a lot of volatility, you were bang on there. So very good job there.

So our first question today is really a basic one and I’d really like to get all of your different views on this. When we have geopolitical events like we have now, how do you guys make trading decisions? What do you pay attention to? Albert, do you want to get us started?

AM: Yes. Personally I view the market as we’re stuck on repeat right now, especially with the Ukraine and everything fundamentals to me right now. I mean, honestly don’t really mean much. And when we had the jobs number come out and then it was everyone just yawned about it because the nuclear power plants were getting firebound.

So for me I’m looking for the Fed to support the market to a certain degree and looking for geopolitical news events to come out and just scare the bejesus out of people.

TN: Okay. Tracy, what are you looking at? Sorry, Sam. What are you looking at?

SR: Yeah, I’ll jump in there 100% agree with Albert. It’s very difficult to trade when the market is just trading on headlines. It is a straight headline market. And does oil look great here? Yeah, but you get one good headline saying that it looks like tensions with Russia are declining and you’re going to have a $5 gap down in oil and probably get stopped out of your position.

To me, it’s one of those very scary moments for anyone who’s trying to trade in that you never know which way the headline is going to come in next. If you’re playing headlines, you’re going to get in trouble and you’re going to get in trouble pretty fast, unless you’re just getting lucky. So for me, headline driven markets are mostly about selling ball and spikes and getting out of the way on everything else.

TN: Tracy?

TS: Well, being that I mostly look at the commodity markets rather than obviously I look at broader markets. But for what I’m looking at, when I see this sort of volatility in the market, I think that you have to have a fundamental grasp of what is going on and what the trade differences are between countries so that you can kind of position yourself for a market change that is not subject to volatility, meaning that you have to know that the oil market is obviously going to be affected, for example. Right. No matter what dips are going to be bought in this market. So you have to have a conviction that this is going to be affected until something else changes, right?

TN: Yes. Tracy, let me dig in on that a little bit. You said something about Fertilizers. We don’t necessarily didn’t mention a specific company here, but you said something about Fertilizers earlier on Twitter today. Could you use that as an example of the type of analysis that you’re talking about?

TS: Yeah, absolutely. I mean, we saw the Fertilizer market rise 23% today. Russia is the second largest producer of Ammonium, Urea and potash, and the fifth largest producer of processed phosphates. And that country accounts for 23% of the global Ammonium export market. So what we saw in the Fertilizer market was an increase of 23% this week across the globe, not just in the United States, I mean, literally across the globe.

TN: I just wanted to cover this little bit because especially in social media, everyone’s an expert, right. So everyone’s a new political expert. Everyone overnight became a nuclear power expert, all this other stuff. And I just don’t want our viewers to fool themselves into believing that they can play these markets with certainty. But I like what you guys all said about you have to have a conviction. You have to have your stops in place. You have to understand when things are going. And headlines could go either way. So there’s a huge amount of risk out there. Right.

Is there anything else on this? Albert, what are you watching on the ground? How do you get information on the ground if you don’t have people? Are there reliable sources that you look at without having first hand research on the ground?

AM: No. Unfortunately, I don’t. I mean, we’ve come to this point where the nuclear plant attack and all of a sudden people are talking about radiation spikes and so on and so forth. And I actually had to get on Twitter and I’m just like, everybody, relax. Those things can withstand airplanes being hit.

A few bullets isn’t going to do the job. So for me, I personally have context in the region on the ground, both in Ukraine and Georgia. So for me, I get almost on the ground intelligence in real time. So that’s how I’m trading. That’s just the reality of it at the moment. The public is not going to be able to get that information. Right.

TN: Okay. This is great. I really appreciate this, guys. I think this is wisdom that comes from years of trading, but it’s also the reality that comes with dealing with geopolitics on a very intimate level. So thanks for that.

Let’s move on to commodities. We’ve seen commodities, wheat, especially skyrocket this week and last week. So a couple of questions here. Tracy, if you don’t mind starting us off. It seems like every commodity was green this week. I know there are a few that weren’t, but what commodities are impacted most by Russia, Ukraine?

TS: Well, so fertilizer, which I brought up earlier. And then you have aluminum, which was up 14.7% today, or this week. Pardon me. We have copper, 9.34%, neon gas, which is something that most people don’t look at. But Ukraine supplies 90% of the neon gas market for the chip making markets. Then we had Palladium up 37%. Not surprising, Russia supply 43% up that market.

TN: You’ve been talking about Palladium for weeks, though. So anybody listening to you wouldn’t be surprised by this, right?

TS: Right. Not at all. I’ve been talking about this for a very long time. And actually we’re seeing platinum get a little bit of a bid because if you look at the automotive markets, Palladium is a huge thing in a catalytic converter. Right. And so we’re starting to see because prices have been so elevated for the last few years, we’re seeing automakers finally start to retool a bit. And so that’s going to give a little bit of a lift to the platinum markets.

Natural gas obviously is up. Right. We all know about that. Oil obviously up. We have nickel up 9%. The other interesting thing is coal. Russia is a material coal supplier at 15% of the global market. And Europe gets 30% of their imports from the met coal market from Russia and 60% from the thermal coal market. So they’re going to be looking elsewhere for other supplies because they don’t want to have all their eggs in one basket. Where you can have everything in coal and that gas and depend on Russia.

I do want to know on the natural gas market, although there have been rumors Yamal was shut down or whatever. But overall, Jamal is only one pipeline into Europe. Gas supplies have still been consistent and steady this whole time into Europe via different pipelines through Russia.

TN: So weird.

TS: So nobody’s caught off of gas. Right. That’s just weird. They’re on other sides of the war, but one is still supplying the other side energy. I just think that whole thing is very.

AM: Yeah, Tony, you know what concerns me, actually, this is a question for Tracy, too, is like the super spikes in commodities are starting to concern me specifically because of wheat, because obviously that’s food. And once people start getting stressed on food supplies, political problems can happen. I think even today, Hungary decided that they cut off all exports of foods, of wheat and grains because of the concern of spiking prices.

Tracy, where do we see wheat possibly even topping off at this point, especially if Ukraine and Russia go at it for an extended period of time, like, say, three to four weeks?

TS: Yeah. I mean, hopefully they won’t. But as far as that’s concerned, we’re looking at the Black Sea right now because exports are halted, because there’s conflict going on, this is what I think European wheat and US wheat has been limited up literally every day this week. Right.

So that’s going to be a problem that’s going to cause inflation, food inflation elsewhere. And let’s not forget that’s how the Arab Spring started as well. Right. So this is very much a concern globally on a macro sense, on food prices, energy prices, especially when we’re looking at kind of a global downturn in the market. And that’s a whole another discussion we can get in another week, but definitely it’s a concern right now.

TN: Let’s dig a little bit deeper into that. We have a viewer question from @Ramrulez. And Sam, can you take a look at this? The impact of sanctions on Russia, on emerging economies. So where are we seeing impacts of, say, wheat prices? I know Albert brought up Hungary, but what are we seeing in, say, emerging markets and other places that this is already hitting them?

SR: I don’t know that there are places that it’s already hitting, mostly because you’re going to have imported wheat. Wheat right now is being harvested in Ukraine, Hungary, Russia, etc. And that’s going to be more of a late spring summer story when you begin to actually have to import your additional food supplies.

So where would you see it? You’d see it in Egypt. Egypt is a significant importer of both Russian and Ukrainian wheat. You’re going to see it on the cornside, too. It’s worth remembering that Ukraine is a significant exporter of corn. You’re going to see it in Semple our way up, which is going to spill over into other markets because you’re going to have to, if there is no resolution or planting season, you’re going to have to replace some flour, oil with something else. So you’re going to have that issue to deal with as well.

So I don’t know that you’ve seen the spillovers yet. You will see spillovers particularly in North Africa, other significant importers of foodstuffs. The other thing to remember is it could potentially be a marginal benefit to some emerging markets. As you see, net exporters of coal, et cetera, become incremental sources for replacement for both Ukraine and Russia. So I think it’s something to keep an eye on both on the food price front, but also on the front of it’s going to be good for some. It’s going to be very bad for others.

TN: Okay. Thanks for that. Hey, before we move on from commodities, Tracy, I want to roll back to this viewer question we have from @YoungerBolling. Yes. What are the other sources of crude, grade wise, that can replace Russian crude for US refineries? This is a common question, and I’m sure you can answer it very quickly. So where else can people look to get Russian grade crude?

TS: We get kind of the sludgy stuff from them. Right. So the best, most convenient, easiest place to get it from is Canada. Right. We can get some heavier crude grades from Mexico, but they’re having some political problems there and it’s coming up. So really the easiest place we can look to is to Canada. So opening import lines from Canada is really our best option since they’re on our border.

TN: Didn’t the US cancel a pipeline from Canada about a year ago?

TS: Something decided. Yeah.

TN: Okay. Thanks for that. And then moving to another question, we spoke a bit about China last week, and I’m curious for any further thoughts that the panel has on China in light of last week’s, of this past week events. We do have a viewer question to get us started off. It’s from @HJCdarkhorse1. He says perspectives on Chinese Yuan. But before we get into that, Tracy, let’s talk a little bit about China’s energy relationship with Russia. What do you see happening on that front?

TS: Right. First of all, if we’re looking at the oil industry, China is Russia’s largest importer. Right. I think that anything that comes off the market wise via the west, that China will gladly scoop up at a $28 discount that they’re currently offering. Right. That is interesting in that respect.

There are still 1.5 million barrels kind of off the market. I want to stress nobody has sanctioned oil or energy at all so far. UK, EU, US. That said that people are hesitant and anticipating, and it’s hard to get banknotes right now to get those deals going through. But China is definitely their largest trading partner. China definitely loves cheap oil. So we’re going to continue buying from them no matter what.

TN: Are their pipelines between Russia and China?

TS: There are, but not like not enough. Not enough.

TN: Okay.

AM: Did they just cut a deal for a new pipeline that’s going to pretty much be equal. Sorry. That’s for net gas, that equals North Korean, too.

TN: Did they also come to some agreement recently about buying crude in CNY? Did that happen in the past?

TS: No, that was buying jet fuel.

TN: Okay.

TS: What they said is if we’re in your airport, we’ll buy in your currency. If you’re in our airport, you’ll buy in our currency, which is not that big. Literally.

TN: To some people’s dismay, the US dollar is still the currency for energy.

TS: Since we’re talking about currencies, you and I have talked about CNY for a long time. So can you give us kind of some perspectives on that? I know we had a question about that as well.

TN: Sure. So CNY. Chinese Yuan is a controlled currency. It’s not a freely floating currency. There is an offshore currency called CNH that is, we’ll say marginally floating currency that is linked to the CNY. But the CNY is strictly managed by the PBOC. And when you have a managed currency, it’s devalued. Okay. It’s appreciated and it’s devalued.

And so what’s happened over the last two years is the CNY has appreciated dramatically. And a big part of that is so that they can buy commodities, knowing that commodities would spike starting in the second quarter of 2020, China’s appreciated CNY so they could hoard those commodities, which they’ve done. Okay.

What’s happened? Well, Chinese exporters have suffered a bit because of the appreciated CNY. On a relative basis, they’re paying higher prices, but their experts have been up, too. So they’re not hurt too much. But we have a lot of things happening in China with a big political meeting in November to where they’re starting to spend in a big way, fiscal spending. We’ve also expected since probably August of ’21, we’ve been talking about China starting to devalue the CNY at the end of first quarter or early second quarter of this year.

So what that will do is it will make things a lot easier for exporters. And so exporters will be happy. There’ll be a lot of fiscal stimulus, a lot of monetary stimulus. So that just in time for this political meeting, everyone domestically in China is pretty happy. So we expect a lot of stimulus and a devalued CNY is a big part of that.

SR: And just to kind of jump on that really fast, that’s a positive on the US inflation fighting front. It’s significant positive. We are going to get.

TS: If you’re exporting deflation, that’s fantastic.

SR: Exactly. So when China goes back to to exporting deflation instead of exporting inflation, that’s going to be a completely different ballgame from what we’ve seen for the past year and a half.

TN: That’s a very good thing. Okay, guys, anything else on China, Albert? Do you have any anything on China that you want to add?

AM: Honestly for China? I don’t really see people talking about the fact that this entire Ukraine and Russia war has been a boom for China. They’re getting cheaper commodities. They’re getting a tighter relationship with Russia, although it’s going to be debatable that Russia is going to be a shell of what it was after all this. But still for China, they’re sitting pretty at the moment. I mean, any other place in the world where the Russians had their hands in the domestic economies of countries that China also did is now going to have to take a step back and allow the Chinese to get their banks financing different countries projects. It’s going to be unbelievable for China in the next couple of years.

TN: Yeah. I wonder if the Belt and Road is going to rebuild Ukraine. It’s a cynical question, but I think it’s an opportunity for China to do something like that on infrastructure.

AM: They’re going to have to because Russia is going to have nothing left economically. Right.

SR: And to begin with, there was a $1.58 trillion economy.

TN: Right. But it’s a very detailed answer to that simple question. But yeah, I think it is a medium term opportunity for China as well, not just in getting cheap commodities now or discounted commodities, we’ll say now, but also long term for their financial system, for their infrastructure system and other things. Right.

AM: Got you.

TN: Okay. So what guys are we looking forward to in the week ahead? Tracy, what do you see over the next week?

TS: Again, I’m going to say volatility. I think markets are going to be very volatile, just like we saw this last week. We had eight to ten dollar moves in crude oil like the blink of an eye. I think it’s going to continue to kind of see that in the commodities markets until there’s some sort of resolution to this Ukraine-Russia crisis because there’s too many commodity sectors involved in this.

TN: Right. Sam, same for you, but you talk about the kind of twos and ten years a couple of weeks ago, and I’m curious what your observation is there in addition to other things?

SR: Yeah. The front end of the US curve has been nuts this week, and I think you can kind of attribute that back to two reasons. One, we sucked out all of the Russian reserves from being able to participate in the market, period, full stop. You probably have a significant amount of hoarding on the front end from Russian banks. Call it the zero to three year type timeframe. That’s where they typically play. So I think you continue to see volatility there. That’s going to be absolutely insane.

The Fed. I don’t think the Fed is going to be all that surprising. The Fed was really interesting three weeks ago, and now it’s kind of boring. You’re going to get 25 bps. You’re going to get some gangs on QT. Nobody cares. We’ve kind of moved on from that.

TN: That’s interesting, though, right? Two months ago, 25 basis points was catastrophic. Kind of.

SR: Yes.

TN: And now it’s a faded company and nobody cares.

SR: Nobody cares. You had almost 700 jobs. 700,000 jobs created in February. We didn’t even talk about that. Nobody cares. Cool. 700k consecration up, whatever.

To Tracy’s point, I think it’s kind of a moss, right? More of the same. And just until you get some sort of resolution and some sort of clarity on how long we’re going to have these sanctions, this market is this market. It’s going to continue to be highly volatile and there’s no end of it in sight.

TN: Okay. Very good. And then, Albert, I’m going to ask you specifically about equities. So if we’re getting more of the same but we have upward pressure on commodities, what do you think is going to happen domestically with US equities? Do you think we’re going to see more of the same volatility? Do we have a downside bias? Do we have an upside bias? Where do you see things over the next week?

AM: Well, I mean, it’s hard to say that we have an upside bias at the moment with so much volatility. But from all my indications, I think Putin’s going to up the war rhetoric and surgeons in Ukraine, I think equities are going to have to come down to, I don’t know, 4200 4250. Right. And then we start talking to the start talking about the fed like Sam was talking 25 basis points is now the consensus. But I will have to say Jerome Powell said he was hoping that inflation is not a big problem when those meetings come. So don’t be surprised if it’s a 50 basis point hike.

TN: I think as an outlier, you could be right. I think it’s a possibility. I think it’s greater than 0%.

AM: If we’re talking about commodity supersight commodity surging, with all this volatility in this war, how is inflation going to come down in the next couple of weeks?

TN: Well, just ask a very direct question. A 50 basis point hike is intended to kill demand, right?

AM: Yes.

TN: That’s all it’s intended to do is kill demand.

AM: Of course. But from their perspective, you killed demand, you killed inflation. I don’t know if that’s going to, I doubt it’s going to work, but that’s their narrative.

TN: Right. Okay. Very good, guys. Thank you very much. Good luck in the next week and forgot for anybody viewing. Don’t forget about our CIF futures flash sale at completeintel.com/promo and see you next week. Thank you.

TS: Thank you.

AM: Thanks, Tony.

SR: Thank you.

Last week’s big news is Ukraine and Russia. So in this episode, we want to talk you through some context and what this means for markets in the near term. First, the guys talked about the most surprising thing that happened and then we moved on to answer a few viewer questions like what’s the implication of Russia being disconnected from SWIFT? Will anything change between Europe and China? Will the Russia-Ukraine inspire China to actually invade Taiwan? How disrupted the energy markets will be? And finally, what happens to the world economy – Fed, QE, QT, consumers, etc.?

Listen to this episode on Spotify

https://open.spotify.com/episode/6ynTFaOtWF6rl1xNKX1Cnq?si=439f4977cb3743fd

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Albert: https://twitter.com/amlivemon
Tracy: https://twitter.com/chigrl

Transcript

TN: Hello. Welcome to The Week Ahead. I’m Tony Nash. And I’m joined by Tracy Shuchart, Albert Marko, and Sam Rines. Before we get started, I’d like to ask you to subscribe to our YouTube channel. And like this video. It helps us with visibility and you get reminded when a new episode is out. So thanks for doing that right now.

We had a lot on this week, especially around Ukraine. So today we’re really focused on Ukraine. We want you to understand the context around Ukraine. We want you to understand what it means for markets. And we’re going to take a lot of your questions that we’ve been gathering off of Twitter.

So just a quick recap of what we said last week. Coming out of last week’s episode, we said it’s not a time to make big decisions. We said to keep risk tight and be careful of volatility. And we said that crude markets would move sideways. So we did kind of come into this assuming risk would be there this week. And obviously, we saw that.

So first, guys, can you walk us through some of your observations of the past week? What are you seeing directly in and around Ukraine or Ukraine, and how is that affecting markets? And as each one of you talk, Albert, I want to start with you, but name something that surprised you most in the past week in markets. Okay. Can you give us a quick overview? I know you’ve got deep networks in that region. So can you talk to us a little bit about what you’re hearing and seeing there?

AM: Well, I mean, concerning Ukraine and the markets. What I was most surprised and a little bit taken aback by was the amount of mainstream media just decorations of World War Three and whatnot then how much it affected the markets? So much so that you have to look at the markets and say what is going on?

Because this is just not normal behavior for markets to respond to a situation in the Ukraine that’s really kind of not really attached to the United States market at the moment. I mean, it isn’t commodities and that’s something Tracy will get into. But it was an overabundance of bad news, just an overdrive. And that’s what actually really took me aback.

TN: Good opportunities out there.

AM: There is absolutely good opportunities. But the problem is the volatility goes way up higher. The VIX exploded. You can’t get into options because they’re just far too expensive. You’re going to get burned doing that. And what do you do? Maybe sitting on your hands is the proper thing to do until things stabilize. But yes, there were actually great opportunities.

TN: What are you hearing on the ground, Albert? I know you’re really close to that part of the world. So what are you hearing on the ground?

AM: Well, the situation is really fluid and really tense at the moment. I think the Russians were taken aback. I know that the Russians were taken aback about the actual veracity of defense by the Ukrainians. Their main objective is to take Mariupol and then take Odessa. That is their number one and number two objective. Their next objective is to take not really to take you because I don’t think they can actually do it unless they want to do some kind of redo of the Chech and guerrilla warfare and just start massacring people. They’re not in that business at the moment. The world’s eyes are on it.

So I think political change, maybe snap elections is what they’re probably going for in Kiev just to surround it, stress the city, stress the residents, force a change where Western governments can’t get a bigger say in the matter on a nation that’s right on the doorstep.

TN: Okay, so I’m seeing on say on social media like TikTok videos of burned out Russian tanks and all these things, and I think it seems to me that Russia is losing the PR war right now and that’s really important in the early days and with different demographics even within Russia. Do you think Russia or Putin kind of underappreciated the impact that social media would have, at least on the early days of this?

AM: Of course, Russia has a vast network globally of PR campaigns in the west. So for him, it’s definitely a concern where you have negative images of Russia, Russia’s military trying to enact power projection. It’s a little bit daunting for him at the moment.

However, from a military strategic point of view, we don’t know exactly what their exact strategy is. Whereas they’re just trying to expand Ukrainian defenses, trying to get the best of their defenses out already. So they have a shortage of supply later on. That’s what most professionals would say is happening.

So we really have to see over the weekend to see what kind of resources have been expended by the Russians trying to take back Mariupol and Odessa.

TN: Do you think the Ukrainians can get stuff resupplied? Do you think they would have any difficulty getting stuff resupplied from the west?

AM: It’s totally up to the west and what they’re going to supply them and how they’re going to supply them. I’m sure that the west have Special Forces sprinkled without inside of Kiev assisting as advisers to the defense forces there. So it just depends on the will of the Europeans at the moment.

TN: Okay, Sam, what have you seen this week in markets that’s kind of gotten your attention or surprise you?

SR: I would say what really caught my attention were two things. One, how quickly Wheat went up and how far it went up and then how quickly Wheat went down and how far it went down.

There were two days where Wheat was just skyrocketing. I think it was 5.5% day followed by negative. I forget where it closed, but a significant negative day in the six to range at a minimum. That really caught my attention.

Ukraine is incredibly important on the wheat front. That’s a pretty important one. And then I would say how quickly and how far gold went. Right. Gold was almost $2,000, and now it’s below where it was prior to the invasion, and it did that all in a day. I mean, that was an incredible move in my book and somewhat shocking. And I think it was kind of interesting when people caught on that if you cut off Russia from being able to really sell, call it dollars, Euros, et cetera, on the market openly, it’s going to potentially have to sell gold if this thing drags out.

So you have an overhang of gold in a war scenario. Not necessarily, I call it a tailwind. I thought that was a really interesting call it knee jerk reaction up in gold, and then kind of a realization of, oh, crap, this might not be the thing to own here.

And then the final thing and I’ll make this one quick is crypto and how war was supposed to be great for crypto. And as the war started, you saw crypto sell off pretty hard. I think it’s interesting on two fronts. One, there’s a significant amount of crypto activity in Ukraine and Russia.

Russia is the second largest country when it comes to providing hash rate to the market for Bitcoin. And if there’s any sort of disruption there, all of a sudden the US could become 50% of the hash rate awfully quickly, which could become an interesting scenario there.

TN: How does the hash rate for people who aren’t crypto experts? How does the hash rate equate to say, the crypto price?

SR: It makes it, call it’s basically an efficiency mechanism where you can either do transactions more quickly, more efficiently, and somewhat of a lower cost. That’s basically what you do.

So if you lower the hash rate, you increase the cost of doing transactions and slow the general system down.

TN: Okay, great.

AM: This is interesting, Tony, because this actually leads into a lot of my arguments against crypto being decentralized, saying, hey, when push comes to shove, governments have control of the networks and the financial system. You can’t get away from that.

TN: Yeah. And if you cut off the electricity supply, it becomes even more difficult.

AM: Nearly impossible. Puerto Rico.

TS: And if you’re Russia that has control of the entire Internet, you can cut off whatever sites that you want. Right?

TN: Right.

SR: Yeah, that’s right. Yeah. It was interesting. There was something floating around yesterday where it appeared that Russia was at least partially geofencing their country from the rest of the world. And if it does that, that could become problematic if it does it in a meaningful way for crypto.

TN: Sure. And taking down the RT site doesn’t help their paranoia there. Right. Tracy, what happened for you over the week? What’s one of your observations that really kind of surprised you?

TS: Well, I mean, to be honest, because I’m focused on the commodity side of everything, pretty much how I saw the markets going or how I pretty much thought how the markets were going to go. Right. I posted a bunch of stuff on Twitter.

TN: You saw all this coming?

TS: No. Well, I didn’t do this. I don’t want to sound like arrogant. I focus on energy, metals, materials, agriculture. And because Ukraine and Russia are such large hubs for all of these commodities, wasn’t really surprising to me that we saw a jump in all of these.

TN: Yeah. Were you surprised the magnitude of the jump?

TS: Yes. And in some respects, I actually expected Palladium to have a bigger jump than it did because Rush is 43% of that global markets and wheat went far beyond bonkers that I thought it was going to go.

Was I surprised about oil? No. On the upside and on the downside today.

TN: Great. Okay, very good. Let’s jump into some of these viewer questions. You guys know that we saw a lot of viewer questions at the start of this.

So the first one I’m going to read out is from Keith Snyder. It’s @snyderkr0822. He says, what would the implications be of disconnecting Russia from SWIFT?

I’ve inspired your knowledge and have to be informed. So there’s been a lot of talk about SWIFT over the past few days. Sam, do you have some insight there on what would happen if Russia was taken out of the SWIFT network?

SR: It would be less bad than it would have been call it three years ago. Russia has somewhat insulated themselves from SWIFT, but not entirely by no means. Right. The SWIFT system can cut you off from dollar denominated, at least dollar denominated transactions.

That’s a pretty important thing, particularly when you’re selling a lot of things that are denominated in dollars. Right. Oil, et cetera. That becomes somewhat problematic. I would say that would be a very significant hit to Russia.

And it would also be a significant hit. And by significant hit, I mean that’s putting you on par with Iran and Cuba. Right. That’s basically putting you at Code E country without saying it. That’s Iran, your Cuba, see you later, bye.

I think that what I would be paying very close attention to is the reaction of European banks. That’s $330 billion worth of Russian liabilities assets on their books. So you’ve got to figure something out there pretty quickly because those books are going to get smacked if you can’t actually get on the SWIFT system.

TN: Okay. And Tracy, if they were taken off a SWIFT on Friday, Germany said that they would be okay with imposing that sanction, how would Germany pay for its electricity?

TS: I mean, Germany said that with a caveat, let’s say, because they did say we’re going to look at this, but we need to look at the implications of this. So obviously the problem there in lies that if you take a Rush off SWIFT, then Europe is screwed energy wise. Right? Unless they choose to scramble and make long term contracts with, say, the United States.

They could go through the United States. They could go through Azerbaijan on the Tap pipeline. They could go through Israel and Egypt if they wanted to, through the Southern gas quarter. I mean, there are options for them.

The problem is that they should have been looking at long term contracts this summer when we already knew that Nordstream Two was going to be delayed.

TN: Four, three, four years ago. I mean, they’ve had this optionality on the table for a long time.

TS: But those options are still on the table for them. But by delaying SWIFT, if you cut Rush off SWIFT, the big problem Europe has to decide is do we cut off SWIFT and hurt ourselves or do we hurt Russia more? And I could argue that both ways. Anybody could argue that both ways. But that’s a big decision that they have to make.

TN: Well, everybody hurts, right? That would not be a sanction that would be pain free for anybody.

TS: Right. Except maybe the US.

AM: Well, Tony, despite the rogue status of Russia, it’s still well attached to the Western financial system. It’s not seen as able or even as aggressive as the Chinese are and detach it from the financial system.

There would be a lot of problems if they were banned from SWIFT. But it’s certainly a valid deterrent if the west wants to actually use it. They keep a lot of their bank and central bank money in the Euro dollar market. So no SWIFT would mean no more Treasuries, but they’d just move into the Euro dollars itself.

Maybe that’s why they were buying gold because of this tension that they saw coming. It’s a risk to their global market.

TN: Sure. Okay, let’s move to China now. We’ve got a few questions on China. We’ve got one from @NathanDallon. He says, does anything in Europe change the situation with China?

There’s another one from Ritesh @chorSipahi, he says question for Samuel Rines and Albert, Ritesh. I’m not taking offense at this. What is the deterrence for China not to invade Taiwan or now to invade Taiwan?

And then we’ve got another one from Rich @rm_ua09. How could China benefit the most out of the Russia Ukraine situation? A, supporting Ukraine in some manner, B, remaining neutral, or C, taking measures to whether Putin.

So there’s a broad spectrum of questions there, guys.

TS: Take the first one, I think, Tony.

TN: Okay, let’s go for it. What happens in Europe?

AM: Well, Europe. I think that the Europeans are going to be actually more dependent on China trade after this because they’re seeing a problem with the Russians politically.

You can’t sit there and tell me that they’re going to be able to support the Russians like they were in trade, whether it’s commodities or whatnot on steel. I mean, name your commodity. Name your.

TN: Chinese already own like 70% of the global steel market. So is it going to make that much of a difference?

AM: It’s, well, I mean, they still diversify. They’re still going to have to play ball in the global trade. So I think at this point, politically, Russia’s poisonous, and then you’re going to have to steer even more towards China.

TN: Right. So, yeah, it seems to me that China could actually use this as an opportunity to distance itself from Russia. Right. If it goes bad, China is very silent right now. And if it goes bad, they could distance themselves from Russia and make some really tight allies in Europe at Russia’s expense. Does that make sense to you guys?

AM: It does to me.

SR: 100%. I think that would be the spare play from China in a lot of ways, because you get two things. You’re going to get tighter ties to Europe, which diversifies you somewhat away from the US even more. It gives you call it a barrier to the United States and whatever the US wants to do, and it also, to a certain extent, raises your profile on the international stage. Right.

TN: That’s key. China really wants to be seen as a credible diplomatic player and I think there’s still a bit of a chip on their shoulder about not being seen as an equal with a lot of the larger Western Nations. So I think your last point is really important.

There seems to be a view that Russia invading Ukraine somehow enables China to invade Taiwan. What are your thoughts on that?

AM: I absolutely disagree with that wholeheartedly. I think the two situations are nothing alike at the moment. I mean, Ukraine is in Russia’s eyes, it’s own territory. Same as is China views Taiwan.

However, Taiwan has a much more active defense military force and more of a backing from not only the US, but Australia, Japan, India. That’s a problem for the Chinese, too. So I think the two. I don’t like to draw a comparison between the two. I don’t think there is anything related to it.

TN: Sam?

SR: I have almost nothing to add beyond that. And I think the one country that’s really interesting in there is India, because India did not step up on the Ukrainian front and India would step up on the Taiwan front.

AM: Yeah. And on top of that, on top of that, let’s just be realistic here. We know that the Chinese probably have military observers inside of Ukraine watching and taking notes.

TN: Sure. How to conduct right now. If you’re a Chinese PLA officer and you’re looking at what’s happening in Russia versus what the United States did in Iraq, what would be your assessment? Russia gives us nothing against the United States.

The United States is a juggernaut. That’s what I think nobody’s even talking about.

TN: Yeah. If Russia didn’t just roll into Ukraine and take it over in 24 hours, what kind of model are they for China?

AM: And that’s on their border, Tony, that’s on their border.

TN: Exactly. No, exactly. So logistically, Russia’s logistic supply chain for their military, it seems like it’s pretty horrific. Their intelligence, like everything. It just seems like a mishmash of let’s just go get them.

AM: They are a professional military force. They have budget problems. That’s what. If they really wanted to go into Ukraine and just smash the place, they could. But the problem is you’d have to kill many civilians in the meantime, which they can’t do that.

So the Chinese are sitting there probably looking at like, what do we do here? Who is this military partner that we’re actually partnering up against the United States? It’s not sufficient.

TN: Yeah. It seems to me that on some level, going back to the social media comment I made, Russia is kind of embarrassing itself. China doesn’t want to be seen allied with someone who’s embarrassing themselves. Right. They’re happy to.

TS: That’s why they’ve been so quiet. They haven’t said nothing.

TN: Yes. And I think China is always looking also looking at how unified is the world’s response against Ukraine. Right. So if they were to go after Taiwan, how unified would the response be?

So going back to what I said earlier, I think China has a real opportunity here to distance itself from Russia, to play nice on Taiwan and really benefit from trade and finance and diplomatic relationships.

AM: 100%.

TN: Tracy, do you have anything else on that on China? Any other thoughts?

TS: No. I think you guys…

TN: Awesome. Okay, very good. Let’s go to the next ones. Okay. Tracy, these are all energy related. So primarily, if we look at this @DaveRubin15, he says, what are the energy implications if Ukraine has no choice but to make this a war of attrition rather than surrender, bleeding Russia out from exposure and can this catalyze an energy super cycle? Okay.

And then we’ve got another one from Giovanni Ponzetto asking, assuming that gas from Russia is kept flowing at the same rate of the past couple of months, will the EU be able to restock gas reserve? So, Tracy, you’re the expert here. Take it away.

TS: All right. So for the first one, there are two extreme scenarios that could happen. Either somebody blows up a pipeline by accident or somebody blows it up on purpose and blames the other side. And if you look at the chart that’s on the screen right now, you can see the choke points where this could easily happen to really hurt gas flows into Europe.

That said, if we look at the role of Ukraine in the gas markets, they’re much smaller today than they were in the 1990s. Right. There was a time when 90% of gas that came from Russia to Europe went through Ukraine. And now it’s about less than a quarter percent.

The other extreme is that Russia just cuts off gas flows entirely. Right. And that hurts EU way more than it hurts Russia because they don’t really actually make that much money selling gas. They make way more money selling oil. They have $640 billion in reserves. They could live without the gas for a few months. And that’s kind of why the US has had problems getting the Europeans on board with sanctions against existing flows from Europe.

In addition, Europe also has other options. They can go again to the United States, Azerbaijan or Israel and Europe.

Now there are about 2.9 million barrels at risk of oil exports that are exported from Russia to the United States and Europe, which is about 30% of their exports. And that would be much more catastrophic than, say, natural gas in the oil markets. But as far as oil flows through Ukraine, it’s very limited. Again, you can see the map.

TN: Okay.

TS: The second question.

AM: Sorry about that. I had a related question for you. How possible is it or how necessary do you think it would be for the Italians to take the initiative and become Europe’s energy hub?

TS: Actually, they really could with Greece. Right. And I’ve been talking about the Southern gas border for a very long time, which branches off, you could go Cypress into Greece and then you could go straight into Italy from the Southern gas corridor.

I think that region is really something you really want to keep an eye on right now. And I’ve kind of been talking about this for a couple of years right now because there’s just so much supply. And although people say that region is geopolitically unstable, so is everywhere. But that’s never really stopped oil and gas flows.

Personally, I think as an investor, I would be looking at that particular area of the world because they really have a lot of gas supply. And now we have pipelines built, and I think it’s more stable than, say, Ukraine, Azerbaijan, that have had a lot.

AM: You know what’s funny, though, Tracy, is every time the Libyans or Egyptians or whoever try to export gas and oil and whatnot, the Russian Wagner conveniently shows up.

TS: Conveniently shows up. Right. Exactly.

AM: Here we are, guys.

TS: Exactly. For the second question, as far as, I think that you were asking about gas flows, if Europe could restock. Absolutely. They can restock because of the things that, because of the alternative sources that I mentioned before, and we’re headed into a season that we don’t need as much. So I think that as we head into summer, it will not be as dire as the dead of winter.

TN: Very good. Okay. Thanks for that.

Sam, let’s look at some economic questions now. We’re looking at from @_0001337 probability of rate hikes and tightening now. We just let inflation run amok. When we see price controls. That’s one question. There’s another one, wondering how North America will go about continuing to grow consumerism, things like cuts on gas taxes, that sort of thing.

And there was another question about gold, which you covered a little bit at first from @Mercerandgrand looking at gold prices. So if you don’t mind, let’s talk a little bit about kind of Fed options now. Are we still expecting given the volatility, are still expecting the Fed to act in March? Are they going to continue to are they going to stop QE? Will they hike? Is QT still on the table for June?

SR: Yes, 25 is going to happen. They will end QE, and QT is still on the table, at least a runoff, not a sale. They’re not going to go over their skis here and start selling mortgage backs or do anything along those lines.

TN: Okay.

SR: But they will continue with their tightening path. I think the broader question here is just how far they actually can go this year. I do think that the limiting factor of highly volatile energy prices at the pump, which is something that monetary policy just can’t solve. Right.

Tightening 5100 basis points isn’t going to push the cost of oil down unless you somehow spark a recession or something. So I think it’s going to be interesting to see how their language evolves around future hikes. I think we kind of know that it’s 25 basis points. 50 is simply not priced in enough for them to do that.

And how we see and how they see monetary policy evolving, call it in the September and onward is going to be really important with the midterms coming up, et cetera. So I think that’s important.

On the consumer front, maybe you see call it a gas tax holiday or something along those lines to lower gas prices at the pump. That could happen. But generally the consumer is not in horrible shape. The consumer is not great, but it’s not in horrible shape. So I don’t really think they have to do much there. And I don’t see any point in buying gold here with the type of move you’ve seen over the past week. I think that if you had narratives that went from invasion of Ukraine to World War Three and you only got it to $2,000 and you couldn’t hold, I think that’s a little bit of a problem for the gold narrative.

TN: Sure. Okay, great. So let’s wrap it up and let’s start looking at the week ahead. What do you guys expect to see the week ahead? Albert, I guess we’ll start with you. Part of it is what do you expect to see on the ground in the week ahead in Ukraine? I expect that to impact markets.

AM: I think that we’re going to get a little bit more bloody, a little bit more daunting headlines. It’s going to affect the markets. I think we probably start shooting a little bit lower depending on how low we go. I think that’s going to make a big impact of what the fed does. I agree with Sam. I think it’s going to be 25 basis points. If the news is okay out of Ukraine, I think they even go 50 basis points.

TN: Wow. Okay. Tracy, what do you expect to see in the week ahead?

TS: I’m looking at the equity markets in particular. So just came out and global flows despite the fact that equities are coming off globally, we’re still seeing people pile into equities, right. We’re still seeing flows into equity markets.

So that to me says that the current situation with Ukraine in Russia is likely to be temporary and that perhaps the big funds and managers are thinking that we’re going to see less of a rate hike in March than most anticipate because they’re still selling bonds and they’re still buying equities.

TN: Okay. Interesting. Sam?

SR: I think you’re looking at a lot of chop here as we transition from as pointed out a moment ago, as you transition from Ukraine grabbing all the headlines to the Fed getting back in the headlines that’s going to be a choppy hand off. When the fed was in the headlines. It wasn’t exactly great for markets and a little bit of a relief rally here off of world war three going into.

TS: Sorry to interrupt. I think that’s a bit of a little bit of end of month rebalancing too, right? What we’re seeing right now.

TN: It could be. Yes, that’s right.

SR: Yeah. Definitely. But I think the hand off from Ukraine headlines back to the Fed headlines creates a lot of chop and probably some downside bias across asset classes or at least we’re assessing.

TN: Sounds like a very interesting week ahead, guys. Thank you. You so much. I really appreciate this. Have a great week ahead. Thank you.

SR, AM, TS: Thank you.

We have the PPI numbers from the US and China recently and we talked about its impact on the inflation, CPI numbers, and whether it’s peaking or not? We also looked at the containership traffic and supply chain changes from China as compared to other locations. And with improvement in global mobility, what does that mean for the oil and energy market? We also discussed volatility and what to expect this week?

This is the seventh episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.

For those who prefer to listen to this episode, here’s the podcast version for you.

https://open.spotify.com/episode/04ATdMquZbUb0Lm4RVLJkS?si=bf093f6490084a8e

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Nick: https://twitter.com/nglinsman/
Tracy: https://twitter.com/chigrl

Transcript

TN: Hi everybody, and welcome to The Week Ahead. Today I’m joined by Tracy Shuchart, Nick Glinsman and Sam Rines. Albert couldn’t join us today, but he will be back. He’s still friends with us. So before we get started, I’d like to ask you to subscribe to our YouTube channel and like this video. That obviously helps us with visibility. It helps you to get alerts when new videos are out. So if you don’t mind, please take care of that now.

So this week we had a lot going on. So we had a very strong PPI print come out. We had Chinese PPI come out. So the US print came out at 9.6% year on year. Chinese PPI came out around actually the same level, 9.1% down from 13%. We had US retail sales search at 3.8%. It was 2.1% was expected, avenues were down on the week, crude was sideways, precious metals were up a bit and the ten year is back below 2%. So what did we say last week?

Well, Sam, last week said that Monday’s Fed meeting was a non-event. Nice job, Sam. Nick said that the Fed wouldn’t fight Volatility. Nice job, Nick. And Tracy two weeks ago, since that was the last time she was with us, said the crude would trade sideways but be pretty volatile, which it has been. So nice job, guys. You nailed that stuff. Right on.

So let’s start with PPIs. So it looks like producer prices are maybe turning over. I don’t know if it’s too early to call that, okay. But based on the Chinese data and the US data, it looks like those PPIs may be turning over a little bit. So what do we think about that? Are we going to see PPIs moderate? First. And what’s the impact on overall inflation, secondary impacts, ultimately CPI and all that stuff? So Sam, do you want to get us started?

SR: Sure, I’ll give a little off. I think China tends to lead in terms of PPI, right. So when you begin to see their PPI go from 13 to nine, give or take a few tenths, that’s a big deal. The second derivative is extremely important when it comes to input costs. We all knew it was supply chain. We all know it’s supply chain. And we all know that the supply chain is not fixed yet. So the pace of that decline is unlikely to continue at 4% month over month or whatever it might be, but it is going to continue to dissipate, at least on the margin, at least call it moderately. That’s important.

That does feed in CPI at some point. And I think one of the interesting points that we talked about last week was housing. And when you begin to see some of these numbers come down on PPI, you begin to get lower input costs to new starts, et cetera. That has a pretty interesting feature effect.

NG: What did you think about the San Francisco Fed paper on the owner’s equivalent rent? Which I thought was reasonably hawkish in terms of having a half percent impact on core CPI.

SR: Oh, if you’re asking me, I thought it could be hawkish to a degree, but at the same time, it was also in my mind a single that was almost a core thing to them. So something that they’re going to cut out.

NG: It does lag, Zillow and apartment list.

SR: Yeah, it always will. Just on a mechanical basis. It’s impossible for the Fed to get a calculation that’s going to keep up with Zillow or any of the other indices. I thought it was almost one of those. It could be really hawkish if they were to incorporate that into their framework. What I would say is it’s more likely that they’ll go in the European direction, which is just cut it out completely in general from their inflation metrics, which is dovish.

NG: Interestingly.

TN: Let’s move on this a little bit. Sam, it seems to me that you’re indicating that PPI at least is peaking. Is that fair to say?

SR: It feels that way? Yeah, it feels that way. Okay. It feels that way. It certainly looks that way in China. I could take a month or two to feedback into the US, but I would say it’s peaking.

TN: Okay. Now, Nick, I think you take the other point of view where this is sustainable. I don’t want to put words in your mouth, but is that fair to say?

NG: Well, actually, I think last week I was mentioning that the inflation outlook is going to level off. I mean, I agree with Sam on China PPI leaving us PPI. I was just fascinated by that particular owner’s equivalent rent housing, part of the CPI composition. And actually in Europe they’re looking to introduce it, which was a paper this week, which again would be quite a surprise.

I just look at not just PPI in China as a leader. I think I’ve seen people say it’s sort of three to six months lead time before it impacts the CPI. So we could have to wait a little bit longer to see it come through. But I just think there are other things in the pipeline and we had this discussion today that suggests to me that financial conditions are of their own making beginning to compress, and if the Fed start to do stuff will compress further and that will have a negative impact on liquidity, whether you define that by balance sheet or as we defined it, we had a conversation day reserves, bank reserves, and I think that’s where I see this peak.

don’t know whether we finished, but I think we’re going to Plateau, if not start to turn around. However, it’s where we finish, where the authorities want us to finish 2% above 2%. I’m sure they want some inflation to hit the debt loads, but the question is where do we finish it? And can you fine tune that accurately? Yeah, that’s not an easy thing to do.

TN: So staying on the China PPI issue, I think if we look at, say, container rates from China and even Port backups from China, if we look at the chart that we’re showing now, the dark blue line is container traffic at major ports from China. So it looks like from Ningboy that the container traffic has subsided quite a bit over the past month. And one would think that that would take some pressure off of supply chains. So if you look potentially at PPI peaking and if you look at the kind of order to receive rates of some of these multinational companies, it’s running in about nine months from, say, China, Southeast Asia to the US hit here in six to nine months, or will it hit later?

Are you guys seeing those dynamics in your studies and with your clients? Do you think that the freight delays and the freight out of China is declining? Tracy, what do you see?

TS: Yeah, I mean, I think the data is a little bit skewed because of the Chinese lunar New Year. But that said, if we do see some pressure let off of China, that will eventually show up here, I’ve always said it’s going to be 2023 before we kind of see some supply chain issues ease. Because what I’m looking at in the industries that I particularly look at, which is materials and energy, I mean, that’s still hitting those. In fact, it’s just starting to hit the industry as far as pipes are concerned, in parts of that nature.

So if we do see that subside, it will eventually end up here in the US and North America. But again, it’s going to be on kind of a lag time.

TN: Right. So China started stimulating or easing, say, last month with a small rate cut.

TS: That’s what I was going to ask you about. Tony, you and I have talked about CMY for years now, right. In the past. And so I wonder what your thoughts were with China beginning to simulate how important is that to how important is that that they tackle the appreciating CNY? There are a number of issues.

TN: I think the appreciating CNY is an issue. I think the stimulus is an issue for a number of reasons. So the CNY is important. What they’ve done over the last two years is appreciated the CNY to accumulate commodities as commodity prices rose. They appreciated the CN so they could accumulate copper, so they could accumulate crude oil and food and other things. There was a lot of worry about food security through Cobain in China. And so they accumulated that stuff and they have a lot in storage.

So with all the political events happening this year with the party Congress in November and other things, it’s really important for them to start to stimulate and also to make things easier on exporters. And that’s why it’s important to devalue the currency. It’s a controlled currency. So it is, in fact, a devaluation that they’ll do.

So they have to do value to get those exporters on sites and to start accumulating, say, more dollars than other currencies. And so with that devaluing and the easing will also come fiscal spending as we’ve talked about in Q two and into Q three before that party meeting. So it’s a really important time for China to make their currency cheaper and to get money out into the channel. And the money transmission mechanism in China is a lot more direct than it is in the US. It’s a lot more direct.

So the PPOC says get money out and the banks get money out. It just happens the old school the way it used to in the US. Does that make sense to you all?

TS: Yeah, absolutely.

NG: Nobody does.

TN: Okay. Anything else on China and the impacts of, say, China easing while the ECB and Fed are tightening? Any concerns there.

TS: Does that mean that we see a rotation somewhat into Chinese equities?

TN: I think that’s possible, right. Although there is some currency risk there. I think the growth, the pent up demand and the growth there may be an opportunity. It really depends on Horizons and it’s something we have to watch. But I think it may be an opportunity for some sort of rotation to China. Again, not in the main, but at the edges of a portfolio.

NG: People have been waiting for that for a couple of months and it’s still not happening. So Tensor is now under investigation by the USDR. Evergreen has just been delisted from Hong Kong and I think there was another set of technology restrictions imposed by the CCP. So every time you think this could be the right time bank.

TN: But Chinese technology is for China and it’s not for the US. Necessarily. Most Chinese companies are really focused on the domestic and the regional market, not necessarily on the US.

NG: Understood. The Chinese tech has been a big expression of interest by the West Coast, and that’s where we got to watch.

TN: Okay. And Tracy, you tweeted about global mobility earlier this week, and so we’re showing that tweet now. So I’m curious, what’s your thought on mobility and the impact that will have on global oil demand?

TS: I think that we’re going to see I think as we’re seeing these countries that are slowly lifting demands, especially like Switzerland, that just lifted all their mandates, including if you’re flying to Switzerland, you don’t need a test anymore. You don’t need a backstash. I think that this will be a global trend. Right? It won’t be. Even as we head into summer, which is high season demand for the Northern Hemisphere. Demand is almost at depending on who you ask, it’s almost at 2019 levels, if not above. And so they’re looking at May to August demand increasing by 5 million barrels per day at over 103,000,000 barrels per day. I mean, that’s a lot of increase in demand. And we’re just not seeing supply come online anywhere.

So I definitely think although we’re kind of seeing some consolidation and if we see Russian, Ukraine pensions kind of pull back a little bit or dissipate, then we could see a bigger pull back into say, the mid 80s. But I think we’re still headed for over 100 into the summer just because of literally supply demand fundamentals.

TN: Interesting. Okay. So while we’re on energy, we have a viewer question from Twitter from Clifford Topham. He says following BlackRock’s about turn on fossil fuels in response to Texas potential threat of removing BlackRock from managing state pensions. Is this the start of a change in attitude by Wall Street? So is it the beginning of the end of ESG?

TS: Well, I think Wall Street is about greed. Right? We all watch the movie. That’s where the money is. So what I think is going to happen is we’ll still see these smaller banks and the smaller insurance companies, etc. That we have seen this week kind of pull back and not get involved in the OMG industry. I still think that we’re going to see these major investment firms and these major banks still hang on to that, if not increase their exposure.

TN: Okay. Sam, are you with your clients on the ESG side? Is there any movement there?

SR: There’s not a lot of movement there in terms of real money. Right. So you can have a bunch of small insurance companies. You can have small pension funds. You can even have a few small colleges. In the grand scheme of things, who cares? You’re still getting all the votes going in the wrong direction for oil and gas companies. You still have Exxon being told that it needs to vest of oil and gas, which is nuts because it’s literally an oil company.

Now, to be honest, we’re not seeing a significant reversal of ESG. We’re seeing maybe call it a billion 3 billion that type of potential money going into the space. And that’s if you look at their portfolios and say do a 2% overweight to the SMP 500 and go 7.5%, that simply isn’t that much money.

TN: Okay, very good. Let’s move on to Volatility. Nick, you talked about Volatility last week, and I wanted to dig into that a little bit. We’ve seen Volatility. We’ve seen the VIX approach 30 this week. And so I’m curious, based on your hypothesis last week, do you see that sustaining? Do you see the VIX increasing and like over a time frame?

NG: I think the Volatility broadens out to other markets. For example, we’ve had VIX can be between 32 and 34. It’s known that people come in and suppress the VIX. The Fed have been active in sellers. That’s well known, and they cover it when it gets to the end. And in fact, in the zero rate world, it’s been in the Fed’s top Randy to suppress Volatility.

And thus, hence you have the Ford guidance with this diminishing Ford guidance. And Mesa mentioned it this week as well, that as they start to hike rates potentially, do QT tighten up everything? The use of Ford guidance has been diminished to it would be a hindrance. The whole point of tightening is not to give the full scope of what’s coming. But the important thing is for all subsidiary markets, Volatility in the treasury market has exploded. I remember everything is priced off of the risk free asset.

TN: Right.

NG: So you’ve seen the move index fly higher. And the reason why that’s so important is bid offer spreads on the treasury market are actually widened. So that means there’s a liquidity issue. And if you remember back in 2020, you had the repo crisis, which was a liquidity issue. If that continues, then the bit of a spread and thus liquidity in credit markets, which should be beginning to suffer and CDX rates were spiking higher stay that will suffer, that will then feed through to equity markets. You will have less liquidity, hence higher Volatility.

So it’s a very risky path and it will be a very volatile path from now on.

TN: Okay. And so when you say from now on, you mean over the next, say, through the end of the year, or is this something that happens, as we say, approach QT in second quarter.

NG: This should carry on happening.

TN: Okay.

NG: I mentioned to you earlier I still don’t trust this Fed. I think it could end up being stop start the economy at the beginning. I think this is going to carry on for quite a while.

TN: Okay. You started to interject, but did you want to add something on that?

SR: Yeah. No, I was going to take the other side of that. Saying that the Fed communicating less is, in my opinion, a Vic suppressor at this point, because if you don’t have Bullard coming out and saying stupid things that nobody should have ever taken seriously. You don’t inject half of the volatility that you currently have in the market right now. You don’t have the possibility of an intermediating hike. You don’t have the 50 basis points. You don’t have the QT coming potentially in March.

So in a way, I think taking away the forward guidance and beginning to actually have some sort of a coherent path with an economy that hasn’t actually broken yet. 30 next time seller. I saw that all day. And if something happens in Ukraine, sell it again and you get I think that’s probably the best risk adjusted return this year is selling Vixen spikes.

TN: Interesting. Very good. Okay, guys, what are we looking for the week ahead? Tracy, what’s on your mind for the week ahead?

TS: Well, again, I think that oil markets are probably going to move sideways until we get some sort of resolution. As far as the Ukraine Russia deal, I think the equity markets are still skittish about that.

Again, I think we’ll see a lot of volatility there. I think precious metals will continue to do well sideways to up, perhaps. Right. Because that market is kind of crazy, but it does well on uncertainty. And I think that if you’re looking at based on industrial metals, that will continue to see those rise because we’re having political problems, say, for instance, with copper in Chile and Peru because of the new leftist government there.

TN: How much of global supply is Chile and Peru?

TS: 40%.

TN: 40%. Okay. So that’s a little bit. Yeah, exactly. Okay. Very good. Sam, did you have something?

SR: Oh, no, I just was English.

TN: Nick, what are you looking for next week?

NG: A continuation of what we’ve had this week. And I think at some point it’s going to be up and down on Ukraine. Who knows, right. I do think the rhetoric from the Fed will continue. I think what’s interesting to me is I take the most retail of retail ETS to see whether retailers sold anything on the way down. And that would be Ark haven’t sold anything. There is a whole lot of pain out there.

And I just think we’re volatile with the downside bias. Yes. You’re going to have a spike up on good news. We had that this morning and it all gave back. Yeah. It didn’t keep it. So I think there’s something more than just Ukraine behind everything. And I think this volatility and my point on I don’t disagree with Sam on the bigs, but I think what’s going on in the fixed income markets will come as a surprise and will flow through and just make trading difficult.

TN: Okay. Let me ask you also, we’ll take this from you and then we’ll move it to Sam as well. When we see the ten year rise above two again.

NG: If things calm down, it goes straight back above two. Yeah, absolutely.

TN: Okay. Sam, what do you think about rates about the ten year?

SR: So what I would say is it would completely flip on my comment that it’s all curve flatteners from last week and say, hey, it’s curve steepener now. Any good news on Ukraine? Anything? You saw it when a few tanks moved or supposedly moved get a big move in oil. You got a big move in the curve. You got the FOMC minutes, et cetera, et cetera. Everything from here in terms of a dissipation looks like Kurt Stephen to me with two stuck somewhere between 140 and 150.

TN: Okay.

SR: And twos heading north or in towns heading north. So really like the steeper now?

TN: Okay. So it sounds like you all are saying we’re kind of in a wait and see for most markets. Is that fair to say.

NG: Wait and watch? Wait and watch?

TN: Yes, wait and watch. Okay, great. No big decisions over the next week, is that what you’re saying?

NG: Keep your risk tight and small.

TS: I mean, everybody’s going to be watching Ukraine and Russia and everybody’s going to be watching the March meeting for the fed. Until then, I think you could see a lot of volatility in the markets, whether it be in equities us Treasuries or commodity markets.

TN: Very good, guys. I always appreciate this. Thanks so much for your time. Have a great weekend. Thanks.