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The Week Ahead – 06 Jun 2022: Is India a geopolitical trend setter?

This past week, we had a flat S&P 500. Nasdaq was up slightly. Bond yields were up slightly. It was a summer stall this week. Not a lot happening from the beginning to the end of the week. In this episode, we’re going to focus on geopolitics.

Key themes:

  1. Is India a geopolitical trendsetter?
  2. China, MBS & Biden – BFFs?
  3. What does Turkey get out of halting NATO expansion?
  4. What’s ahead for next week?

This is the 21st episode of The Week Ahead, 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

Time Stamps

0:00 Start
1:36 India as a geopolitical trendsetter now?
3:55 US is frustrated with India? What’s going?
7:35 Is India being ridiculously nationalistic?
8:00 China, MBS, and Biden as BFFs?
10:08 How does MBS look at Biden with China opening up?
11:31 Awkward and Desperate: Is the US-Saudi a short-term diplomatic issue?
14:45 Is there any place they can go for energy supply?
16:00 What does Turkey get out of halting the NATA expansion?
20:20 What impacts on some countries by opening the Bosphorus.
21:22 What is DC thinking and do out of the gun discussions?
24:24 What to expect for the week ahead?

Listen to the podcast version on Spotify here:

Transcript

TN: Hi, and welcome to The Week Ahead. I’m Tony Nash. And as always, we’re joined by Sam, Albert, and Tracy. Before we get started, could you please like and subscribe? It’s very important. But here’s what’s more important today. If you could comment on the episode, we would appreciate it. We check that stuff every week. If you disagree with us, if you think we’re full of it, let us know and let us know why. Okay.

So this week, this past week, we had a flat S&P 500. Nasdaq was up slightly. Bond yields were up slightly. Kind of a summer stall this week. Not a lot happening from beginning to end of the week. So we’re going to focus on geopolitics this week.

We’re looking at a few things. Is India a geopolitical trendsetter now? That’ll be a really interesting discussion. Second, we have China, MBS, and Biden as BFFs. So let’s see what’s there. What does Turkey get out of halting NATO expansion? Really, Turkey becoming a real geopolitical linchpin. And then we’ll have a quick chat on what we expect for the week ahead.

So first is India as a geopolitical trendsetter. India recently has halted some commodity exports. They’ve done some deals with Russia for energy, and they’ve been really independent. And India’s typically independent with foreign policy. But I’m curious if we can look at, say, the energy deals first, Tracy, can you help us understand a little bit about that, and what is India doing there?

TS: Well, I mean, absolutely. First of all, India has been complaining about oil price and saying that it’s unsustainable for them for months now, right. As we’ve been over $100. And so when they were typically not really buying anything from Russia.

However, after the Ukraine invasion, then we had that discount. The Euro to Brent discount fell to almost $40 at one point. So India started buying a lot of oil from Russia, obviously, because it’s less expensive. And they said outright energy security is more important to us right now than anything else because they are also having issues with coal. And whatnot really that’s their focus right now.

And so what we think is that likely they’ll probably become a semi permanent customer of them and probably will take in about 500,000 barrels per day going forward. So what is coming off of the European market is actually going to India and China.

TN: A lot of Westerners don’t understand that India and Russia or the former Soviet Union have had a long political ties, longtime political ties, and those long term political ties tend to come up when people need friends. There is a connection between India and Russia that a lot of Westerners don’t understand.

Albert. I guess the US tends to do this very binary. You’re with us or against us. And I would imagine that the White House and State Department, if we actually have a State Department, that they’re a little bit frustrated with India. What’s going through the US’s mind with the India relationship right now?

AM: Well, this is basically goes back to Obama, actually, with his animosity towards Modi. But the Biden, State Department and the DoD just have this naive idea of how things work in the world. India, like you said, the Russian ties with India are long standing because they use them as a counterbalance against the Chinese aggression. Right.

If you look at a map, because I always say this on Twitter, look at a map before you start talking about geopolitics. India’s surrounded by Pakistan, China, all these other proxies to China and Russia. So they can’t afford they can’t afford to sit there and poke the Hornets nest in the region because it’ll just come back at them. I mean, Pakistanika starts things in Kashmir.

The Chinese have been building mountaintop air bases to stress India over the watershed in the Himalayas. There’s so many issues that the Indians have to deal with and balance that with their Western counterparts, animosity with the dealings with Russia. It’s not that complex if you sit there and talk about it for 15 minutes. But for some reason, our State Department just can’t come to grips with that. And it’s actually causing quite the damage of the state relations of United States and India right now.

And you can talk about the Chinese component and how they stress India because they’re a major competitor in the manufacturing sector.

TN: Right.

SR: And not to mention that India has always been a very large importer of energy. And it’s a critical part of their development going forward. And they’re a 1.1 billion population. If you begin to have significant problems with energy prices and food prices, that’s a big problem for a democracy in that part of the world.

And not to mention, I think it’s somewhat hypocritical for the US government to be so mad about them buying 500,000 barrels a day when you still have Europe buying oil and gas every single day and being like, well, maybe we’ll be done by the end of the year.

TN: Right.

SR: The number of hypocrites that just keep coming out. Is India really our friend? It’s like, well, it’s Germany, it’s France, Italy.

TN: Those are valid questions.

SR: I mean, to me, it’s a little bit insincere for us to continuously be pounding on India for trying to survive as a democracy. It doesn’t make a lot of sense.

TN: Well, you conveniently overlook the fact that India regularly imports energy from Iran. Korea places like Korea regularly import energy from Iran. The State Department and White House regularly just overlook things conveniently because they want to. Right. But when it comes to Russia, for some reason, it’s a major issue.

So one quick thing I want to talk about with regard to India, and this has happened with some other Asian countries where India stopped exporting sugar and a few other commodities. We saw Indonesia stopped exporting, say, palm oil and a few other things. So this has been kind of painted as some sort of nationalistic action.

My contention has been, look, a nation state has the kind of obligation to look after their own people first. What do you guys think about that? Is India being ridiculously nationalistic by not exporting sugar and a few other things?

AM: Absolutely not. I mean, this is a case of survival, not just for India, but for multiple countries. Egypt recently, Morocco and all the other North African countries are following suit. I mean, they got to feed their own people. You can’t have your own citizens miss meals because pitchforks and torches start coming out.

TN: Yes, I think that’s a perfect way to say it. Okay, let’s move on to kind of a little bit of a crazily, delicately balanced series of relationships with China, MBS in Saudi Arabia, and Joe Biden. There’s been talk of a trip of a Biden trip to Saudi Arabia, which is a little bit awkward given the fact that MBS wouldn’t take his phone call last month. And then we’ve got China as energy importer. There are a number of levers there.

So, Sam, actually, Tracy, can you take us down that path a little bit on the energy side of what happens there and why that is so important?

TS: Well, I mean, I think it’s a thing. Relations have already been strained. Right. So I think it’s too little, too late. And second of all, to go ahead and think that Saudi Arabia or OPEC, for that matter, can lower oil prices in the US or lower gasoline prices in the US is completely misguided. We should be focusing domestically on what we can be doing here instead of banking other countries.

TN: Let me stop you right there and ask the refinery capacity is like the highest it’s been in 20 years or something, right? 92.4% or something.

TS: Yeah, it was 92.7% this week. The prior week was we were at 93.4%. So we’re pretty much at we’re cranking it out. We definitely need more refining capacity going forward. We haven’t had a major refinery built since 1977. Brownfield projects, but not real Greenfield projects.

TN: Okay. Going back to the Biden-Saudi visit, Sam, what are your thoughts on that? And if you can throw a little bit of China analysis, if China is actually opening up. How does MBS look at Biden with the potential of China opening up more aggressively?

SR: I think he looks at it as a little bit desperate. Right. And probably wants quite a bit out of doing anything. And to begin with, Sunny doesn’t have that much fair capacity. There’s not a whole lot they can do very quickly, maybe release some stocks, et cetera, but there’s not a whole lot they can do to get oil on the market quickly. And there’s a lot less that they can do to magically make diesel.

We don’t have the amount of diesel out there that we need. And we are building a refinery, and a refinery takes three to five years to build. So good luck with that. So I think it’s going to smack is a little bit desperate to MBS, and I think there’s going to be a pretty good bargaining spot for him to be in, given that China has largely shut down for a month and a half to two months, maybe reopening, and that’s going to be another tailwind to oil consumption.

And if you all of a sudden have higher oil consumption coming out of China, that’s going to be a problem for oil prices, even from $1.20, $1.15 where we’re sitting right now. That’s a tailwind that I think MBS kind of has a little bit of a grin on his face saying, hey, nothing I can do here.

TN: Right? And tell me a little bit more about the political dynamics there. Does the US and Saudi Arabia, is this kind of a short-term, say, diplomatic issue, or is it something longer term?

AM: Well, you and Sam said two key words, “awkward” and “desperate.” At the moment, Biden going to Saudi Arabia to meet with the King, which was rejected, so they’re actually pushing them off to MBS is such a black eye to the United States foreign policy. Unbelievable. I mean, at this point, you’re going to have Joe Biden go meet with MBS, who Biden’s cabinet brought up Khashoggi not too long ago, which prompted the phone call to be not even taken by the Saudi, leader of a US President. I can’t even remember when last time US President was ignored by the Saudi Arabians. I mean, it’s a disaster in the making that will probably take a good ten to 15 years to rectify.

The Saudis, what are they really going to do? A couple of hundred thousand barrels extra in a pump just to make Joe Biden happy? It’s not going to do anything. I mean, swallowed up by demand almost instantly. But when it comes to the political stuff, you have a realignment between Saudi Arabia, Russia and China happening right under our noses. And it seems to be just completely missed by the State Department of Biden administration.

SR: And to Albert’s point here, and I think it’s an extremely, extremely important point. Saudi doesn’t need the US anymore. Saudi needed the US for a while. We were their biggest customer. We are not their largest customer by a mile, and we’re unlikely to be their largest customer ever again.

So their pivot towards Asia and away from the US makes strategic sense for them. And that, to me, is an understated long term fundamental issue facing the US-Saudi relationship.

AM: That’s exactly right, Sam. And the only other component that actually contradicts that is because of the security situation between Iran and Saudi Arabia, the Saudis need US armaments, they need the relationship with Israel, and they need to re-mend relationships with Turkey. But if Russia at this point, if they’re not poking the Iranians to mess with the Saudis, there’s really no real desperate need by the Saudis for the US defense umbrella at the moment and they can just be free to sell to the Chinese, the Asians and whoever else. And remember that Biden attempted to go to Venezuela to try to get them to pump more, but then realized that while their refinery is broken down and can’t really produce anything at the moment.

SR: So the Arabians went to fix it.

TN: Yeah.

AM: There’s a lot of hypocrisy and a lot of awkward things that’s coming out of the Biden administration right now for geopolitical issues concerning the Saudis.

TN: It’s amateur hour, guys. Lincoln is a joke, often as a joke. I can’t believe it’s embarrassing where we are right now. Tracy, is there any place else they can go for supply right now?

TS: If you look at OPEC, OPEC can’t even produce what their current quote is, right? Because you have too many, too many laggards. So it doesn’t really matter. I mean, they’re 2 million barrels plus below quota last month. So it doesn’t matter if they keep raising or not. They just don’t have the spare capacity. And a lot of the smaller countries are having problems with production.

There’s nowhere else to go. Right. Especially if you’re trying to push Russia out, which is, depending on the month, the second or third largest producer. Right.

TN: Okay. And I think we can all agree that if we just buy electric cars, that would solve everything.

TS: Oh, absolutely. With the announcement that we’re going to have rolling blackouts in the Midwest this summer, I’m sure that rush right out and get EVs should help us.

TN: Right? Exactly. Okay. Let’s move on to Turkey and get really interested in the power dynamics with Turkey right now and their veto power over NATO expansion and some of their control of energy going through the Bosphorus. Turkey has really emerged as a real regional power.

I remember reading about this with George what’s his name’s book the next 100 years, reading that Turkey would be really powerful. This was a 20 year old book. Right. George Freedman. Right. And so it hasn’t happened exactly as he thought. But at the time I thought, “no, Turkey can’t reemerge.” And it’s happening right now. Right.

Albert, can you talk us through what does Turkey get out of halting NATO expansion?

AM: Well, a few things actually, quite. They really want to stop the Kurdish money system support system coming out of the Scandinavian countries because that’s where a lot of the money and support groups based themselves out of Stockholm and parts of the Baltic area. So they really want to stop that. Right. But that’s not really what they’re after because the Scandinavians put a block on their sales of arms. Right. So the Turks obviously want to sell their drones.

They want to sell some military equipment to the EU and to other players in the region. The Turks, they have a big economic problem. Right. And so they’re using every point of leverage they possibly can use. They’re trying to press the EU to give more loans, trying to stress the refugee situation, trying to stress the energy situation, trying to stress the food situation through the Bosphors. And I’ll let Sam and Tracy touch on that.

But for them right now, if you look at it like I said, with India, look at a map. Turkey right now is arguably the most geostrategic position in the entire world right now with concerns to wheat, gas, oil, refugee status. You can just pick a topic and Turkey is pretty much top five.

TN: Okay. Sam talked us through kind of from a macro perspective. What does that mean? What opportunities does that bring up?

SR: I mean, it brings leverage, right? It brings incredible amount of leverage, particularly as you begin to have Sri Lankan type issues. Go to North Africa. The easiest way for North Africa to solve its problems is for Turkey to solve the problems very quickly by opening the Bosphorus or doing something along those lines. So I think from a macro perspective, it’s really about leverage and what type of leverage they want. Right.

They actually manufacture really good, fairly cheap drones. That’s a pretty easy thing for NATO, the EU, to kind of give them a pound on the back and say, okay, yeah, go. Right. That’s something that they can actually do. And quite frankly, if you’re Sweden and Finland, guess what? You don’t really have a choice.

Turkey is going to be selling drones. Turkey is going to have some leverage on what they get to do, and you’re not going to be able to veto it or you’re going to be sitting there like a sitting duck for the next time that Putin decides he wants a little extra territory.

TN: Right. Okay.

AM: And to expand on that, Tony, the Turks, in sort of cooperation with the Iranians and the Russians, have been moving into Africa using old Ottoman trading post colonies, I mean, through West Africa, North Africa, Horn of Africa, everywhere. And there’s been absolutely no talk about it, no counteraction against it. They’re acting as if they were a major superpower with no one really putting them in their place.

TN: Well, this potentially could turn into I don’t know how much you guys know about Ottoman history 1860s, 18870s, debt load that the Turks had and the refinancing that the British and French came in to do it. And I wonder if that’s where we’ll be in five or ten years. It’s really interesting to see how that Ottoman history played through and see if that happens again with Turkey. I hope it doesn’t, because that ended up leading to World War One. But this could be really interesting.

Tracy, they opened the Bosphorus. What impact does that have on some of these countries, like Egypt and North African countries and say, Lebanon and some of these other countries that are really desperately waiting for some things out of Russia and Ukraine?

TS: Yeah. I mean, obviously that’s going to help. We’re going to get some wheat out. It looks like that is going to happen and that we are starting to see shipments flow that’s obviously going to ease tensions. Hungry people tend to revolt. So something needed to be done, in other words. And so it looks like that’s starting to happen, which is obviously a good thing.

TN: Great. Okay. I want to spring a kind of a surprise topic on you guys just really quickly. It’s a big debate in the US since we’re talking geopolitics. Guns on top of everyone’s mind. Some shootings in the States over the past few weeks.

Albert, I know, you know, DC probably better than all of us. So can you walk us through really quickly? Excuse me, what is DC thinking? What will likely happen in DC out of all of the gun discussions?

AM: Well, because it’s an election year, probably nothing. And I’ll tell you what. In politics, you cannot take a singular issue, isolate it and solve the problem. It doesn’t work like that. So, for instance, and this is something I always stress about. When you look at guns, you have to look at it as what voters intentions are and feelings are with the guns because they’re electing their members. Right.

When you have guns, they’re typically rural Americans that are religious, that have views on abortion and are farmers. Right. What’s under farmlands? Oil. So not only do you have to tackle the religious voter, the anti abortion voter, the rural farm voter, but then also big oil that actually funds all these people. So you can’t take guns alone and say, I’m going to solve it without agitating another 40 million Americans and Senate races are completely dependent on rural voters, not so much urban because that tends to go Democratic anyways. But there is actually swing cities and swing areas on top of the conservative areas that there’s a political calculation and numbers game that has to be played.

So for this year, I don’t see anything happening with guns at all. Maybe something extremely minor, but nothing that would actually be effective.

TN: For people who are non Americans, what do people outside of America not understand about the gun discussion in the US?

AM: It’s a cultural thing. The United States prides itself on being a system of checks and balances. Right. And for guns, Americans tend to think we are not going to let our government intrude and overtake us. That’s our checks and balances to dictatorships. Right. Authoritarian systems.

As other issues come up from the left and come up from the right, just everyone’s going to get more pulverized on this. There’s never going to be 100% solution. The Europeans are definitely not going to understand why Americans love their guns. But it’s just…

TN: Europeans, Australians, Asians, they don’t actually some in Asia get it.

AM: Some in Asia get it. The Swiss hilariously get it. They’re mandatory. They have Pentagon, everyone’s. And it’s unfair for the rest of the world to compare a small country of like, say, 10 million people statistically to the United States that has 350,000,000 plus people out there, the giant system.

TN: Yeah.

AM: We’re doing our best and nothing is a perfect system and we’re getting towards it. But it’ll take decades.

TN: Yes. Okay, good. I just wanted to cover that off since it’s been such a big topic lately. Okay, guys, the week ahead. We had a kind of a lackluster week this week. Tracy, what do you see happening in the week ahead? Crude actually had a fantastic week. What do you see going on next week in, say, energy and commodities?

TS: I’m still bullish energy and commodities. From a technical standpoint, we broke out of a technical pattern. Right. I don’t see anything changing, in other words, in the physical landscape, I mean, markets are tight. We have a structural deficit. The whole complex is in bacridation. So I expect energy prices to stay high. Really? I don’t think Biden’s meeting is going to do anything.

TN: Right. Okay. Very good. Shannon, what are you looking for?

SR: More chop. A lot more chop. I think the jobs report on Friday, there was a quote that it was goldilocks-ish it was not goldilocks-ish if you’re the Fed. The Fed saw a lot of jobs created. It’s a participation tick up and it’s average hourly earnings still sitting at 5.5% for everyone on a year over year basis. Those are three things that they don’t really want to see sitting that high.

TN: Right.

SR: It’s that simple. They would be much happier with 100,000 jobs created or lower. I think they want a couple of negative prints. An average hourly earnings that’s closer to 2% year over year. That means that the wage price spiral isn’t happening. And they really want an awful lot of call it pain in the inflation space. So you’re not really seeing anything to knock the Fed off of its current path. And if anything, you probably gave it a little bit of a tailwind to some more hawkish rhetoric.

Brainard being a Hawk? That should scare everyone. Because when Brainard comes out as a Hawk, that’s a signal.

TN: That’s weird.

SR: That’s a signal that they’re going and they’re going hard.

TN: Yeah, that’s upside down world weird. And then was it May said out yesterday saying they could do another fifty in September?

SR: Yeah. After the print on Friday, guess what, this is the best part about the Brainard statement is she said in order to have a better balance in the labor market, they need to see job openings decline.

This is critical, though. Job openings are reported a month lagged to everything else. Right. So in September, they’re going to be looking at maybe August.

TN: Let me ask you this. Elon Musk was out this week saying, hey, if you’re not going to come back to the office, we’re going to consider that you resigned. Are we going to see more CEOs do that? And could that potentially have an impact on the jobs numbers?

SR: Not really. One, Musk, then he said we’re over staffed by 10% across salaried workers. So the statement for Musk was probably more to get some natural attrition. So we didn’t have to actually lay off people because it’s a lot cheaper when people quit than it is when people get laid off. And Musk needs a couple of headlines because his Twitter deal was a really dumb idea.

TN: Yeah. And also I kind of preempted Musk by two years. I told my staff in June of 2020, but if you don’t show up, you could resign. So I was early on that boat. So Albert, what do you expect in the week ahead.

AM: Everyone saw Yellen come out and say I missed the inflation and how bad it’s going to be. That’s her getting ahead of the CPI print. It’s going to be a bad one. I think it actually could get close to 9% which would be not good for the markets.

On top of that Opex Fed minute coming up, I think we’re going to be like Sam said, I think there’s going to be some chop. They’re doing their best to keep this thing above 4200. So I think we’re going to be looking at probably push 4250 which is a bull bear line this week until CPI print comes in and then Armageddon.

TN: That’s what you said last week.

AM: That’s a 4200 on that Monday on futures.

TN: Okay.

AM: They tried but they sold it. Everyone’s just selling.

TN: Okay. So we have another chance this week.

AM: Yes.

TN: Great guys. Thank you very much. This has been a great discussion. Thanks so much and I really appreciate this. Have a great week ahead.

AM, SR, TS: Thank you. Bye.

Categories
Week Ahead

The Week Ahead – 7 Mar 2022

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.

Also, we’re having a flash sale for CI Futures which is Complete Intelligence subscription product. We forecast about 800 markets assets, currencies, commodities, equity indices, and a couple of thousand economic variables with a very low error rate. We’re doing a flash sale right now for about $50 a month and you can see the URL right now, completintel.com/promo It’s a limited time flash sale so please get on that. That’s a 90% off rate on our usual price. So thanks for that.

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.

Categories
Podcasts

Tech Crumbles as Spigots Close

TECH CRUMBLES AS SPIGOTS CLOSE

Tech stocks on Nasdaq and NYSE are being pummelled as momentum behind the Fed’s unwinding policy continues. Tony Nash, CEO, Complete Intelligence, discusses.

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/tech-crumbles-as-spigots-close on January 20, 2022.

Show Notes

KHC: BFM 89.9 20th of January 2022, 7:06 in the morning with me Khoo Hsu Chuang with Philip See. Now let’s look at how global markets closed yesterday.

PS: Oh, it was terrible. I think that was a lot of downward pressure in the US. Down S&P500 were down 1%, Nasdaq was down one 2%. Asian markets were relatively mixed. The Nikkei was down two 8%. Hung Seng up marginally zero 6%, Shanghai Composite down zero 3%, STI up zero 1%, and back home, FBM KLCI down zero 8%.

KHC: And to discuss what’s happening in global markets, we now welcome Tony Nash, the chief executive of Complete Intelligence. Tony, Nasdaq down 8.3% year to date. It’s been a bit of a bloodbath. How concerned should equity investors be at this point in time, especially those that are heavily into tech companies?

TN: Yeah, if they’re heavily invested in tech companies, they should be very concerned when interest rates rise. It’s a signal that there should be rotation out of technology. And that’s clearly what’s going on. So if we look at Apple, for example, Apple was down over 2% today. They’ve had a really hard time recovering the kind of $180 share peak they hit in early December. So people have known for a month and a half now. Well, definitely over a month that there’s been a rotation out of tech. So we expect headwind for several months until we get a clear indication of the path that the Fed’s going to undertake and how steeply they’re going to raise rates and start to tighten their balance sheet.

PS: Do you think the markets are priced in all the hikes planned?

TN: I think markets are trying to figure out what rates they’re going to do. I mean, there’s gossip right now that they’re going to raise 50 basis points in March, which would be probably an overshoot. But that’s part of the reason you’re seeing such volatility in equities right now is people aren’t really sure. And it’s a debate. It’s an ongoing debate. So where do you put your money? Well, you look at commodities, you look at commodity companies, energy companies, more traditional say manufacturing, not durable goods. People really stocked up on durable goods over the last two years, but other types of manufacturing companies could be interesting.

KHC: And Tony, we’ll talk about oil in just a second. But where do you think the funds are flowing? I know it’s a liquid activity, but where are the funds flowing away from tech into?

TN: Well, if you look at Walmart, there’s some very reliable, say, retail names that they’re going into. If you look at some of the resource plays, like Goldfields was up almost 13% today, volley was up 4.5%. So some of these commodity plays are really intercepting those games.

KHC: That’s right. And of course, talking about commodities, oil is on a tail 13% higher for Brent at $88. West Texas is up 15% to $87. What are the key drivers behind this upper trajectory beyond obviously this market driven flows, Tony?

TN: Yeah. I mean, part of it is the rotation in the market. There are some supply constraints that have been talked about and kind of been undertaken over the past week with some activities in Iraq between Iraq and Turkey, Libya. And there are some political risks, of course, Kazakhstan, Ukraine and other places. But our view is that oil is really kind of topped out for this run. There’s potentially a little more upside, but we don’t necessarily expect oil to take a run at, say $100 right now. We expect a little bit of a pullback certainly later in the year. We expect much higher crude prices.

PS: Do you think this will have any short term impact on the travel industry then and Airlines particularly?

TN: Yes, of course, it depends on what happens with jet fuel and the magnitude of the rise with jet fuel. But Gosh Airlines are contending with enough problems already as it is. So I think for them it’s just kind of another headwind to kind of throw in their pocket.

KHC: And Tony moving into China, and of course, they are pursuing a zero covet policy. They’ve locked down key shipping ports like Nimbo. Obviously, global supply chain problems have been exacerbated by that. So what measures can countries outside China do, for example, nausea, to alleviate these issues in the short, long term?

PS: I think that’s a technology issue.

TN: Sorry, guys. No, that’s my technology issue.

I apologize.

We’ve had these Covid issues for about two years now, and I think the real problem there is policy uncertainty, and some of these policies are becoming quite dangerous. They were very understandable early in the pandemic. But as we’ve started to recognize the issues, these things really need to be tightened down. So, for example, I think the best thing or we think the best thing countries outside of China could do is accept COVID as endemic and convince China that it’s now endemic. Why is that important? Well, we’ve really been in a bunker mentality, and we can’t really stay in that for another two, five or ten years. So if we look over the past day or so, the UK and Denmark have both announced normalization over the next week, and that’s ending things like work from home, ending vaccine requirements and passports, that sort of thing. The impact will be social, it will be economic, and of course, there will be political benefits. So the only reason these politicians are moving in that direction is because they’re getting such political pressure to unwind the requirements that they’re finally doing it because China is the center of global supply chains.

There has to be political pressure for China to normalize because supply chain constraints are affecting every country. And so this is something that really needs to happen. Now if China will not normalize, if they continue to close factories and ports, then companies just need to move their supply chains closer to their consumption countries. And I say just it’s a very complicated activity, but they’ve certainly had two years to start preparing to move those things. So they should accelerate those plans.

PS: And, you know, Tony keeping on the theme of unwinding and going back to normal, I guess many would say increasing interest rates would be kind of normalizing. But I wonder what their applications will be for countries like Brazil, Egypt, Argentina, South Africa and Turkey Who are potentially vulnerable to rising US rates. What’s your assessment on that?

TN: Yeah, it’s going to be hard for them. These are countries with weak and volatile currencies. Turkish Leira, Brazil riyal in Asia, I work particularly about the Tai Baht and the Rupia and Indonesia, I think they’re both vulnerable to rate hikes. I think part of what we’re witnessing is a transition from government led, say, planning. And for the last two years we’ve all looked to government for leadership on this stuff. And I think we’re starting to see a transition toward private sector leadership, at least in developed countries, at least in the west, those private sector companies will feel that currency volatility in their operations in countries like Indonesia, Thailand, Turkey and so on and so forth. So it’s not going to be painless for those governments, for the people in those countries or for the companies that operate there.

KHC: Tony, delightful to have you on again. Thank you so much for your time. That was Tony Nash, chief executive of Complete Intelligence. I don’t know if you’re an investor this year. I mean, what do you do? We’re just literally 20 days into the new year and it’s been tumultuous, right?

PS: It’s choppy waters. I mean, look at year to date, right? All down. I think S&P, Dow Jones, Nasdaq, Nasdaq down 8% year to date.

KHC: Yes, but then my dad a humongous last eleven years, right? So they’ve seen the market capital explode. A bit of correction isn’t bad for the soul sometimes, but you just wonder Where’s the end inside, right?

PS: Correct. I mean, the debate is I think earnings expect to be robust, but the issue is your evaluations.