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UK Turns To QE To Calm Markets

This podcast was originally published at https://www.bfm.my/podcast/morning-run/market-watch/uk-qe-outdated-government-bonds-calm-markets-british-pound

The Bank of England surprised markets by announcing that it would buy long dated government bonds in order to stabilise capital markets. Tony Nash, CEO of Complete Intelligence explains why and what does this mean for the Pound.

Transcript

BFM

Good morning. You’re listening to the Morning Run on Thursday the 29 September. I’m Shazana Mokhtar with Wong Shou Ning. Now, in half an hour, we are going to discuss the political future of Crown Prince Mama bin Salman, or MBS of Saudi Arabia, now that he’s been named the Prime Minister of the country. But as always, let’s kick start the morning with a look at how global markets closed.

BFM

Yesterday, US markets had a very good date was at 1.9%. S&P 500 up 2%, while Nasdaq was up a whopping 2.1%. Meanwhile, in Asia, it was all red. Nikkei was down 1.5%, hong Singh was down a whopping 3.4%. Shanghai and Times Index both down 1.6%, while our very own FBM KLCI was down 0.6%.

BFM

So for some thoughts on what’s moving international markets, we have on the line with us Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks for joining us. I want to start off with moves by the bank of England that said it would move to buy long dated government bonds in order to stabilize capital markets. Can you talk us through what the BoE is trying to do and whether this will ultimately be successful?

Tony

Yes. So here’s what happened. You had some pension funds who bought debt, debt instruments called Guilt, and they used those gilts as collateral to borrow more money to buy more debt instruments. And they use that as collateral to borrow more money to buy more instruments. So they were many times leveraged on these government debt instruments. And when the value of those gifts declined, they had to provide collateral against the loans they had taken out to buy that debt. So it’s a very circular kind of series of events that’s happened. So because these pension funds got in trouble, the UK, the bank of England wanted to prevent their insolvency, of course, because many of them are government pension funds. So since the bank of England has nearly endless currency, they can help the government come to a relatively orderly decline. So is it ideal? No, but there was some messaging out from the new Prime Minister in Whitehall that was very disturbing to government bond investors and that triggered the sell off and then that triggered a multibillion pound rescue from the bank of England.

BFM

Okay, I want to stay on the topic of the United Kingdom, but us about the currency. They must be the only G seven countries still doing quantitative easing in some way. Where do you think the pound is heading? Dendu?

Tony

Well, because of the energy environment, they’re going to be spending more money on subsidies to help the British people through the winter and more pound? Denominated spending actually makes the pound stronger, but you have aggressive quantitative easing and you have a relatively stronger US dollar. It’s possible that we see the pound decline, say, 35% more, unless something dramatic happens, like another event like today or another event by the government that really erodes credibility, I don’t see a lot more decline happening, but it’s a weird year. It’s a weird few years that we’re having right now. Right. So I think on some level it’s really hard to tell. And the problem with losing credibility is that you lose credibility. And if they erode even more credibility, it could be worse than anybody thinks. So I think that’s a small chance. I think we’re probably in a range at this point.

BFM

And if we take a look over at the US, we have seen federal officials reiterate the very hawkish stance that they have. But San Francisco Federal Reserve Bank President Mary Daly said that the bank is resolute by bringing down high inflation, but wants to do so as gently as possible so as not to drive the economy into a downturn. Do you think it’s possible at this point to engineer a soft landing, or is a recession inevitable?

Tony

I think it’s possible to engineer a softish landing. I think the problem with the Feds facing as they were very slow to respond to inflation, and so now they’re trying to respond as quickly as they can, and they’re responding in a very kind of brutal kind of way. Mary Daily coming out with these as gently as possible comments are good. And that’s new. Neil Cashari yesterday said he’s another Fed governor. He said there is the risk of overdoing it on the front end, meaning that the Fed could raise rates too quickly. So some of these governors are getting out with messaging, trying to soften the Fed’s hard message over the last couple of months. So the wording from the Feds, ongoing wording generally from especially JPOW, has said that they’re going to be ongoing aggressive hikes, and that’s scaring people. So, like, the Fed needs to be less aggressively hawkish in their language. So that doesn’t mean they turn dovish. That doesn’t necessarily mean they start doing QE. They just need to be less aggressively hawkish. And that’s just toning down the language. I think it’s a little bit too little too late in as much as markets have fallen by, say, 23%, I think, since the highs.

Tony

But I think if they start inserting some less aggressively hawkish language, we can have a smoother glide path to balance, meaning higher interest rates, more moderate equity markets at a slower pace.

BFM

Okay, Tony, can you help us understand what happened today in markets? Because I’m a little bit confused in the sense that US ten year treasury yields fell the most since March 2020. On a day like this, equities shouldn’t go up, but it did. Why?

Tony

Well, I think equity investors are seeing what the bank of England did, and I think on some level they see equity markets versus central banks as a bit of a game of chicken. And the bank of England blinked. And I think equity investors are hoping that the Fed will slow down or blink. This is not a pivot. Meaning when people talk about the Fed and say a pivot, they mean pivoting to quantitative easing and pivoting to dovish language. I don’t see that at all, but I think equity investors are seeing a chance of the Fed becoming less aggressively hawkish, as I was saying. So I think that’s really what happened is just a quick breath think, oh gosh, maybe they’re going to slow down a little bit, which would be positive for equity markets.

BFM

And if you take a look at the Nordstream gas pipeline disruption, that does seem to have changed the energy calculus in Western Europe. How do you think it’s going to affect the dynamics of energy prices over there, especially with winter looming?

Tony

Yeah, I think it will affect, but there isn’t a lot of gas coming by Nordstream. There are other pipelines bringing gas to Europe, so it’s really, at the moment, more perception than reality. So Europe has a fair bit of gas and storage for winter. It’s 87% of their goal, so they’re in pretty good shape. They’re not in great shape, but they’re in pretty good shape. They can make it all the way through winter with what they have in storage, but they aren’t reliant on Nordstrom to fill their reserves further. So I think the kind of the gut punch on this is that it’s a pretty damaging leak and so it would be really hard to get it back online. If Russia say something happened with a resolution of UK, sorry, Ukraine, Russia, and there was optimism that Russia could turn on the taps again, that would be really hard to achieve. So it’ll be an expensive winter for energy in Europe. But Nordstream doesn’t really impact it all that much. It’s more, say, the long term hopes and expectations for Nordstream.

BFM

Tony, thanks very much for speaking with us. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead. Really assessing what’s happening over in the UK with the actions by the bank of England overnight. That has helped somewhat to calm the plunge in the pound sterling that we’ve seen over the past few days. I think this pound has rallied, but how long this equilibrium will last, I think, is anyone’s guess.

BFM

Well, this morning pound against ringgate is 5.0260 at the lowest in the last two days, if I’m not wrong, 4.8. Right. So it has truly, truly recovered. But volatile markets ahead, I think still question marks about whether this trust economic policy makes any sense. Confusion over the tax cuts, how they’re going to pay for it, reverberating around global markets because we’ve seen actually global bond yields peak. Question about whether there will be more activities by central banks to intervene, to prop up their currencies or to restore come to their own respective markets, because we saw that in Japan. And apparently even South Korea says it plans to conduct an emergency born buyback program.

BFM

Indeed, we do see also that the yuan is coming under pressure, and China central bank has issued a strongly worded statement to warn against speculation after the currency dropped to its lowest versus the dollar since 2008.

BFM

I love the language. The language is released yesterday. Do not bet on one way appreciation or depreciation of the yarn, as losses will definitely be incurred in the long term. Can’t spell it out more clearly than that, right? Indeed.

BFM

716 in the morning. We’re going to head into some messages. And when we come back, what does long or need more? Another quarry or preservation of its forests? Stay tuned. BFM 89.9 you have been listening to.

Categories
Week Ahead

The Week Ahead – 09 May 2022

The Fed just announced the 50 basis point hike this week. Albert and Sam explain what this means for markets in the near term. Also, how badly does JPow need media training (he said “a normal economic person probably doesn’t have that much extra to spend”)?

We also discussed what’s happening with TLT? And then, what will the Fed do next? Why is everyone talking about a 75bp move?

Tracy explains what’s happening in natural gas and the crude oil markets. Why does energy seem range-bound?

Key themes:

  1. What the F just happened? (F for Fed)
  2. What the F is next? (F for Fed)
  3. Why does energy seem range-bound?

This is the 17th episode of The Week Ahead in collaboration with Complete Intelligence and 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
Tracy: https://twitter.com/chigrl
Albert: https://twitter.com/amlivemon

Listen to the podcast on Spotify:

Transcript

TN: Hi. Welcome to The Week Ahead. I’m Tony Nash. Today we’re joined by Tracy Shuchart, Sam Rines and Albert Marco. We’re always joined by those guys. Before we get started, I’d like to ask you to like and subscribe. Really appreciate it if you subscribe to our YouTube channel.

It’s been a very interesting week, guys. We have a few key themes. First of all, what the F just happened F is for Fed. Then we’re looking at what the F is next. So that F also is for Fed. And then we really want to look at some energy stuff. Why does energy seem to be range bound? And I think that’ll be a really interesting discussion.

So Sam and Albert, kind of talk us through what the F just happened? We said this would be the most dovish 50 basis point move in the history of the Fed and it was. And here we are at the end of the week and things don’t look so good. So what happened?

AM: Well, was it a Dovish Fed? Not really. I mean it was pretty hawkish but it was already priced in. Everyone knows it was going to be 50 basis points and everyone knows they were going to talk about all these hawkish words. But then Powell comes out and throws in a little sprinkle of dovishness in there and then the market took off with it. I think it rallied at 3%? Crazy.

However, from what my guys told me, a lot of that was because traders were loading up on spy calls and ES futures and just gamma squeezed it. It was really easy. The market is kind of liquid right now. That actually agitated the Fed because they didn’t want this thing to rally and they came back and just torched everybody the next day. It was like 4% down? Just stunning. Absolutely stunning price action that we’re seeing right now.

It’s just not tradable. I mean you’re in this market and you’re swinging 100 points up and down each way every couple of hours. It’s just not tradable right now.

TS: Albert made a very good point. The thing is these swings that we’re seeing in energy and also in equities, these swings are untradable. Right. So that is very cognizant point that you have brought up.

SR: I mean the interesting thing to me with the whole thing was how quickly you went up, how quickly you went down to follow it up. Not just in ES and S&P, but the dollar got trounced following the Fed and finished flat basically to pre-Fed to finish up the week. You had the two-year absolutely plummet and make a little bit of a comeback. But it generally actually stayed lower following the Fed minutes. But these were huge moves across the board.

It didn’t matter what asset class you were trying to hide in, besides maybe energy. It didn’t matter where you were hiding it. You were just getting whipped. And there was very little tradability across the board in that period.

So it was pretty interesting also to hear several Fed speakers today. I think there were five or six of them come out and were generally hawkish across the board. I mean, you had one non-voter, Barkin, talking about putting 75 back on the table. I mean, it’s ridiculous. Powell just absolutely said no to 75. And then you have beneficials coming back with maybe I haven’t taken 75 off the table. I mean, not that Barkin matters, but he tried to put it back on the table. Their communications are a mess.

TN: The interesting part for me about Wednesday was Yellen came out first saying, “no, it’s all good. Nothing to see here. There’s going to be no recession. Fed is going to be able to manage it.” Everything else. To me, that was the real tell, right, that he was going to be fairly gentle. Of course, it was a 50 basis point hike, but it was a fairly gentle 50 basis point hike. And he was going to stave off the 75 basis point talk.

But then today we see these guys come out being fairly hawkish. So we’ll get into kind of what’s next in a couple of minutes. But I want to ask about a couple of things. Powell, he talks, man. He is not the Greenspan kind of mysterious guy. And his talking seems to get him in trouble.

So one of the things that he said on Wednesday that really caught me, which he said, I’m looking at my notes, he said “a normal economic person probably doesn’t have that much to spend” when he was talking about inflation, that much extra to spend. Sorry, but he actually let the words “normal economic person” pass his lips. And words like that, language like that makes American people feel like it’s the government, this gilded government employee who inflation doesn’t touch versus the American people. What’s wrong with those guys? Why are they using that language?

AM: In my opinion, they want to crush excess money and they’re doing just that. These wild swings in a week that’s meant to just erase money from the system. And Powell is an attorney. He’s not really an economic guy.

TN: An attorney should know words.

AM: Yeah, well, he doesn’t. He’s flustered. He’s flustered. There’s so much stuff going on behind the scenes that he’s flustered. And really, I don’t really even think that Jerome Powell is even in control of things. I think more align on to Auntie Yellen. I think she’s the mastermind behind this dollar rise. I know she is, in fact. I had discussions about it.

She’s the mastermind of pushing this thing past 110. She’s the mastermind of getting capital to force it back into the US equities. She’s the one doing all this.

TN: Right.

AM: Powell might be fighting it, but I’ve talked about this many times. You have this disjointed policy between what the Fed wants to do and Powell and what Yellen is doing. So this is what I see is going on.

TN: Sam?

SR: And to your point. I think their communications generally are a nightmare. They’re not doing a phenomenal job of telling people anything. Right.

It was such a disastrous week. You had quarrels out early in the week talking about how because Biden hadn’t nominated Powell to come back to the Fed. That was one of the reasons why they were behind the curve. Sorry, Randy, but that’s a ridiculous statement. Everybody knew, the betting odds never really broke through 70 that Powell was going to be renominated. Let’s be honest. He was always going to be renominated.

AM: You bring up an interesting point, Sam, and kind of a signal is will Powell actually get confirmed and is Randy and those guys, because Randy deserve this, I believe.

SR: Yes.

AM: So are they trying to defend or trying to upstage Biden and possibly not getting Powell confirmed?

SR: Well, it’s interesting because you would think that Corals would want Powell confirmed because Powell he’s fairly conservative in mindset relative to some of the other people. That could be dominated.

TS: Middle ground, too, I would say.

SR: Yeah, a decent middle ground. And most likely after that, it’s going to be Brainard. Right. I don’t think Corals wants to mastermind getting Brainard in there.

AM: No, I’m saying that Corals are trying to get ahead of the game here, thinking that Powell might be ousted.

SR: Oh, yeah, maybe. I also think that there’s an awful lot of people once they get out of the Fed and they see that they’re part of the decision making that got us to the current inflationary environment and current problems. There’s a little bit of face save when it comes to, hey, look, we wouldn’t actually be here if they had done their job. It wasn’t really us. It was this lack of nomination.

So generally, then you get into the FOMC meeting, the after presser, call it the kerfuffles that he makes constantly during it. Then you get to the Fed speakers after it. The worst part about the FOMC meeting is not the FOMC meeting. It’s just the blackout ends. Let’s be honest. Then we have to listen to them for another three weeks before the blackout comes.

TN: Normal economic people do stuff.

SR: Yeah. Like buy stuff and actually contribute to the economy instead of just blustering about 75 basis points.

TN: Right? Exactly. Okay. Before you get 75 basis points, Sam, can you walk us through what’s happening in the TLT market because it’s falling off a cliff a month ago. Is it like 140. Now, it’s like 118. So what’s happening there? Because I’m hearing a lot of chatter about that.

SR: Yeah. I mean, it’s the tracker for the 20-plus year US Treasury note. When yields rise, the thing is going to get trounced. Right? I mean, that’s pretty easy.

The easiest way to underperform the S&P this year has been to buy TLT. That’s just been that bad. I think it’s down 21% or 22% as of the close today. That’s a pretty devastating bond move right, for portfolios when bonds were supposed to be the safe asset. But generally it’s liquid. Right? You can buy and sell TLT all day long and you can short it. You can do some stuff.

So it’s a fairly easy way for particularly investment advisors and other smaller players that are running separately managed accounts to get in and out of fixed income exposure quickly and be able to move their portfolio duration pretty dramatically, pretty quickly. So it’s a trading tool.

And so when you need liquidity and you’re not going to sell individual bonds, that’s going to be generally fairly liquid and you get some pretty big spreads there. You’re not going to sell those bonds, you’re going to sell TLT instead.

TN: So are TLT markets telling us that they expect tightening to accelerate? Is that what’s being communicated to us?

SR: No, I would actually take the other side of that. And I think it kind of goes to Albert’s point last week is long end yields don’t rise if the markets are expecting a tighter, faster Fed. Right. That would be a recipe for disaster.

Recession being pulled in towards us, not pushed out. So the Fed is expected to do 50 basis point hikes instead of potentially 75. QT was a little bit, QT was basically what was thought even a little slower to phase in. Yields could be telling us a number of things, but one of them is not that the Fed is tightening faster.

TN: Okay.

AM: This is the problem. This is the problem. Right. This is something that nobody’s really talking about is the Fed is trying to create this narrative with long bond and whatnot that? We’re going to tighten. We’re going to tighten, we’re going to tighten. However, the market is still red hot. I mean, even the consumer credit today was outrageous. Did you see that?

SR: That was insane.

AM: I was talking to my client today and we’re looking at shorting retail and whatnot? And I said we cannot show retail. And he was why? I just walked into Gucci and it was a velvet rope with a line of 100 people trying to get in there. And none of them make more than $50,000 a year. Just buying stuff left and right. It’s like, well, the Fed is trying to say we’re tightening, but the market is red hot right now.

TN: Fascinating.

SR: I have no push back to that whatsoever. The consumer numbers today were stupid. 50 plus billion. That was a silly number. That was a silly, silly number.

TN: That’s a great segue to what the F is next. Right. What’s the Fed going to do next? Because if consumer credit is still expanding it’s really fast, how do they slow it down? Is 75 basis points are realistic? I know he said no. But then why do we keep hearing about it? Then why are all these geniuses saying 75?

SR: I haven’t seen a single genius.

TS: That doesn’t mean that it’s necessarily going to come to fruition.

TN: Okay.

SR: Yeah, I mean it’s, James Bullard basically planting that seed. Yeah, one fed and then Barkin picked up on it and said I wouldn’t rule it out. I mean, it’s two people that if you still listen to Bullard and Barkin, I’m sorry, but you’re going to lose money.

TN: Bullard was great like ten years ago, right?

AM: Yeah, but they’re trying to sway less than intelligent traders to believe that it’s coming. Maybe sway some money that way.

TN: The only reason I’m saying it is because I want everyone watching to know that.

AM: They are lying to you. Okay? They are lying.

TN: So the expectation is that what the F is next is kind of staying disciplined. 50 basis points in the next meeting and maybe QT accelerates slightly. Is that kind of what we expect to happen next?

SR: Yeah, I would say 50 bps, but I don’t think you even have to accelerate QT. It’s very difficult to accelerate.

TS: This mark is going to scare them. And what is going to happen is they’re going to be another 50 for sure. But they’re going to be even more dovish than they were last time.

TN: Okay.

AM: I actually want to take a train. I think they’re going to do 50 bips for sure, without question. But I think they’re going to have to accelerate tightening just to scare the market a little bit, for God’s sake, because especially if they want to…

TS: Acceleration timeline, I mean, you could barely take a magnifying glass to it. Right. So you’re talking about almost $9 trillion going down to maybe 8.5. I mean, can you really see that?

AM: No, but they’re also going to be using the dollar. They might even take a dollar to 115 or 120. It breaks everything.

TS: Any QT that they have, it has the exact opposite effect. So they’re not stupid. They know that monetary policy that they’re doing right now may break the market, but they’re going to ensure that…

AM: Yeah, but they want to do QE later in the year.

TS: They want to be able to do it.

TN: I saw an interesting discussion on social media this week about what’s the worst central bank to be a part of right now. And I think it was easily the Hong Kong Monetary authority. Right.

With everything terrible happening in China, but they have to match what the US is doing. It’s just a very difficult place to be in. So I think even as we talk about what is the Fed going to do next, there are some central banks out there that are just in a terrible place. And raising the dollar at 110, 115, 120 would absolutely break some of these central banks and put in a very terrible position.

AM: Yeah, but Tony, the Chinese, they’re very pragmatic with that respect. They’re waiting to see what the Fed does and they’ll react. They are for sure going to stimulate their economy.

TS: They’ve already announced so much stimulus. It’s ridiculous. The market hasn’t particularly reacted at this point as far as the commodities sector is concerned. But literally they have so much if you look at what they have said, they have so much stimulus on the line as far as infrastructure. They do not want, they want, they’re determined to have their 5.5% GDP by the end of year ’22. Right.

TN: Yeah. Well, they’ll hit that no matter.

TS: What they are doing is they’ve already announced so much stimulus. Markets not looking at right now. Right. Or the North American market shows looking at it right now, I promise you.

AM: Yeah, but Tracy, also, you got to remember that the SEC started coming out with delisting threats all over the place. They added 80 more companies to the delisting threat. That’s actually toned down.

TS: I’m not saying I would invest in Chinese companies. What I’m saying is I would invest in commodities.

AM: I know. But when you say that the market hasn’t reacted, that’s a lot to do with it. These delisting things have really scared investors away from them.

TN: What China needs is dump truck and helicopter loads of cash on the boon like tomorrow. And I think to hit 5.5, they’re going to have to do that in every major town. They’re going to have to unleash dump truckloads of cash. The infrastructure they’ve announced is close to what they need to hit that. Sorry? And they have a share… t

TS: hey’re made up number. But in order to. Yes. Hit that, you’re completely correct.

TN: Yeah. They’ve got to do it and they’ll end up canceling unofficially. They’ll give dead jubilees, all that kind of stuff. Like they’ll do all of this unofficially. But it’s to let people reload so they can spend more money. They’ll do all of this stuff starting as soon as they rip the Band Aid off of the lockdown.

TS: That’s why we’re seeing a deval in the currency right now.

TN: Right, right. Which we talked about for months and months. And I’m so glad that it happened. Let’s move to energy, guys. And Tracy, we were talking about this a little bit earlier about energy being kind of range bound.

I’ve got Nat Gas and WTI on screen. We’ve seen Nat Gas really come down hard over the past couple of days. Can you tell us what’s going on there? Because it’s performed really well over the past month, except for that little period. So what’s going on with Nat Gas and what’s going on with WTI? Is it really range-bound?

TS: I mean, it is range bound. What we’re seeing is we’re saying although it’s a larger range, right, like we’re seeing $10-15 ranges in WTI. What we are seeing is that if you look at a daily or weekly chart, you’re seeing that range is coming down. Right.

TN: Okay.

TS: And that’s to be expected. One thing that the market did was that they increased margins. Thank you.

TN: Yeah.

TS: They increased margins. That put a lot of retail traders out of the market. That said, if we look at the recent OI? OI has actually increased daily all this week. So it looks like and we can’t tell at this point whether it’s retail traders or institutional traders. But OI has increased this week in that sector across gasoline.

AM: Yes. Speaking of gasoline, I’m looking at diesel and gasoline crack. I think you’re looking at shortages coming in the summertime. Those things look to get explosive.

TS: You know, texted you two months ago and said, get long diesel.

AM: Yeah.

TS: It lies in the EU. Right. And they are going to see shortages. This is going to affect their overall GDP. We’re going to see less transportation we’re going to see less manufacturing. We’re going to see because they can’t handle these prices. That said, if you’re an investor, you’re going to look at the refiners right now that are refining these because the crack spreads are increasing exponentially.

So if you want to invest in this sector, I think you would be looking at refiners right now that specifically are involved in distillates. Interesting.

TN: Great. Perfect. All right, great. So, guys, what are we looking at for the week ahead? What’s on your mind, Albert? Definitely not shorting retail.

AM: Definitely not shorting retail. I just can’t take that out for at least June. But honestly, the Roe versus weighed the political atmosphere right now and how that’s going to affect the congressional races, not so much the House, because the House is set for the GOP, but possibly the Senate. And why I bring that up is because now those economic bills going through Congress, they start getting affected. And investors started calling me to try to figure out what’s the makeup of Congress.

And I think that’s what I’m going to actually start paying attention to because the beginning of next year we’re going to need stimulus the way that this economy is going. So I’m taking a look at what the makeup of the committees are going to be, what possible stimulus packages will be materializing.

The auto sector, for God’s sake, it’s completely trashed. I think that’s on life support and definitely going to need some help. I’m actually looking for auto sector plays for the long term, 24 months out.

TN: Okay, Sam, what’s on your mind?

SR: I’ll be paying pretty close attention to where the dollar heads, particularly based on our earlier conversation on the Renminbi. And in the end, following the Fed this week and then listening to how other central banks begin to form a narrative around their next moves based on the Fed in particular, Latin America is going to be very interesting given some of the inflation pressures down there and the push and pull of someplace like Brazil, where commodities are both good and bad for an economy, or Argentina, good and bad for an economy, export a lot of food, but import a lot of energy, even though you have the black maritime, psychotic, that’s pretty poorly run.

Anyway, that to me is going to be one of the really interesting stories of the next couple of weeks, given the Fed. The Fed moving quickly, beginning to do some quantitative tightening.

Generally, that would be your number one method of affecting markets is through the dollar. So I just want to see what the dollar does and follow the dollar and not fight that tape.

TN: Yeah, very good. Tracy, what’s on your mind for next week?

TS: I’m going to be concentrating actually on the yuan at this strength. I want to see how much are they going to actually devalue their currency, because I think that’s the sign of how desperate they are to bolster the domestic economy. That’s where my main focus is right.

TN: Supposed Fed your eyes on China.

TS: But you have to realize what happens is that people don’t really talk about why does China devalue the currency? They devalue the currency so that exports become cheaper and more competitive. In turn, that makes imports more expensive. Why does that help the domestic economy? That means that people in China are not buying imports. They’d rather buy from domestic businesses which bolsters their economy.

So right now I think that’s one of the most important things to be looking at right now is to see how much are they going like, how desperate are they?

TN: That’s a great observation and something that I watch every day and I’ll tell you, they’re very desperate. I don’t mean to laugh at it. I feel really empathetic for the people in China but they’re very desperate. So I would watch for some moves that are I would say that tried to appear disciplined because they don’t want to look desperate. But in fact, they’re desperate to get their economy moving because of these lockdowns.

So I think the first sign of that would have to be starting to see a lifting of the lockdown like a legitimate lifting of the lockdowns and not moving into more towns like they did in Beijing over the past couple of weeks. But really legitimately taking these lockdowns off and free movement.

Looking at things like the port zone in Shanghai and how many people are allowed to work in those bonded warehouses, those sorts of things to get that port activity moving. As we look at those indicators, we’ll know how serious the Chinese government is about getting back to work. If they don’t do it, they’re not serious. And if they’re not serious, they’re going to have some real trouble.

I’m not a gloom and doom kind of China is going to have a coup or anything type of guy. But I do think that they’re going to have some real trouble. They want everyone to be happy and harmonious going into the national party meeting in November and there’s going to be some runway needed to get everybody happy. And by everybody being happy, I mean all of those CCP guys in Guangzhou and all the different provinces, they have to be happy coming into that Congress because if they’re not, then Xi Jinping has several problems. Serious problems.

Okay, guys? Hey, thanks very much. I really appreciate this. Have a great week ahead and have a great weekend. Thank you.

AM: Thanks, Tony.

SR: Thank you, Tony.

Categories
Week Ahead

The Week Ahead – 25 Apr 2022

Subscribe to CI Futures special promo here: https://www.completeintel.com/promo Only until April 30th.

Fed Chairman Powell was out this week all but assuring a 50bp hike in May, also implying we may see a burst of quick hikes. Then everyone who said “it’s all priced in” two weeks ago panicked on Thursday and Friday. Mike Green shares what’s new here and why are we seeing the reactions now?

We’ve spoken before about Q2 earnings, expecting them to generally be weaker, partly on inflation, which every company is blaming for shortfalls.

– Snapchat missed earnings but it reported 64% revenue growth, with daily active users up 20%.

– Netflix lost subscribers. They’re now the tech cautionary tale.

– FB is falling in anticipation of an earnings shortfall next week.

– Tesla reported a 42% earnings surprise and they’re about even on week

We keep hearing about commodities getting smoked this week. What happened this week and what should we be thinking about right now? We’ve got a bunch of housing metrics out on Tuesday (Case-Shiller, etc). Do the guys expect to see an impact on house prices already or will it take a couple of months/another rate rise to have a noticeable impact?

Key themes from last week:

1. Powell’s Wrecking Ball (Dollar Wrecking Ball)

2. Tech Earnings

3. Commodities getting smoked?

Key themes for the Week Ahead

1. Housing

2. France election

3. Geopolitical lightning round


This is the 15th 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

Mike: https://twitter.com/profplum99

Albert: https://twitter.com/amlivemon

Listen to the podcast on Spotify:

Transcript

TN: Hi and welcome to The Week Ahead. My name is Tony Nash. Today we’re with Albert Marko and Mike Green. Before we get started, I’d like to ask you to like and subscribe to our YouTube channel. Thanks for doing that. I also want to let you know our CI Futures promo ends on April 30th. This is CI Futures, about 3000 assets forecast every month for $50 a month. That promo will end on April 30th. So if you’re interested, please go to completeintel.com/promo and check it out.

So this week we’ve got some key things from the past week. First of all, Powell’s wrecking ball and rate rises and the dollar wrecking ball that comes with that very important item. Tech earnings. We’ve seen a collapse in tech equities over the past couple of days. Not a collapse, but some really interesting activity. We’re going to talk through that. And then commodities. We’ve seen commodities, heard some people say commodities are getting smoked late this week. So let’s talk through that.

So Mike, first let’s look at Fed Chair Powell is out this week, all but assuring a 50 basis point hike in May. And a lot of people think it may be stronger for a longer period of time, maybe June and July even. I hear a lot of people saying a few weeks ago, it’s all been priced in yet we’ve seen kind of some panicking markets on Thursday and Friday. So we’ve got the 10-year on screen right now. So what is new here from your perspective and why are we seeing the reactions now?

MG: So the point that I would argue on this is that we’re in a feedback loop effectively where the market tries to price the Fed’s indications the Fed is in turn responding to the market. And so it’s leading to a dynamic where the Fed is saying, well, look how interest rates are rising, particularly at the back end. Clearly, we’re behind the curve. Therefore, we need to hike more and we need to convey to the market that we’re going to hike more. The market mechanically has to respond to that because you just can’t ignore it. Right.

You have to effectively think of it in a binomial tree type framework. The Fed has told you they’re going to hike more aggressively. Therefore, you need to shift the whole system up. Right. And that feedback loop, I would argue, is what we’re kind of captured in right now. And it’s part of the reason why the market is forced to respond to it in a risk off fashion, et cetera. We just don’t know if the Fed really actually knows what the underlying signal is and how much of it is us and how much of it is their insights onto the economy.

The second thing that I would just highlight is that the Fed has put themselves into the very uncomfortable position of last year, arguing that inflation was transitory. And this has been one of these really frustrating things for those of us that actually agreed with them that it is largely transitory in inflation rate. Right. So the rate of inflation is transitory, but the price level, I don’t expect oil to go back to negative $37 a barrel. That would be absurd. Right, right. So when you talk about the transitory dynamic, it’s typically thought of as the rate. But I think the perception had broadly been the prices themselves were going to somehow come back down and not adjust to the realities of accommodating the difference.

So I think that is sitting at kind of the core of the issue is that the Fed is now in the same way they were trapped in that transitory framework that people began to increasingly malign and make fun of. Now they feel this overwhelming need to come out and tighten and show that they’re actually serious about inflation and reestablish credibility, even as it’s very clear that the economy is starting to slow. And they’re then forced into the mantra of now saying, well, we see no signs of the economy slowing. And so they’re going to have to maintain that for a period of time or they sound like fickle policymakers.

TN: Right.

MG: I think the market is understandably concerned and scared at how far they’re going to have to go to prove to us that they’re really serious.

TN: Right. And Yellen was out saying there will be no recession this year, which I mean, I hope she’s right.

MG: There’s a recession. Yeah.

TN: Exactly. So I was roasting coffee yesterday, and my coffee guy was telling me that coffee prices will stay elevated because of the buying cycle from the farms and so up and down the commodity supply chain, across, it seems, across metals, across crude, across ags. That timing has a real impact on the change in levels. The rate may not change much from here, but it seems like the level will remain elevated, as you’re saying.

MG: I think that’s right. And again, that’s why the transitory, I think, was so toxic and confusing to people because they were thinking, oh, we’re going back to $1.75 gasoline as compared to the $6 in chains that we’re currently paying in California. Right?

TN: Right.

MG: That’s very hard to accomplish under the current framework. And the coffee example is a really good one. It’s not so much the level. The adjustment to the level is painful. Once that level has been reached, all sorts of changes in relative purchasing activity can occur. Right. You can decide you’re going to roast your own beans because it’s cheaper than somebody else’s beans. You can decide that you’re not going to go to Starbucks, you’re going to do your coffee at home and put it into a travel mug to save money.

Whereas the Wall Street Journal highlighted you can reduce your consumption of beef and chicken and increase your consumption of lentils. And yet another example that just pisses people off because it feels completely disconnected from the reality that they’re in. But those are all true statements, right. Those are adjustments that people make once the level settles down. Where the real problem occurs is the uncertainty about the level.

Is it going to be 20% higher next year? Is going to be 20% lower next year? That makes it very hard for me to plan. And that’s really what we’ve experienced. And now what your feedback, what your contacts are telling you is no, prices are going to stabilize at a higher level because that’s what’s required to induce the supply response.

TN: Right.

MG: Okay. It sucks. Coffee is more expensive now, but at least it will be in the stores.

TN: Right. So going down the path of, say, your Wall Street Journal saying you need to eat lentils instead of beef. With interest rates rising, it seems like consumers would utilize more credit during that adjustment period. With rates rising, it seems like it would make things much more difficult. So there’s a double whammy on consumers. Are we seeing that impact right now?

MG: I don’t think we’re yet at the point that the higher interest rates are feeding through in a way that matters. Right. So the vast majority, something like 95% of outstanding mortgages are no longer adjustable rate. They’re fixed rate. And so that is going to be very slow to adjust. We’ll see that the marginal purchasing behavior. And we are absolutely seeing that. We’ve seen a dramatic reduction in refinancing and purchase applications. We’re starting to see traffic deteriorate. We’re starting to see new orders roll over. We’re starting to see consumer spending intentions begin to plummet.

And there’s two reasons why people can use credit cards. Right. You can use credit cards to smooth over effectively saying, hey, guess what? I’m getting paid my bonus next week. Therefore, I’m going to make the purchase now and I’m going to repay it. Or you can see people start to tap credit because they are so strained that they can’t do anything else.

And unfortunately, the evidence that I’m seeing suggests it’s the latter, that it’s the lower income households who are now taking advantage of high cost financing choices in order to sustain a level of consumption that they’re having difficulty retreating from.

If your rent goes up and you don’t want to be homeless and their coffee prices have gone up, at some point, you need to expand your purchasing capacity. And that means using credit.

TN: In basic terms, what we’ve been talking about on this show is demand destruction. The Fed is aimed at demand destruction. And that means that demand curve actually moves in, right?

MG: Yeah.

TN: So people are going to have to rein in their behaviors because we’re likely at new pricing levels for many things. And so that consumption is going to have to decline a bit to adjust to the new environment. Albert, you had a comment?

AM: Yeah, two comments, actually. The thing about the demand destruction and the supply, from the Fed’s point of view, they think that getting rid of demand involves eliminating supply. Right. So that a little bit has to do with the rates, but also what Mike said about doom loop. I mean, that’s very interesting because that’s exactly what we were talking about in multiple areas, not just for bonds, but Yellen herself, she’s had her minions go out in the bond market and just straight up lie to bondholders, saying, oh, they’ll recover, they’ll recover while everyone keeps buying, and they just keep butchering the long bond.

The 30 years just been 3.1 today or 3.5. It’s crazy. She did this in 2013 where she had this little ploy where she has preventing capital flight, leaving the United States in order to prop up the US equity markets. And that’s what we’re seeing today. And this doom loop between the Fed and the treasury, because they’re not on the same page. They’ve got different policies, different ideas of how to keep the market, and it’s causing problems.

MG: I would actually add to that and just highlight that this is, of course, the downside to not having people who actually have ever traded or negotiated a swap or done anything else along those lines in positions of decision making. You don’t want to put a fox in charge of the hen house. But the reality is it is somewhat useful in terms of understanding what’s actually transpiring. It doesn’t surprise me at all that Janet Yellen says something along the lines of, well, there’s no sign of a recession because they’re working very first order, first derivative type dynamics. It’s that second and even potentially third derivative that ultimately conveys the dynamics of what’s really happening.

And the second part is that the Fed operates under a model in which negative real interest rates, which is basically a function of inflation expectations and the current level of yield. Some people roughly approximate it with trailing inflation and current yield, which is completely insane. But at least if you’re doing it in a structural fashion, they tend to presume that the only reason why markets move is due to information.

The market has some insight, and this has been one of the huge policy innovations. And I use “innovations” over the last 20 years has been this dynamic of, okay, well, if we’re trying to figure out market expectations, let’s use market inputs. But those market inputs in turn respond to the policy makers. Right?

TN: Right.

MG: And there’s all sorts of structural features to markets. If I happen to short a pay or swap shop, for example, and my risk manager is forcing me to cover that risk, it has no economic signal to it. It’s simply a market feature that they are then trying to interpret as indicative of underlying demand. That’s just wrong.

TN: Right.

AM: On top of that, you have a political component where Yellen tied to a certain party or not just Yellen but others tied to a certain party are going to do things beneficial to that party.

I know economists and financial guys don’t like to hear that, but that’s just the reality of it.

TN: That’s the reality of national accounts. We also mentioned the dollar wrecking ball. We’ve seen over the past week, Yen devaluation or Yen depreciation. We’ve seen CNY devaluation. CNY has gone from, I think, 6.34 to 6.49, which is a dramatic deval of CNY. How much of an impact does the dollar have on those markets, particularly because we’ve heard about the dollar losing influence for the past, I don’t know, 50 years. But talk to us, Albert, what’s going on there?

AM: Like I said, Yellen wants to restrict capital flight, and a strong dollar does that. It’s killing the emerging markets. They gave Japan the go ahead to devalue the yen in order to offset anything that China does asymmetrically against the United States, because they have been. They’ve been in a little bit of a tit for tat for quite some time now.

So the dollar at 110 just absolutely annihilates emerging markets, except for the markets that are commodity based, like Canada. I’ve been in Canada. I love the Canadian economy right now. It’s strong oil based, gold based. So that’s where I’m coming from on the dollar right now.

TN: Great. Okay.

MG: I would just broadly highlight but by the way, I don’t know if you saw the CNY today, but it moved huge again today. So it’s actually now 6.50. Well, fantastic in the same way that like a root canal is fantastic. Right. But yes, it’s a wonderful technology. Nobody wants to experience it.

But just to put this in context, this is a move now that is equivalent in terms of devaluation of what we saw in August of 2015, in terms of the much-heralded… Right. And I would just highlight that I think this is an important move. I think it’s telling you that there’s all sorts of stuff that’s going on. I tend to fall into the category of terms of trade dynamics, more so than interest rates or even anything, those dynamics.

Japan allowing its currency depreciate, leading to depreciation for the Chinese currency or contributing to depreciation for the Chinese currency. They want a competitive in global export markets. Right. So there’s an element of China needing to respond and maintaining competitiveness versus a significant devaluation that’s occurred in the Japanese yen, which is basically, if you think about it from an American perspective, means I can buy 30% more of what a Japanese worker produces today than I could a year ago. Not quite exactly. Right. But somewhere in that range.

The second part of it, though, is that the terms of trade have just turned so ugly for these countries where the things that they need to import, they have incredible food insecurity, they have incredible energy insecurity, and those are the things that are rising in price. And we’re seeing no signs that those are going to retreat, whether it’s LNG that Japan now has to compete with China in Europe or from the United States and elsewhere or whether it’s wheat or rice or corn.

I believe, Albert you may know this better than I do but I believe Malaysia just announced export restrictions on palm oil, worried about their own food security. This is the way the system breaks down. And the irony of course is the US, are we going to get unlimited palm oil imports? Of course not. But can we use soybean oil or canola oil in lieu of palm oil for frying our Twinkies and our food? Of course. Right. We can do that. The US can survive almost anything from a food or energy shortage standpoint. It’s the rest of the world.

Albert referenced the emerging markets. I mean man, if you are a cash crop producing emerging market that is now struggling with issues around food and energy security, this is going to get bad. It’s really bad.

AM: It’s really bad. It’s causing political uncertainty in many regions of the world. And again use the phrase doom loop because politicians over Covid policies have created a doom loop in trade.

TN: But let me ask you and we need to wrap up this topic but I want to take this full circle because it’s fascinating. With the currency devaluation depreciation in China, Japan and the food issues could that potentially push, say, North Asia to put more pressure on Russia to wrap up the conflict so that the commodities out of Russia and Ukraine can alleviate some of this price pressure on emerging markets. Is that a possibility?

AM: It’s a possibility, but I think it’s a small possibility. Things have changed because of the Ukrainians sinking that battleship. They got bears at that point.

But Interestingly though, now that you mentioned, I just thought of it. Japan and China have always competed for the fishing rights and then sea Japan. So you could see a future. Want to say naval skirmish but a couple of boats taking some live firearounds.

TN: Sure. Yeah. Or a mistake. Right. You could have a mistake that results in something like that. Okay, let’s move on to tech. I think we can talk about this issue for hours.

AM: Yeah.

TN: Let’s move on to tech. Robert, we’ve spoken about key to earnings for a while, expecting them generally weaker, partly on inflation and other pressures. But this week we saw Snapchat miss earnings, but they reported 64% revenue growth and their active users were up 20%. So their business seems to be going well. Netflix lost subscribers and we saw them kind of as the tech cautionary tale. Facebook is falling in anticipation of their earnings for next week. On the bright side, Tesla saw a 42% earnings surprise, but their stock, after moving up a bit, really hasn’t moved much.

So on screen, we’ve got Facebook and Snapchat kind of showing their downward trajectory over the past month. So can you talk us through kind of what’s happening with tech earnings? Is that a rotation? Is tech really out of gas? What’s going on there?

AM: I believe tech is out of gas. A lot of it has to do with inflation and rates and whatnot. But I think tech earnings had gone into the stratosphere when Covid was just blazing because of the lockdown. People stayed at home, got on Snapchat, got on Facebook, got on Google and whatnot. Right.

The Tesla earnings. Those are a joke. It sounded like Tesla is the most efficient automaker in the world, which is absolutely a joke when they’re making cars intense. And it took the market up like 70 points. And then as soon as some of the better analysts started digging through the information, immediately sold off again. And then that actually triggered, I think that triggered the market to sell-off a little bit because people are worried about tech earning. I think Google’s going to miss big because their brick and mortar advertising scheme is hurting. Last month and this month it doesn’t look pretty.

But I want to take some caution here because everyone’s going to get beared up on these tech earnings as everyone’s seen the Huawei, big puts coming out there and whatnot. But we’ve seen time and again these tech earnings missed on revenue. And then the guidance is fantastic and the market rips 200 points in a week. I don’t want to be short tech at this level right now.

TN: Right. Mike, what are your thoughts?

MG: The obvious component is that we’ve got extraordinarily difficult compares for most of the tech companies. Right. So you go into a pandemic and every kid needs a computer, every kid needs a cell phone, every kid needs that. And I’m speaking to you over a microphone that was purchased during the pandemic and a computer that was purchased during the pandemic and a video camera that was purchased during the pandemic. Right. And I upgraded my software and my kids got new phones and all this sort of stuff that all occurred. Well, guess what? It’s not happening now. That’s harder.

And when I think about the reinvestment that needs to occur as we talk about going back into the office and into work, et cetera, it’s much less on the soft side. It’s much more on the simple dynamics of how do we restock a pantry at a company cafeteria. Right. Which hasn’t had to happen for a while.

TN: Right.

MG: So I am generally skeptical of it. I’m particularly concerned about the consumer side of it. One of my friends many years ago had highlighted that the emergence of cell phones as a consumer good had by and large, replace lots of other types of spending. So it reduced clothes, reduced spending on everything else. People are now tapped out on buying those phones. Right? They’re out of money and they’re using their credit in one form or another. So I’m skeptical on particularly Apple.

I agree with Albert, by the way, on Google. I think people are underestimating the importance of the bricks and mortar, and they’re also underestimating. I think this is one of the challenges for the Netflix. I’ll be 100% straight with you in terms of my household’s reaction to it. I mentioned it to my wife. She’s like, well, we’re obviously switching to the advertising supported model as soon as that becomes available because, candidly, I don’t even like watching Netflix to begin with. I could care less. If I have to watch ads and get it for $10 as compared to $20, then I would argue that this is happening broadly.

As we move back to an advertising supported model, the inventory of advertising space is about to explode at the exact same time that demand is relatively weak. So who thinks we’re going to get premium prices for advertising anymore? These models are screwy in terms of how badly they could deteriorate. If you simultaneously have a boom in advertising space at the exact same time that demand is relatively short.

TN: But lucky us, we get more campaign ads until November.

Okay, great, guys. Moving on to commodities. We saw commodities pretty much get smoked in the last half of this week. We’ve got one month history of WTI and copper up on the screen. So what happened this week, and what should we be thinking about right now with respect to commodities?

AM: I think that in terms of commodities, I think the biggest component right now is to see what happens in the Ukraine war, whether Russia stops because the Europeans and the Biden administration is using that as like the Putin price hike and whatever. But that’s what they’re blaming it all on. And a lot of people are worried about this being an extended war. I don’t think it’s going to last more than another month or two.

But for commodities, especially wheat and fertilizer, the moment that Ukraine comes back online, those things are just nosedived. And the Fed wants that to nose dive because they’re trying to kill supply in order to tackle inflation. So that’s from my perspective, there.

TN: So a lot of this at this point, you think depends on Russia, Ukraine.

AM: Yeah. That and the dollar. That and the dollar. So the dollar goes up, prices will come down.

TN: Okay. So appreciated dollar, did that hurt commodity prices this week?

AM: I think so. Go ahead, Michael.

MG: Yeah. So they’re not quite inverse. But remember, when we see prices, we’re seeing our prices, we’re not seeing the rest of the world’s prices. And exactly to the point that we were raising before with Japan and everything else on a year to day basis, as much as you may think, oil prices are up in the United States, they’re up maybe 50% in the United States. They’re up 100% if you’re in Japan. Oil prices 100% on a year to day basis.

AM: Wow. Right.

MG: I mean, that’s just an extraordinary outcome. You’re looking at these kind of underlying characteristics, and you have to say to yourself, the rest of the world is going to start to experience significant declines in aggregate demand.

Forget the supply component that Albert is highlighting. Focus much more on the demand. And when we think about commodities, developed world demand is extraordinarily efficient. We don’t throw copper on the ground. We don’t discard it into landfills. We recycle copper. Right. We recycle aluminum. We clean up the sludge off of our factory floors. That doesn’t happen in most places around the world. Right. Scrap found out in the open is still a significant fraction of aggregate supply. So we just use it more efficiently.

As things shift back here, we’re going to become more efficient at it. And I got a lot of heat earlier this week for posting a chart that said, look, I’m not seeing this commodity super cycle. I’ll say I’m not seeing this commodity super cycle. I don’t see the underlying outward shift in aggregate demand in almost any commodity that says we’re going to have truly sustained high levels of inflation and need for significant additional production other than effectively the disaggregating of supply chains. And you’ll hear things like huge copper demand because of electric vehicles. Right. That is selling human innovation so short, it’s just ridiculous.

If copper prices go higher, we’ll figure out how to use less copper wiring. That’s the history of the world.

TN: Right.

AM: That’s absolutely correct. That’s when they started using, like, gold flakes and sprays and different types of adhesive made out of whatever.

TN: But it generally takes a big demographic change to enter a commodity super-cycle or some sort of supply cut-off, right?

AM: Yeah. I can see a super-cycle within one or two commodities peaking and then coming back down and another one peaking and coming back down. But this insane super cycle that people were expecting, I don’t think it can happen. I agree with Mike.

TN: Okay, great. Let’s switch gears and look at the week ahead. Guys, we talked a little bit about housing, but we’ve got a bunch of housing metrics coming out next week with Case Shiller and a few other things. Because of rate rises, do you guys expect to see a near term impact on house prices? Are we kind of in a wait and see mode? What do you think is happening there.

AM: Politically? The Democrats want housing to come down. Right. And I think some of this bond action is meant to do that to be honest with you. I think they want houses down in the 30 year up. These prices, these housing prices are insane. It just stuns me to see some of these homes going for 150% of what they were two years ago.

And at some point the buyers are going to dry up. I mean, these cash buyers are going to dry up. And the credit now, I think in Tampa, it’s like over 6% for a 30-year mortgage. It’s going to make it even more unaffordable.

TN: But how much does that have to do with housing supply? Are we seeing more supplies coming on the market?

MG: Well, we are seeing more supply of new homes because the delays in completion means that homes that were ordered 18 months ago are finally starting to show up on the market. And that’s been one of the challenges. Unlike what we saw in 2005, 2006. This is not a function of massive amounts of new housing being built in areas that previously did not have housing.

So the character of 2004, 5, 6 was effectively converting farms and semi rural environments into subdivisions of endless numbers of homes that look identical so that people could have a home and then drive an hour to their work or an hour and a half. I mean, that was just crazy.And that was killed by the spike in oil prices that occurred with Hurricane Katrina and Ivan.

This time around, you just have a shortage of supply in terms of people willing to move. And unfortunately, the increase in interest rates, paradoxically, can exacerbate that. Right. Because I don’t want to leave my house and buy a new house because I have to enter into a new mortgage. Right. Of the mortgage. So, perversely, this could end up preventing supply from coming onto the market because when I go to look to replace my home, I can’t do it. And so it’s not clear to me that prices are going to take the hit that people are looking for.

I think at the low end, you’ll see certainly some pressure on new homes. You’ll see some pressure. But perversely, that just exacerbates the problem. Right. If new homes get hit more than existing homes, guess what? We’ll get less new homes.

TN: Okay, great. So far, it’s a very positive show, which is fantastic. End of a rough week into a rough show.

Let’s talk a minute about the French election, guys. It’s next week, what do you expect to happen in markets, say, with the Euro and French equities.

AM: Yeah, actually, we ended up buying the Euro today, looking for Macron to win reelection. Everyone that sees my Twitter feed knows I’m a conservative. Le Pen is a disaster for France, for Europe, transatlantic relations with the United States. She just can’t win and she won’t win. But the thing is, a lot of people think that she’s going to win.

So I think the Euro is going to probably pop half percent, maybe even percent, come Sunday into Monday. And then the dollar might actually come down and the market might actually rally a little bit crazy.

MG: I’m certainly sympathetic to that. I mean, the degree of sell off that we have seen, everything ranging from the yen to the Euro, et cetera, it’s hard to sustain this type of momentum. Ultimately, I’m exceptionally bearish on Europe. I’m exceptionally bearish on Japan for reasons that are largely unrelated to the immediacy of it.

I agree with Albert, and I actually would highlight something that he said that is really important for people to understand. When you describe yourself as a conservative, most people would say, okay, Marine Le Pen is a conservative. Right. Because she represents anti immigration and she represents behave more like French people. Right. But the reality is conservatism is all about let’s not break the system and try to replace it with some utopian vision. Right. Let’s try to work within the existing system to make it better.

When you enter into periods of uncertainty like what we’re experiencing, there’s a reason why the incumbent almost always wins, because people don’t want radical change in their lives. It makes it far more difficult. And so I just am not seeing any evidence that Le Pen has the chance that she’s claimed to and not that I want to join Albert on the potential tinfoil hat conspiracy standpoint, but I agree with them. I don’t think she’d be allowed to win.

TN: Okay, interesting. So a little bit of stability in Europe, which is great.

Guys, let’s have a quick geopolitical lightning round. I know there’s a lot going on in Russia, China, Ukraine, elsewhere. What’s on your mind, Albert, when you talk to your politics, what are you talking about the most?

AM: Honestly, China. The civil unrest in Shanghai, that’s actually looking like it’s spreading is kind of really concerning. For years, Xi’s been holed up in bunkers and can’t go.

You know, China, Tony. I mean, you have 1.3 billion people mad at you. You just don’t go out. Xi has this problem at the moment. So for me, it’s the civil unrest in Shanghai spreading to Guangdong and even outwards.

MG: Wait a second. So XI has 1.3 billion people mad at him? Did he say something against Bitcoin? Sorry.

AM: That would be 2.3 billion people because all of India is there too.

MG: 1.4 billion people. But yeah, exactly. You get really mad about that, as I’ve discovered.

Now, listen, I completely agree with Albert that, and this is again, part of the great irony of everything that’s been going on and I’m somewhat guilty of this myself looking at the dynamics of Russia and the moves that they were making and I think both Albert and I would still come to the conclusion says they’re going to take Ukraine and they’re going to take it in a much more violent fashion because now they’re really pissed.

TN: Yes.

MG: But the simple reality is that I think most people had described a degree of competence to Putin and Russia that has now become very clear that the authoritarian and central planning tendencies associated with that style of governance has its flaws. People are slowly waking up to this.

They’re now beginning to see this in China where it’s like well, wait a second. Maybe Xi’s not planning for the next 100 years. Maybe XI’s planning for the next two days to figure out where… without getting killed.

TN: That’s exactly it, Mike and I’ve been saying that to people for years. China does not think in centuries these guys are making it up as they go along. I’ve been inside the bureaucracy. I know it. They’re making it up as they go along.

So you hit it right on the head. They’re planning for the next two days or two months. They’re not planning for the next 200 years.

AM: Yeah. And the Chinese, they’re quite practical but it’s just too big of a country. I mean, there’s so many different regions and dialect. How do you keep something that big cohesive manner? You don’t.

TN: It’s hard. It’s a collection. It’s like the EU or four of the EU. But it’s very complex for one guy to manage. So guys, thanks very much for that. I really appreciate it and have a great weekend. Thank you very much.

AM: All right. Thanks, Tony.

MG: Thank you very much.

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This podcast was originally published in https://www.rthk.hk/radio/radio3/programme/money_talk/episode/810164.

Surging energy and food prices in the United States have sent inflation to a 40-year high. Consumer prices rose 8.5% in March, the fastest annual gain since December 1981. The monthly rise was 1.2%, the fastest jump since September 2005 and a sharp acceleration from February’s 0.8% increase. 

Russian President Vladimir Putin says peace talks with Ukraine have reached a “dead-end” and he accused Ukraine of deviating from agreements reached in Turkey. He said Russia’s “military operation” will continue, blaming Ukraine for “inconsistency in key issues” from talks and “fake claims” about war crimes.

The World Trade Organisation said that global trade could be cut almost in half and is expected to grow by 2.4% – 3% in 2022, lower than its previous estimate of 4.7% in October due to the ongoing conflict between Russia and Ukraine. The WTO said the war could lower global GDP growth by 0.7-1.3 percentage points to somewhere between 3.1% and 3.7%. 

Sri Lanka said yesterday it will temporarily default on its foreign debts amid its worst economic crisis in over 70 years. The country was due to pay a US$1bn international sovereign bond in July, part of a total of US$7bn of debt payments due this year. Sri Lanka’s foreign reserves stood at US$1.93bn at the end of March. 

Shanghai saw a drop in new Covid cases on Tuesday after ten straight days of record highs. The financial hub reported 23,342 new local cases for the day, compared with just over 26,000 the day before. However, it was being reported on Tuesday that authorities were backing away from lifting restrictions in several thousand low-risk areas. Residents can move around within their compounds but are still barred from venturing out onto the streets if their surroundings belong to higher-risk areas. Officials ordered another round of mass testing, at least the seventh in 10 days, in the highest lockdown zones. 

On today’s Money Talk we’re joined by Dickie Wong from Kingston Securities, Carlos Casanova of UBP and Tony Nash, Founder & CEO & Chief Economist at Complete Intelligence.

Show Notes

PL: This is Radio Three Money Talk. Good morning. It’s eight in Hong Kong. Welcome to Money Talk on Radio Three. From me, Peter Lewis. Here are the top business and finance headlines for Wednesday, 13 April. Surging energy and food prices in the United States have sent inflation to a 40 year high. Consumer prices rose 8.5% in March, the fastest annual gain since December 1981. The monthly rise was 1.2%, the fastest jump since September 2005 and a sharp acceleration from February’s zero 8% increase. Russian President Vladimir Putin says peace talks with Ukraine have reached a dead end, and he accused Ukraine of deviating from agreements reached in talks in Turkey. He said Russia’s military operation will continue, blaming Ukraine for inconsistency in key issues and fake claims about war crimes. The World Trade Organization said that global trade could be cut almost in half and is expected to grow by 2.4% to 3% in 2022, lower than its previous estimate of 4.7% in October due to the ongoing conflict between Russia and Ukraine. Wto said the war could lower global GDP growth by zero 7% to 1.3 percentage points. Sri Lanka said yesterday will temporarily default on its foreign debts amid its worst economic crisis in over 70 years.

The country was due to pay a $1 billion international sovereign bond in July, part of a total of $7 billion of debt payments due this year. Sri Lanka’s foreign reserves stood at just under 2 billion at the end of March, and Shanghai saw a drop in new covert cases on Thursday after ten straight days of record highs. The financial Hub reported 23,342 new local cases for the day, compared with just over 26,000 the day before. However, it was being reported yesterday that authorities are backing away from lifting restrictions in several thousand low risk areas. On today’s Money Talk, we’re joined by Dicky Wong from Kingston Securities, Carlos Casanova of UBP, and Tony Nash, founder and CEO at Complete Intelligence. The moderation in core CPI initially prompted a rally in stocks on Wall Street and sent US Treasuries higher. But stocks then gave up their gains as the session wore on, with the S Amp P 500 and Nasdaq falling for a third day. The S Amp P 500, which was up 1.3% at the high of the day, closed a third of a percent lower at 4397. The Dow relinquished a gain of over 360 points to close 88 points lower at 34,220, and as the composite index, which was up 2%, declined zero 3%, ending at 13,372.

In Europe, the regional Stock 600 index fell a third of a percent. Deutsche bank and Commerce Bank led losses for the index, with both falling more than 8% after an undisclosed shareholder unloaded roughly 5% stakes in both German banks. London’s footsy 100 dropped null. .6% and it was a volatile day for mainland China and Hong Kong stocks, which opened higher before plunging late morning and then staging a drastic rebound in the afternoon session with reports that the China National team was actively supporting the market. The rebound came amid calls from China’s market regulator that firms buy back shares and ask major shareholders to support stock prices amid a sluggish stock market. The Hangsting index had slipped half a percent by lunchtime to a four week low before rebounding to close 111 points, or half a percent higher at 21,319. Tech index was up two and a half percent in the morning session before dropping zero 8% at lunchtime and then rebounding to close 1.4% higher. The Shanghai Composite recovered from losses of 0.8% to close one and a half percent higher at 3213. $0.10 advanced 3.6% added 4.2% after China approved new online gaming titles for the first time since July.

In the commodities markets, brewing crude oil rose almost 6% to $104.87 a bowel. Gold is up close to 1% at $1,966 an ounce. The yield on the benchmark ten year treasury notes fell five basis points to two point 73% after hitting two point 83% early in the session. And in the currency markets, the US dollar is stronger this morning. The Euro is trading at $1.08 and a quarter cents. The Bucks at 125.5 Japanese yen Sterling is worth one point $0.30 and Hk$10.19, and the Chinese yuan is at six point 38, versus the dollar in offshore markets. Bitcoin this morning is about 1% firmer at $40,100. Around Asian stock markets this morning. In Australia, the SX 200 up about zero. 1%. Stocks in Japan have now opened the nicate 225, about three quarters of a percent higher. The Cosby in South Korea is half a percent higher, but futures markets pointing to a loss of about 70 points for the Hang Sein at the open this morning. Fine. Let’s welcome our guests. We have with us Dicky Wong, head of research at Kingston Security this morning, Dickie

DW: Good morning, Peter. How are you?

PL: I’m well, thank you. And also with us, Carlos Cassanova, senior Asia economist at UBP. Morning to you, Carlos.

CC: Good morning, Peter.

PL: And over in Texas, in the USA, we have Tony Nash, founder and CEO and chief economist at Complete Intelligence. Thanks for joining us again, Tony.

TN: Thank you, Peter.

PL: Let’s start in the US with those inflation numbers. Surging energy and food prices in the United States have sent inflation to 40 year high. Consumer prices rose eight and a half percent last month. That’s the fastest annual gain since December 1 981. The monthly rise was 1.2%, the fastest gain since September 2005. Excluding food and energy, core CPI increased 6.5% on an annualized basis in line with expectations, core inflation rose zero. 3% for the month energy prices, they were up 32% year on year food prices, they jumped 8.8%. And shelter costs, which make up about a third of the CPI, rose by 5%. Tony, you’re over there in the US, so let’s start with you. It’s hard to find very much good news in this data. But who do workers blame for this?

TN: I think a lot of Americans really do see inflation rising as Joe Biden has been in office. It’s accelerated during his tenure. So whether it’s his fault or not, he’s sitting in the seat while it’s happening. There is a lot of resource from the White House going into saying that this is Putin’s inflation responsibility, claiming that inflation didn’t really accelerate until the war started. But again, if we look back to the rapid acceleration of inflation, it really started, I guess you could say maybe October. But we’ve been at this for a year or so. I think Americans working level, Americans, whether they’re working class, blue collarly workers, they’re obviously the hardest hit by this. And for workers at those levels, it’s really looking at the political issues, not something that’s happening on the other side of the world.

PL: So what can Joe Biden do to try and bring inflation under control? What are people expecting to do?

TN: Well, I think one of the really easy things that he could do, which I’m in Texas. So this is a very biased view, but since Joe Biden has come to office, he’s put a lot of restriction on the drilling and transport of oil and gas. And so there could be a lot of alleviation of energy prices if the White House would remove the regulations that they put in place on the drilling and transport of oil and gas. The White House also killed a pipeline of Canadian crew or a pipeline from Canada that would transport heavy crude to American refineries, which is what’s needed for petrol or gasoline here. And Americans actually don’t necessarily use the light sweet crude that’s refined or drilled, say in Texas. They use the heavy sour crew that say from Canada and from Venezuela. So the pipeline from Canada would have been very helpful to keep prices stable in the US, energy prices stable in the US, but that was killed literally on the first day of the Biden administration.

PL: Vicki, what is the impact for markets and particularly out here, US markets? They rallied initially because they took some optimism for the fact that the core CPI had declined slightly from last month, but they lost those gains. How do you think markets are going to respond to this?

DW: Well, in terms of inflation, I guess it’s an overall problem not only in US but basically everywhere else, also in China. And you may say, like Russia invasion of Ukraine intensified the situation of inflation in US, but inflation is already there. It’s already a problem in US. So in terms of the market expectation, I would expect first of all will probably have another rate cut for even 50 basis points in May and continue to high interest rate until the year end. At the year end, maybe the sets and target rates will be like two point 75 even at this really high level compared to one year ago. So in terms of the year car still going on, keep going up there’s no question ask but already probably the market already digest this kind of situation like you asked me have to continue to high interest rate. But in terms of in mainland China is another thing. Even though China official CPI rose by 1.5% in March, still below US CPI or everywhere else in Europe. So expecting that PVoC may have some kind of room to have an outer round of rate card or triple archives.

But in terms of the situation now in mainland China it’s pretty dilemma because if they really want to have another round of fresh cut of interest rate or even triple R may intensify the situation now because the ten year value of the US Treasury is slightly higher than the same period treasury in mainland China. Now it may be some kind of money outflow from mainland.

PL: Is the window of opportunity for the PPO to go and cut rates? Is it closing the worst this inflation data gets? It doesn’t leave them much opportunity, does it?

DW: Exactly. So I don’t really expect a rate cut in the near term but maybe I expect Arrr cut instead of a rate cut because rate cut create a high pressure of capital outflow. We have already seen in March no matter in the bond market, also in the Asia market from the stock connect. So people actually getting money out from mainland China. So this is also another reason why recently the Asian market underperformed even the US market because the capital outflow. So it’s not a good timing for China but then you still have to think about it, what they can do because capital outflow and intensified the situation in Russia and Ukraine. So also create another round serious pressure. The CPI future growth is mainland June.

PL: Let me bring Carlos in. Carlos, this is not an easy situation for central banks to deal with, is it’s? Because this is not demand led, this is a supply shock, correct?

CC: I think what we saw in the market this week was some investors pricing in the probability that inflation was peaking within the next few months. We think it’s a little bit early to say we are expecting around eight to 9% inflation in the US in the coming months and of course then a gradual descent, but it will nonetheless remain significantly higher than expected in 2022. And as Tony was mentioning, this will be front and center with Biden facing elections in the fall. So I do think that central banks around the world are going to be very focused in trying to address the demand side factors or drivers of inflation even as they have very little control over the supply side factors. And on that note, just keep in mind that we have this conflict in Ukraine that’s leading to supply chain disruptions. But we are already seeing disruptions to global shipments through the Port of Shanghai following from the lockdown there. So it is likely that these supply factors will continue to exert pressures in the coming months. So in my opinion, I think central banks will unfortunately remain in this very hawkish trajectory even though they don’t have 100% control.

PL: And what does the PPOC do? That’s probably the one major central bank in the world that would like to ease monetary policy to cope with the slowdown there on the mainland. It’s in a difficult position as well, isn’t it?

CC: Ppoc is in a very difficult position because we’ve seen authorities voice their concerns about the lack of easing quite a few times since the middle of March, and yet PPOC has an east the risk of outflows is real. We saw that China’s premium over the US in terms of its ten year yield is completely gone. So any form of eating will exacerbate potential capital risks. But you have inflation creeping up potentially above the 3% target set by the beginning of the year. So the conditions could turn less accommodative very quickly. So PPO has a narrow window of opportunity in my opinion to deliver stimulus and a triple our card won’t be enough given what is happening in Shanghai, given that we have -40% sales in the housing sector and that accounts for a third of the economy is not going to be enough to get us from where we are now to 5.5% growth by the end of the year. So unfortunately, they should be doing a rate cut even if that exacerbates capital outflows and even if the impact of a rate cut might be more muted as most people remain in some form of lockdown.

So it’s less easy to go out and spend money. I think that is something that PVC has been discussing, but it doesn’t matter. They need all hands on deck in order to reach the fact growth target by the end of the year and really running out of time given that inflation is rising.

PL: Tony, you mentioned energy prices, but of course, food prices are also jumping as well. They were up 8.8% over the period. We’re seeing global trade slow quite dramatically now. And the UN saying that the war in Ukraine is causing a huge leap in food prices. The UN food prices index is at a record high. It was up 13% in March are on consumers feeling that as well. Over in the United States, this rise in food prices?

TN: Yeah, for sure. Americans are feeling the rise in food prices. I think, however, the most acute food price rises will be in places like Lebanon and Egypt and other places that are more directly affected by the Ukraine and Russia war. Here in the US, we do have pressure on wheat and corn prices, corn prices or maize prices. There’s upward pressure on those prices partly because the White House just said they want to add corn to fuel here to in their minds, reduce fuel prices. So there’s pressure on corn both to feed people and for fuel now and of course, with proteins, those prices are up as well double digits. So Americans are feeling it really all around, but not as acutely as some of the people in Europe and the Middle East will as the pressures from, say, Ukrainian and Russian exports hit those markets.

PL: We’ve already had an energy shock in many parts of the world. Do you think we’re heading for a food crisis that we’re going to see shortages, we’re going to see prices soaring, and maybe, as unfortunately always happens in this case, it affects the poorest parts of the world the most?

TN: Yes, it does. And sadly, I think that is the case because places like Ukraine and Russia do provide so much mostly Ukraine provide so much weed and maize and cooking oil to some of these markets. So, yes, I definitely think that that is.

PL: Our Americans questioning President Biden’s support for Ukraine. When you start to see the costs of this mounting. They’ve banned American. They banned Russian oil and gas imports. That’s helping fuel price rises. They’re seeing the price rises in food. Are they starting to question whether or not the US is on the right track supporting Ukraine?

TN: I don’t know. I know that a number of Americans have questioned it from the start, not that they don’t support Ukraine, but Americans are worried about being directly involved, meaning sending troops to Ukraine. I think Americans generally are comfortable sending weapons and supporting with that aid, but not necessarily with the troops.

PL: Okay, Dickie, let’s talk about the lockdowns up on the mainland. There was a slight decrease in COVID cases yesterday, but we’ve had ten days now of record cases in Shanghai. Guangdong, Guangzhou has gone into a partial lockdown as well. Now, what sort of impact is this having on the economy?

DW: Well, that’s so obvious. The big lockdown in Shanghai may give some kind of pressure to not only the first quarter GDP, but indeed the 5.5% annual gain of the GDP. It’s probably not that easy to achieve. So I do see some kind of civil linings because China’s government recently added some of the approval of the online and cellphone gaming. And also when we talk about the first quarter lending also hits record to 1.3 trillion before PVC take any action in the first quarter because last year PPOC cut LPR rate triple R, but not this quarter. So I would expect definitely I do agree that PPOC has to take some kind of action like seriously to treat the problem, especially the lockdown in Shanghai. And 5.5% is not something easy. So they have to no matter fiscal policy, monetary policy, and et cetera regulations has to be used, especially some of the tech companies.

PL: Let me ask you also because I want to ask you about the markets as well. We’re seeing a lot of calls now from Premier Leakage, the State Council to take steps to support the economy and also from the regulators now to support the market the China Securities Regulatory Commission wants shareholders to buy back stock. It wants Social Security funds, pension funds, trusts, insurance companies to increase their investment in the markets. What are your thoughts on this? Isn’t this the regulator going way over their skis here? It’s not the job of the regulator, is it to tell companies to buy back more shares and to put public money into the stock market? Surely this is way, way beyond what the regulator should be doing.

DW: Well but in terms of the mainland market, the HR market, this is probably the regulator will regularly do I know they do it but it’s wrong isn’t it wrong that the regulator should do that?

PL: It’s sort of almost an outrageous abuse, isn’t it? The regulator should be there to make sure the market operates fairly and efficiently to crack down on abuses but not do this?

DW: You may say so but the regulator to mainland because you can see intensifying the tension between China and US never gone and also like recently no recently just yesterday the holding foreign companies accountable action called Hscaa a fresh round of addiction of a lot of Chinese companies like more than twelve companies this is the fourth round already it gives some kind of pressure to the ADR market yesterday in US and definitely some of the ADR may open slightly lower today although the pressure may not be as high as the previous one or the first round of the addiction of the Hscaa but because of the tension of these two countries China may have to do their own thing so in terms of like Green Valley always comment about the stock market and try to interfere with the stock market I will not say good or bad but at least it would be some kind of support to the local Hong Kong stock market so I believe we find support at 21,000 because investors may expect or they will expect like PPOC will take action very soon so it may help to stabilize the overall sentiment in Hong Kong as well as in Asia Carlos.

PL: We’Ve heard Premier Leakage now has issued his third warning about economic growth in under a week what can they do?

CC: Well, we do expect to see weaker growth in March, April and May so those will be the three weakest months I think that in addition to doing more monetary policy and fiscal policy support the big question Mark is will they announce some easing of restrictions or at least provide some degree of regulatory clarity for global investors? On the housing and also tech front there’s a whole debate around this. Recent regulations surrounding dual circulation in China points to some additional regulatory headwinds for some of these companies but I think that the issue is not so much regulation it’s more the lack of visibility so they are likely going to at least provide that in the coming weeks. And of course, if this contraction is bigger than expected in the first half, and I did use the word contraction because I do think that GDP has a chance of actually declining in Q two, then the measure of last resort in order to achieve that growth target would be to effectively inflate the housing sector again in Q four. But we should be back to square one. So I think they will try as much as possible to use more Australian and other channels to try to prop up the economy so that growth doesn’t follow the cliff.

But they are running out of time and we do hope that they will announce something big in April.

PL: Okay, Tony, final word to you. I know all sorts of things go on on the mainland that perhaps wouldn’t go on elsewhere, but when you see the regulator trying to arm twist companies into buying back their own stock and get public funds to get the market back up, what do you make of that, Peter?

TN: It reminds me of June of 2015, if you remember, when markets on the mainland really fell pretty hard. There is pressure domestically in China for people to buy shares for a patriotic reason. Even within the Chinese bureaucracy. There was pressure for Chinese bureaucrats to buy shares. So I think they’re just doing it out loud now and they’re doing it for the companies themselves. But to me, when I first saw this news, it really was an Echo of June of 2015 when markets fell and there was real pressure on Chinese retail investors to buy the dips and to support the market. And a lot of them lost. I knew people there who lost 2030, 40% of their wealth because they were buying patriotically.

PL: Yeah. Okay. Well, that’s a fair warning. Thanks very much. That’s Tony Nash, founder and CEO and chief economist at Complete Intelligence. Dickie Wong, head of research at Kingston Securities, Carlos Casanova, senior Asia economist at UBP. You’re listening to Money Talk on RTHK Radio Three. Let’s take a final look at the markets for today. In Australia, the SX 200 up zero 2%, the Nico two five in Japan rallying as well, up zero 8%. The Cosby is up. A third of the cent in South Korea does look like, though the hangsting is going to fall slightly, about 50 points or so at the Open later on this morning. Thank you very much for listening this morning. Please join me again for the final time this week in a holiday shortened week at 08:00 tomorrow. Stay tuned for covered updates after the news with Jim Gold and Anna Fenton. The weather forecast, mainly cloudy, few showers going to be hot with sunny intervals during the day. Maximum temperature of 29 degrees, mainly fine and hot during the day tomorrow. And on Friday, the temperature right now 25 degrees, 82%. Relative humidity 32 here’s Andy Shawski with the half hour news.

AS: Thank you, Peter. The head of the Government’s policy innovation and coordination office says the authorities have expanded it’s $10,000 subsidy for people who have recently lost their jobs Due to covet. Officials say they have received 470,000 applications for the subsidy. In February. They expected only 300,000 Would apply. Doris Hoe said that’s because more people have lost their jobs.

DH: This is partly because more people were out of employment in March When the unemployment situation was in February and partly because we expanded our scheme subsequently to cover employees working in closed app premises such as affinity centers and beauty salons and who were forced out of work about their employers.

AS: Medical Association President Choi keen says the government initiative giving private doctors access to oralcobid drugs will definitely be effective in preventing severe cobalt infections. Authorities on Monday said that private doctors could request antivirals through a dedicated electronic platform. Doctor choice said this is a sensible arrangement.

DH: The patients usually see the GP first before they go to the emergency Department before they get very ill, so it’s the first stage that the antivirus are infected. So if they are seen at the first stage and given the medication, they will not proceed to a very ill stage so it is effective and useful.

AS: Police in New York are searching for a man who shot ten people at a Brooklyn subway station during the morning rush hour. Six others were also hurt, Mostly through smoke inhalation. None of the injuries are life threatening. The New York city police Commissioner, Ketchen Sewell, gave details of the incident just before 824 this morning.

KS: As a Manhattan bound and train waited to enter the 36th street station, an individual on that train donned what appeared to be a gas mask. He then took a canister out of his bag and opened it. The train at that time began to fill with smoke. He then opened fire, Striking multiple people on the subway and in the platform. He is being reported as a male black, approximately 5ft five inches tall with a heavy build.

AS: The city of Guangzhou has reported 13 new COVID cases. Health officials in the city say the new infections were linked to previous cases, but they warned that transmissions might have been taking place for some time before the new cases were found. And the next few days will be critical. To contain the outbreak, local authorities have been conducting mass testing to screen out patients primary and secondary schools of suspended face to face class.

Categories
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Business and Market Discussion

This podcast was originally published in https://www.rthk.hk/radio/radio3/programme/money_talk/episode/808974.

Shanghai on Tuesday reported a surge in local asymptomatic cases as the entire city of 25 million people remains in lockdown. The city reported 268 local symptomatic cases and 13,086 local asymptomatic cases, including 6,788 from Pudong. That’s a 48% increase from the previous day. China’s Vice Premier Sun Chunlan ordered local officials to curtail the outbreak “as soon as possible,” on a visit to the city. Media outlet, Caixin, has reported that close contacts of infected people will be moved to neighbouring provinces. This could potentially involve hundreds of thousands of Shanghai residents.

The US, EU and G7 group of nations are set to impose broad new sanctions on Russia, after President Macron accused Russia of war crimes and President Joe Biden called for a war crimes trial. The US will ban all new investment in Russia. The EU proposal, which will need backing from the 27 member states, will include a ban on Russian coal. Germany said it would temporarily take control of a German unit of Russian state-owned Gazprom, which operates some of Germany’s largest natural gas storage facilities. in a bid to secure gas deliveries. 

The US Treasury said Tuesday that it will not permit any dollar debt payments to be made from Russian government accounts at US financial institutions. The move is designed to heap further pressure on Moscow and force it into a choice between using dollar reserves held in its own country to pay bond investors, spending new revenue, or going into default.

Federal Reserve governor, Lael Brainard, who is awaiting Senate confirmation to become the next vice-chair, said yesterday that the Fed will begin a “rapid” reduction of its US$9tn balance sheet as soon as its next policy meeting in May and is prepared to take “stronger” action when it comes to raising interest rates in order to bring down inflation. She added, the Fed was prepared to take “stronger action” when it came to tightening monetary policy, suggesting support for delivering half-point rate rises at forthcoming meetings.

On today’s Money Talk we’re joined by Iris Pang at ING Wholesale Banking, Jack Siu from Credit Suisse and on the phone from the USA, Tony Nash of Complete Intelligence. 

Show Notes

PL: Good morning. I hope you have a great day off yesterday. This is Peter Lewis back with your business and finance news on Money Talk on Radio Three. The Times 8:03 in Hong Kong on Wednesday, the 6 April. Shanghai on Tuesday reported a surge in local Asymptomatic cases as nearly the entire city of 25 million people remains in lockdown. The city reported 268 local symptomatic cases and 13,086 local Asymptomatic cases, including 6788 from Poo Dong. That’s a 48% increase from the previous day. The US, EU and G seven group of nations are set to impose broad new sanctions on Russia after President Macron accused Russia of war crimes and President Joe Biden called for a war crimes trial. The US will ban all new investment in Russia. The EU proposal, which will need backing from the 27 member States, will include a ban on Russian coal. Germany said it would temporarily take control of the German unit of Russian stateowned Gas Prom, which operates some of Germany’s largest natural gas storage facilities, in a bid to secure gas deliveries. The US Treasury said Tuesday that it will not permit any dollar debt payments to be made from Russian government accounts at US financial institutions.

PL: The move is designed to heap further pressure on Moscow and force it into a choice between using dollar reserves held in its own country to pay bond investors spending new revenue or going into default. Federal Reserve Governor Lyle Brainard, who is awaiting Senate confirmation to become the next vice chair, said yesterday that the Fed will begin a rapid reduction of its $9 trillion balance sheet at its next policy meeting in May, and it’s preparing to take stronger action when it comes to raising interest rates in order to bring down inflation, suggesting support for delivering half point rate rises at forthcoming meetings. On today’s Money Talk, we’re joined by Iris Pang at Ing Wholesale Banking, Jack Siu from Credit Suisse, and on the phone from the USA Tony Nash of Complete Intelligence. On Wall Street. Overnight, US stocks have fallen following Fed Governor Lao Brain odds comments suggesting support for 50 basis point rate increases and a rapid reduction in the Fed’s balance sheet. The SP 500 fell 1.3%, to 4525. The Nasdaq Composites lost 2.3% to 14,204. The Dow slipped 281 points to 34,641. Shares of Twitter rose 2% overnight following a 27% jump on Monday after it was revealed that Elon Musk had bought a nine 2% stake in the company.

PL: Earlier today, Twitter announced that the company will appoint Musk to the company’s board of directors, and shortly afterwards, Elon Musk tweeted that he looked forward to making significant improvements to Twitter in the coming months. In Europe, the stock 600 index rose zero. 2%. London’s Footy 100 climbed three quarters of a percent Hong Kong and mainland China markets were closed yesterday for the Chingling festival. In the commodities markets, oil prices fell slightly, with Bunk crew settling down 1.8% at $106.64 a barrel. Futures linked to Europe’s wholesale coal prices rose more than 10% $290 a ton after European Commission President Ursula von der Leyen said the EU would impose an embargo on Russian coal. Gold is down half a percent at $1,922 an ounce, and following Leo Brain odds remarks, the sell off in US Treasury has accelerated. The yield on the ten year bond surged 16 basis points to an almost three year high of two point 55%, the biggest daily move in two years. And the yields on policy sensitive two year notes also rose, jumping ten basis points to two point 53%. In the currency markets, the US dollar index is up half a percent.

PL: The Euro is trading at 1.9 cents, the Bucks at 123.5. Japanese yen Sterling is worth one point 33 quarter cents, and Hk$10.24 the Chinese yuan is at six point 38 versus the dollar in offshore markets this morning. And Bitcoin is trading 1.3% weaker at $45,500 round. Asian stock markets this morning. It’s all looking to the downside. The SX 200 in Australia is off a third of a percent. Stocks have just opened in Japan, where the Nico 225 is down 1.3%. Similar story in South Korea. Stocks there of zero. 7% at the open futures markets, pointing to a decline of about 70 points for the Hang Segue later on this morning. At the Open, the time is eight or eight and a half. Let’s welcome our guests. We have on the phone Iris Pang, chief greater China economist at Ing Wholesale Banking. Morning to your Iris.

IP: Morning, Peter.

PL: And also with us is Jack Sue, chief investment office of a Greater China at Credit Scores. Morning, Jack.

JS: Good morning, Peter.

PL: And on the phone from the USA, we have Tony Nash, founder and CEO and chief economist at Complete Intelligence. Welcome back, Tony.

TN: Thank you. Good morning, Peter.

PL: Let’s start in Shanghai. A surge in local cases there. The city has reported 268 symptomatic cases over 13,000 local Asymptomatic cases. That’s up almost 50% from the previous day. And the city remains in lockdown for mass testing. It was supposed to have come out of testing yesterday. A media outlet, Kaishin, has reported that close contacts of infected people will now be moved to neighboring provinces. Iris, this sounds it’s getting serious, isn’t it? It’s lasting a lot longer than we thought. This lockdown, the cases seem to be getting worse. What are the consequences of this going to be on China’s economy?

IP: It is actually quite long from my perspective, and because they also come to close contact. So the number of people affected is a large group. So these people cannot work, because if the close contact is moved to another province, they cannot work. And I believe that they will be isolated. So it depends on now how many days they will be isolated. I believe that it will be at least 40 days. So almost the whole month of April is wiped out and Shanghai is a big city. So it’s wiped out around two percentage points of GDP.

PL: Two percentage points for this quarter.

IP: Yeah, for this quarter.

PL: So that means that China is not going to meet its growth target of 5.5% for this year because Shanghai is what, 4% of the country’s GDP.

IP: Yeah. Anyway, my focus originally before this cold outbreak is actually 4.8% lower than the target of 5.5% and now it is 4.3% even lower.

PL: Jack, what are your thoughts on this and also in particular its impact on Chinese markets?

JS: Well, we have a less pessimistic forecast at quite a twist. We think in the second quarter GDP for China, the Shanghai situation will knock off about 1.2% to the quarterly GDP. But in a full annual GDP hit, we calculated about 9.3% hit to the full cars. But the thing is the situation is leading to the authority to come up with more stimulus and setback is regulatory crackdown. And so similar measures are coming to offset the situation right now. So if the tariff situation lasts for the next few weeks, we do see some downside risk. So we are hopeful that in two to three months time we will be returning back to Nova. This is exactly what we expect to happen in Hong Kong, which is about two months ahead of the mainland. In terms of the culprit situation.

PL: We haven’t seen much signs of stimulus so far from the authorities. They seem to be fairly restrained. Do you think it’s coming?

JS: Well, we have seen that workership policy for housing market has continued relaxed. We have seen that the listing rules for us listed companies have relaxed. We have seen that the claim, the message from the central party that they will reduce the crackdown pressure on tech companies. There’s a lot for the investors that digest. We think we are hopeful that it’s impact that lifting the crackdown itself will add a 0.3% GDP. This is an indirect impact. It’s hard to calculate, but we are quite hopeful. We are above consensus and GDP forecast. We’re still sticking to our 5.9% above consensus forecast for this year.

PL: Okay, Tony, let me ask you for sort of an international perspective on this because obviously Shanghai is China’s largest Port. There’s a lot of factories there that are crucial to global supply chains. Is this being noticed and talked about in the US and how do you see it from there?

TN: Oh, sure it is. Yeah. Today a friend told me that the wedding all bonded area at Shanghai Port was closed, I think until April 11 because they found one Kobe case. And I think the view from here is very surprised because I live in Texas. We have been open since June of 2020 effectively. And we’ve had a lot of covered cases and business and life has pretty much gone on. People come to the office when they’ve tested positive for COVID. I know Texas is a little bit extreme, but from this side the concern is the impact on supply chains. So obviously we have inflation with commodities, but the constrained supply of goods of manufactured goods, the secondary impacts of inflation that we would see in manufactured goods simply because of commodities, inflation will be accentuated because of the bottlenecks for manufacturing. So what I have been telling recommending people in the west is that Western governments have to have a discussion with China to accept that Kobe is endemic, that has to be accepted for the health of the global economy.

PL: They don’t seem to want to discuss that, do they? I mean, they are sticking adamantly with this, what they call dynamic zero plan, right.

TN: But it’s Peter, countries cannot live this way and societies cannot stay locked down this way. And the global economy will have that double accelerator of inflation if manufacturing bottlenecks continue. I mean, we already have a double accelerated, but it will accelerate even more. So you talked about the Fed activity. The Fed potentially in intermediate rise and the 50 basis point rise in May and June is becoming more likely. And you can’t necessarily offset supply side shocks with monetary policy. All they can really do is demand destruction. And so with Brennard talking about both interest rate rises and reducing the balance sheet, the Fed is really focused on demand destruction and they’re going to have to accelerate that if China remains closed. So I believe that behind closed doors Western governments are having discussions with China saying, look, you have to accept this as endemic because most of the rest of the world already have.

PL: Iris, do you agree with that? Do you think this zero covert policy that’s being maintained on the mainland is not going to be sustainable? And if it does, it’s not only going to damage China’s economy but it’s going to damage the global economy?

IP: I think it is not a question for us. It’s a question for the Chinese government. Back in the two sessions in early March, there was a signal that the government seems to decide to move away from dynamic clearing because they didn’t mention it in the two sessions and the government work report. But then the outbreak in Hong Kong makes them really worried. And therefore, for example, in Sunshine before Shanghai, the government moved very swiftly to have the mass test and then broken the infection link. But Shanghai is a bigger city than Shenzhen and can’t escape from this. So I think it is the willingness of the central government to move away from the idealistic dynamic clearing. It seems that they are not because of several things that is different between China and the Western side of the world. The first thing and the most important thing is the capacity of hospital. China’s capacity of hospital per capita is actually very low. So in such cases life is more important than economic growth.

PL: Jack, this is all coming at a difficult time because just as we’re seeing the slowdown on the mainland, we’re also getting talk of even more aggressive interest rate rises from the Fed. Markets are pricing in now nine rate rises, nine quarter point rate rises this year, which means there’s going to have to be some half point rate increases. We had loud bridge last night talking about an aggressive reduction in the balance sheet. Is this going to start to affect stocks? It already is clearly on the bond markets. But do you think this is going to start to affect stocks?

JS: Well, number one, on the previous topic, I think China is fully aware of the situation that it cannot live in a serial corpus strategy forever. What we are waiting for is the availability of treatment such as Paxlon which is a proof drug for onshore China. When the supply of drugs become widely available to mainland hospital or healthcare system which would likely at the beginning of the year end or beginning of next year, we will have a gradual shift to lift with Colbert in 2023. This is our forecast number one. Number two, in terms of rate hikes, the third is expected to hide rates by 50 basis point in our view in an early May meeting and followed by another 125 basis point by year end and then another 100 basis points by next year subject to the development of Russia’s Ukraine situation and whether there is a rate hike related hit to the economy that would lead to less consumption in the United States. These are very concerning factors to consider because if I think about my mortgages in Hong Kong which is linked to the Fed rate, if mortgage rate increased by another 150 basis points in Hong Kong, if say you have a mortgage of HK$5 million, $87,000 this year, the money that’s been giving out to the population is only $10,000.

I mean the consumption impact is definitely a concern in terms of how it’s going to hit economy. But in terms of investment, right. We have to focus on areas that is not really driven by consumers. Like in China we have infrastructure led policy where we do see earnings rising in later sectors. In the new energy sector we do see earnings rising because of the global transaction in the green energy. And in terms of global investment we do see in the short term US Equities can go higher. I think beyond that we have to be very selective in this sector strategy because the banks are going to be beneficiaries of rising interest rates and high inflation. The energy companies, we think oil price will remain above 100 this year and therefore they will still be profitable and we have to be invested in SME sectors where because they are able to reprice because inflation pressure is coming. At the same time as business we open in the west, they are able to charge slightly higher price on the back of high inflation, and they can do that. And those companies will be more profitable than the last couple of years.

So we have to be selective when investing in this new environment we’re in.

PL: Okay, Tony, let me ask you about Laurel Bernard’s comments overnight. She’s talking about an aggressive reduction in the balance sheet. She seems to be suggesting that she supports now 50 basis point rate hikes. We’ve obviously seen a big reaction over the last couple of weeks in the bond markets to this idea that the Fed is going to get more aggressive, not really so much in stocks. Maybe today more concern. But do you think at some point investors are going to have to take more notice of just how aggressive the Fed is talking at the moment?

TN: Oh, absolutely. And I think Brennan’s speech today was an important milestone because Lornad is seen as an Uber Dove in the Fed. She is seen as not wanting to get bullish at all. So when she comes out with a speech like she did today, talking about rate rises in QT, at the rate that she was discussing today, people have to sit up and notice because she is probably at the extreme end of dovish of the Fed group. So I think people are finally starting to realize that this is serious in January. If somebody would have said that we’d see 50 basis point rises in May and June, you would have been lapsed out of a room and QT on top of that. But things have changed really quickly on the inflation front, and the treasury is pushing very hard to have some action taken on inflation because it’s an election year in the US and they don’t want to see double digit inflation going into elections in November.

PL: Okay. Iris, we seem to be facing a trifecta of shocks at the moment. Don’t we have the Fed talking a lot more aggressively? We have the Ukraine war, which is creating a global supply problem, and the slowdown in China as well. This is all coming together at a bad time.

IP: Yeah, you’re right. But for China itself, the economy, I think the most important thing for this time is whether to control covet successfully within a short time frame. So I expect it only affects April. Hopefully it doesn’t expect it doesn’t expect May because the long holiday in May. And I am also looking for stimulus, but not those mentioned by Jack. I’m looking for stimulus in infrastructure projects, so that could be really fast kick off of the growth.

PL: Again, Jack, switching topics, I want to ask you about US listed Chinese stocks. Chinese authorities look like they’re preparing to give US regulators full access to the audit reports in the hope that that will keep them mainly listed in the US. The Csrcs confirmed that it’s going to change confidentiality laws that prevents its overseas listed companies from providing sensitive financial information to foreign regulators. How big a game changer is this and is this supportive for Chinese markets?

JS: I think this is very supportive and quite positive to the Chinese equity market in general, because removing the listing risk for more than two thirds of the company listed in the United States suggests that the selling pressure in these equities will substantially reduce because the listing risk no longer exists for most of them. Secondly, the market would begin to price out the listing or regulation risk premium from both the US and the China side. In other words, the discount we’ve been seeing in these stocks in the last one year or so will continue to reduce. And now we are left with whether earnings can continue to rebound in the current environment because despite this risk premium being removed, what we’re seeing is the valuation of these companies have been increasing, but the earnings of these companies have not been increasing and not being revised higher. So what we are looking for now is there’s probably more room, more upside for valuation of these companies to rise further. But investors have to be aware if in the next couple of quarters earnings do not start stabilizing or rebounding, then there may be an opportunity to take some profits after the rebound.

JS: For now, we think there’s more upside. We think the Hang Seng Tech index, which is the main Beneficiary listing in Hong Kong, are likely a better investment than the Hangstang index itself.

PL: Tony, I’m wondering out here, as you’ve heard there from Jack, people are taking quite a positive view of this that’s going to be quite supportive of stocks. But I’m wondering if investors here maybe getting ahead of themselves because we still don’t know yet what the view of US regulators is on this. I know it’s hard to look into their minds, but do you think there’s enough here to satisfy them?

TN: Yeah, I think you’re right to be cautious, Peter. I think it is getting a little bit ahead of itself now, but also the large US portfolio managers that I’ve talked to have said that they’ve been told that they must be very cautious with investments in China. So if that is happening among the large portfolio managers in the US, then this change could be helpful. But I don’t necessarily see it clearing the way for a massive kind of acceleration evaluations of Chinese companies. I think the best thing that can happen for Chinese companies, for example, in tech is a big stimulus that’s going to funnel money into tech that would help evaluation. So investors say in the west could see that those profits, as Jack talked about, are actually coming in to match some of the revenue rises. But while the regulatory aspects will help.

PL: I don’t necessarily see that they will provide a major thrust of investment from American portfolio managers and also the companies themselves under these rules have to decide what is sensitive information and what can’t be handed over to US regulators. So there’s still pressure on them.

TN: That’s right. And it’s political, right? What? Sensitive information is very political.

PL: Yes. How do you see this?

IP: I have no comments on this.

PL: Okay. Let me ask you. Tell me why you’re here. As a final thought, let me ask you about Twitter. We’ve seen this 30% share price jump in two days now after Elon Musk said he owns 2% of the company, has just been appointed to the board. Interestingly. When he ticked his box on the regulatory filing, he indicated he was a passive investor in Twitter. Do you believe that? What’s in his mind? Why does he want to do this?

IP: Yes, please, go ahead.

TN: I’m sorry, Iris.

IP: All right. Thank you. I think it is very difficult to find evidence of anything that has happened. Right. Unless we have the CCTV to check again. So it is very interesting that a CEO is saying something like that and it also means that if it is true, then it is more careless. If it is wrong, then what’s behind it? He could be maybe have some other intention that we don’t know. So I would rather stay away from it.

PL: Totally fine. And work for you on this. What do you think is his mind here? Is he really a passive investor?

TN: Well, I think he’ll be very active in terms of his board position. And I think there are a group of technology entrepreneurs, Mark Andreessen, Elon Musk, other people who are becoming more aggressive in trying to pull tech away from a political alignment. Tech in the US is seen as being very leftward aligned. And I think some of these guys who have a more middle ground view are trying to pull tech back to the middle. Twitter has been very left aligned, blocking Donald Trump and a lot of people on the right. And I think these guys understand that if they want to have viable products for half of America, they have to move back toward the middle. And I think this is the first action of what could be many over the next couple of years to try to pull these companies back toward the political metal.

PL: Okay. Well, thank you very much for your comments. You heard that Tony Nash, founder and CEO and chief economist at Complete Intelligence, Iris Pang, chief Greater China economist at RNG Wholesale Banking and Jackson, chief investment officer for Greater China at Credit Suisse. You’re listening to Money Talk on RTHK Radio Three. A final look at the markets for this morning. In Australia, the SX 200 down a third of the K two five in Japan is off about one and a quarter percent. The Cosby is also down in South Korea around about two thirds of a percent. And it looks like the Hang Seng is going to lose about 70 points at the Open coming up after the news on Radio Three Covet updates with Jim Gordon. Anna Fenton, the weather forecast for today five hot and dry during the day, maximum temperature of about 28 degrees, and the outlook is for it to be mainly fine and dry in the next few days. Hot during the day. Temperature right now is 21 degrees and it’s 80% relative humidity coming up to 832. Here’s Andrew Shawski with the half hour news.

AS: Thank you, Peter. Professor John Burns from the University of Hong Kong says the chief executive’s decision to not seek a second term was well expected.

JB: Kerry Lam has had a very hard time, a very difficult five years. She started off with great promise, but by 2019 we had the chaos in Hong Kong, which the government is partially responsible for and has yet to accepted responsibility for that. I think the central government was not happy with that. And then we have the management of COVID.

AS: A spokesman for the restaurant trade says he’s concerned that it won’t benefit from the latest round of consumption vouchers, which will be released tomorrow as social distancing curbs on eateries are still in place. Last year, eateries took a third of the share of vouchers, said the President of the Hong Kong Federation of Restaurants and Related Trades, Simon Wong. But this year, with restaurants only allowed to see two people per table and with dine in not allowed after 06:00 p.m., Mr. Wong expected that figure to fall.

TN: And this time I assume that because of this social distance we can only get about 15% of the share and we still have to wait until the second round of lifting of the social distancing measures.

AS: The Ukrainian President, Vlogalensky, has told the UN Security Council Moscow must be held accountable for the atrocities committed by the Russian Army during its occupation. Mr. Zelensky showed a short graphic video which included pictures of victims and mass graves and called for Russia to be excluded from the Security Council. The BBC’s not atopic, reports.

BBC: President Zelensky’s address to the Council was devastating. He said the most terrible crime since the Second World War had been committed in Ukraine. Civilians in Bucha were killed in their homes, crushed by tanks, women raped and killed in front of their children. He accused Russia of deliberately killing as many civilians as possible to leave the country destroyed. And in Runes, which Moscow denies, he urged reforms for a more effective UN for the next generation.

AS: More than 10 million people have now fled their homes in Ukraine because of the Russian military campaign, and further accounts of devastation and allegations of possible war crimes are emerging from areas of Ukraine from which Russian troops have withdrawn. Police in the town of Bora dyanca, to the northwest of capital KIV, said there could be hundreds of people trapped in the rubble beneath bombed out blocks of flats. Local people claim that Russia troops fired at those who attempted to dig out the victims the news from RTHK.

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If Recession Is Coming, Does Jay Powell Still Raise Rates?

US bond prices are pointing to an oncoming recession, raising the question of whether the Fed stays the course on its path to rate normalcy. Tony Nash, CEO, Complete Intelligence, discusses. 

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/if-recession-is-coming-does-jay-powell-still-raise-rates on March 31, 2022.

Show Notes

SM: BFM 89 Nine. Good morning. You’re listening to the Morning Run. It’s 7:05 A.M. On Thursday, the 31 March, looking rather cloudy outside our Studios this morning. If you’re heading on your way to work, make sure to drive safe. First, let’s recap how global markets closed yesterday.

KHC: US markets down was down. .2% S&P 500 down .6% Nasdaq down 1.2%. Asian markets, Nikkei down zero 8%. Hong Kong’s up 1.4%. Shanghai Composite up 2%. STI up 3%. Fbm KLCI close flat.

SM: So fairly red on the board today. And for some thoughts on where international markets are headed, we have on the line with us, Tony Nash, CEO of Complete Intelligence. Tony, good morning. Always good to have you. Now markets are speculating that the brief inversion of the two over ten year US Treasury yields this week is a sign of an oncoming recession. So do you agree with this? And if not, what might explain these brief periods of inverting or inversion?

TN: It could be a sign. Shazana, I think we have to see a more consistent and meaningful inversion to say that we’re definitely headed into a recession. So what this means is that what a yield curve inversion means is that people have to pay more for shorter duration money. So right now, if you look at, say, the five year treasury, the yield is 2.4% and the ten year is around two point 35%. So it’s cheaper to borrow longer term money, which is really weird. It could have a lot of reasons. Maybe companies need money more. They’re short on cash and they’re more willing to pay for it. So that would be a sign of a recession. So if we see a more consistent yield driven version, we see the two and the five years continue to be higher rates, then we need to be more concerned. For now, there’s a lot of speculation, but we just don’t necessarily see the certainty of it yet.

TCL: Tony, markets are wondering whether the Fed is going to push ahead with this rate policy on tightening because this volatility both in share markets and bond markets is a bit muddling for the analysts and the fund managers to make sense of. What’s your point of view?

TN: Yeah, I think at least for the last few months the Fed has been fairly consistent. But of course, we’ve had exogenous type of events, the war between Russia and Ukraine being the biggest, and that has had an impact on raw materials costs. So food in the case of Ukraine with wheat and sunflower oil and all this other stuff and energy with Russia. So it doesn’t matter what a central bank does necessarily. They can’t push down the price of oil through monetary policy. What they can do is demand destruction. And this is why we think that they’re going to lead with some fairly sizable 50 basis point rises, say in May for sure, and possibly in June. I don’t know if you saw that today. JPmorgan was out with a note saying that there will be 50 basis point rises in both May and June, which would be a pretty sharp rise in interest rates. The good news is we see a sharp rise initially, but then they’ll only do that for a short period of time to cut off demand pretty quickly and hopefully cut down on some of the demand for petrol and oil and some of these other materials.

TCL: Okay. So your sense is that the Fed and JPowell will stay the cost and increase rates, but what’s happening in Japan is quite the opposite. They’re actually showing quite discernible decoupling because they’re staying with zero interest rates. I think the ten year yield on the JGBs is about zero point 25%. What does that spell? Because the Japanese yen is now down at a six minute seven year low. Obviously, there’s a big sense of what’s going on here. What’s your point of view?

TN: J I think yesterday announced that they would have unlimited purchases of Japanese government bonds. So what they’re doing through that is it’s an open door for them to insert currency. It’s kind of a backdoor to growing their money supply, which leads to evaluation of the yen. And so Japan is in a place right now where they want to grow their export sector. They do that through yen evaluation. The competition between, say, Japan, China, Korea is there. China’s exports keep growing despite a strong Chinese Yuan Japan. There are other central banks. It’s partly that reason, meaning the ECB tightening and the Fed tightening, but it’s also competitiveness of Japan of their exports. So there are a number of reasons at play there.

KHC: So you were saying that earlier that maybe we will see 50 basis points increase in May or June. How do you think the share prices of US banks and financial institutions typically would do in this kind of environment, and would they be ultimate winners?

TN: They could be, I guess the only dilemma there would be the impact on mortgage. So if the Fed raises rates really quickly and it has an impact on mortgage demand and mortgage defaults, then that could be a real problem for banks. But short of that, I think they’re probably in a decent place to do fairly well. Of course, that’s company specific and all that sort of thing. But I think financial services in general should do fairly well on a relative basis.

TCL: Yeah. Tony, if it goes ahead as follows. Right. And Japan does not increase rates like the US is, it just extends its debt to GDP ratio. I think Japan is now 255% to GDP. I think the US is well above 100%. That’s quite disconcerting. What happens? How does it all end? Because it’s quite clear that Japan cannot raise rates because it just cannot fall into recession.

TN: Well, the problem with Japan raising rates is their population. And you all know this story, but they can’t necessarily raise productivity without automation. So they have to automate to be able to raise their productivity, to be able to raise their rate of growth. So that’s the foundational problem Japan have now with the BOJ buying with their JGB purchases, they’re actually buying the debt that the Japanese Treasury creates. Okay. So it’s this circular environment where the Japanese Treasury is creating debt to fund their government, and the BOJ is buying that debt basically out of thin air. They’re retiring. Okay. So Japan is in a really strange situation where it’s creating debt and then it’s buying it and retiring it. And this is a little bit of modern monetary theory, which is a long, long discussion. But Japan is in a very strange place right now.

SM: Tony, thanks very much for speaking to us this morning. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that are moving markets at the moment. And in the conversation there with a look at Japan and just the curious situation that it finds itself in amid all these economic and geopolitical pressures happening in the world.

TCL: Yeah, it’s really weird, right? The Japanese are so much in debt and they can’t get out of it. They’re creating these debts and they’re buying back this debt. It’s quite insane. But America does the same thing with their bond buying program until this year. Right. And that they haven’t even significantly cut that program. It’s really weird because what happens then for the US dollar? What happens to the Japanese yen down the line when your paper currency is near as meaningless? Right. It’s not banked by anything. It’s just being printed every day Willy nilly. It’s really weird.

SM: So all eyes are, of course, on the Fed, I guess, the most powerful central bank in the world, and how much it’s going to raise rates when it’s actually going to start or stop its QE in since quantitative easing, opposite of that. Somebody tell me what it means. Qt. There we go. And when they start reducing, that’s something that everyone’s watching very closely. Let’s take a look at some of the international headlines that have caught our eye. We see something coming out of Shanghai. Volkswagen said yesterday that it would partly shut down production at its factory in Shanghai because the lack of key components indicating further how a resurgence of the Omikan variant has disrupted the Chinese economy and global supply chains. The Shanghai factory operated in a joint venture with SAIC of China, and it’s one of Volkswagen’s largest facilities. It shut down for two days in mid March, but reopened now. It looks like it’s going to have to shut down again.

KHC: Yes. And the company also gave indication they didn’t give actually any indication on when normal production will resume. But China is booked Vegas largest market in the essential source of sales and profit. So the country is in the midst of the worst outbreak since 2020. And so that should prompt the government to impose lockdowns and restrictions. And even car maker like Tesla is also having a large factory in Shanghai also have to suspend production because of this strict covet policies. And so voice mechanics, they’re actually having a lot of shortages and slowdowns in other markets as well.

SM: So it’s really the twin it’s the twin issues, right? It’s the pandemic on one hand and then it’s also the geopolitical events in Ukraine that’s really affecting it’s, leading to a shortage of auto parts. So all this comes together and it’s not great for car makers in Shanghai at the moment. Turning our attention to another headline, if we look over at Russia, Russia is going to lift the short selling ban on local equities later today. And this is actually removing one of the measures that helped limit the declines in the stock market. After a long, record long shutdown, the bank of Russia also said equities trading hours will be expanded from a shortened four hour session to the regular schedule of 950 to 650 P. M. Moscow time. So I guess they’re trying to get back to normal but how we see that impact the stock market is still, I think, an open question. Yeah.

KHC: And since the stock market has since that stock actually gained 1.7% and the daily move also has been limited. Prior to the resumption of trading, the Russian government actually took measures including preventing foreigners from exiting local equities and banning short selling and to avoid the repeat of 33% slump scene in the first day of the Ukraine invasion last month.

TCL: Yeah, this whole Russia Ukraine invasion is set off a domino effect of domino effect quite catastrophic. Or repercussions manufacturing in capital markets in currencies. How does it all end?

SM: We don’t know. We don’t know the end to that story. And how long 717 in the morning. Stay tuned to BFM 89.9%.

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Podcasts

Could Stagflation Be a Worry?

The Fed has finally increased interest rates hikes for the first time since 2018 by 25 basis points, but what are the implications for the market? Tony Nash, CEO of Complete Intelligence shares his thoughts on this

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/could-stagflation-be-a-worry on March 17, 2022.

Show Notes

SM: BFM 89 Nine. Good morning. You are listening to the Morning Run. It’s 706:00 A.m. On Thursday, the 17 March. I’m Shazana Mokhtar in studio today with Tan Chen Li and Wong Shou Ning. It’s looking quite foggy outside our studio windows here. So if it’s raining out there, we hope you stay safe on the road as always at this time of day. Let’s recap how global markets closed.

WSN: Yesterday in US, Dow was up 1.6%, SMP 500 up 2.2%, Nasdaq up 3.7%. Asian markets actually quite happening there. Nikki up 1.6%, Hong Kong and up 9%, and Shanghai Composite up 3.5%, STI up 1.7%. FBM KLCI up zero 9%.

SM: So I think we can see that the Asian markets are really rallying on the back of some news coming out of China, the fact that Chinese authorities are going to intervene to kind of support the market after this historic route that we’ve seen over the past few years.

TCL: So basically they came out with a statement with very positive market measures, one of which is that they’re going to emphasize financial stability. They’re not going to go after the technology companies. So as a result, all US China listed stocks actually sought the most. In fact, NASA Golden Dragon jumped 33% on Wednesday.

SM: All right, well, not only are we seeing announcements coming out of China, but we also saw the Fed make an announcement yesterday about the raising of rates. So joining us for some thoughts on where markets are headed, we have on the line Tony Nash, the CEO of Complete Intelligence. Tony, good morning. Thanks for joining us today. So let’s talk about the Fed announcement. After much anticipation, the Fed has finally increased rates for the first time since 2018 by 25 Bips. They also signaled six more hikes for this year. So markets seemed really relieved. We see the green rally across US markets. But has this truly been priced in?

TN: Well, I think people feared worse, but what you need to know is they raised by 25, but it was a range of 25 to 50, so there will be movement in that range over time.

TCL: Okay. But the Feds also said that they will be starting to shrink its US. 8.9 trillion billion balance sheet. Do you think that’s going to shape markets more than the height which have been talked about a lot?

TN: Yeah, I think the shrinking the balance sheet will have a big impact on the available currency in the market. Inflation is already killing available money. It’s eating people’s purchasing capability. But shrinking the balance sheet takes money out of circulation and so that will make the economy feel higher.

WSN: The US PPI numbers jumped 10% while the New York State manufacturing index recorded a steep drop in economic activity. Are we looking at possible staff stationary signs in the US economy?

TN: Yes, I think that’s a very real worry with the labor market where it is with elevated salaries, with inflation, the 10% CPI there or the PPI there. Sorry. And with manufacturing sluggish, really, supply chains are hurting manufacturing still, and that’s hurting available inventory. So we are really looking at a stagnationary environment.

SM: And Tony, oil prices have been on a roller coaster from a peak of $130 to below $100 a barrel. Now, can you give us some insight into the current supply demand dynamics underpinning these price levels?

TN: Yeah. Obviously, things are tight with the embargoes on Russia, not necessarily as tight in AMS, as crude as being sold in China and other places, but it’s certainly tight in Western markets. And we don’t necessarily see that alleviating anytime soon.

TCL: And just curious, right. About the Russian bond situation. Do you see that deteriorating? Perhaps.


And even the rubber coming under increasing pressure. It’s already down more than 40%.

TN: Yeah. And the rubber appreciated just a little bit. But the debt issue is a real problem, and I think that’s going to get worse before it gets better.

TCL: But will there be a contagion effect on global markets if the Russian bonds actually default?

TN: There would be. You’re already seeing impact on European banks, which are the banks that own the most Russian debt. So we’ve seen a lot of pressure there, but some of that has been alleviated in recent days, but still, that real debt pressure is there mostly for European banks.

SM: Tony, thanks very much for speaking to us this morning. That was Tony Nash, CEO of Complete Intelligence, giving us some quick takes on some of the trends that are affecting markets, from the Fed raising of rates to what’s going to happen to Russian bonds, whether they’ll be able to make those payments.

TCL: Yeah, but staying on the topic of the Fed, I think the 25 Bips was pretty much anticipated. It was probably priced in. But what I find interesting is that they are continuing on their policy normalization, which is six rate hikes for the rest of the meetings this year. And they’re also launching a campaign to tackle the fastest inflation in four decades, even though I think there are concerns that global growth might be slowing down as a result of this Ukraine Russian war, not helped by the fact that China is actually some key cities like Sunshine and Shanghai are in lockdown. So clearly impacting the global supply chain.

WSN: And the Fed also said that they are going to allow the 8.9 trillion balance sheet to shrink at the coming meeting, but they didn’t elaborate more about this.

TCL: Yeah. The question is, can they engineer a soft lending to the world’s economy? Because you always have this concern that the Fed will over tighten, and when they over tighten, that might cause global markets to kind of crash. It’s a very delicate balance because inflation is extremely high, so it’s probably going to come in above 8% at the next reading.

WSN: Yes. CPI is about I think the last one was 7.9% in terms of inflation. Fed actually have a projection on it, and it’s 4.3% this year, which is still coming down to 2.3% in 2024.

TCL: I think this 4.3% is a bit like Malaysia CPI official figure of 2.5%. If you tell anybody that, they’ll start laughing.

WSN: Yeah, I think this is an inflation number, not the CPI number, though.

TCL: No, I know. But you have official numbers and unofficial numbers, right?

SM: That’s right.

TCL: But other I think interesting news Is coming out of China because we mentioned earlier the NASA Golden Dragon index hit a high of actually went up 32%, closing and even hang Seng yesterday closed up 9%. That’s a Whopper jump on a one day basis. And that’s very much driven by the fact that China came up with some key announcements to keep the markets going. And this was on the after a top financial policy committee Led by Vice President Yuha, who is the top economic official. So he made some promises, Stabilized better financial markets, Ease regulatory crackdown, Support property and technology companies While stimulating the economy.

WSN: But a lot of investors are also wondering, are they just words? What exactly are they going to do? They need more than just words. They need more action.

TCL: Yeah, but you just want to say this to calm markets down. It’s not the first time he’s done it. In 2008, this exact official said the same thing. It wasn’t really followed by a lot of action, but it’s a signal to the market that maybe they will ease off in terms of any crackdowns, which they did last year, Especially for the technology companies, Gaming companies, Healthcare companies, Education companies, when trying to pursue this common prosperity model. So I think they said, okay, we’re done with what we want. So you investors, maybe you don’t have to worry so much about policy risk.

SM: I think.

TCL: Yeah.

SM: So it’s going to be interesting to see whether this will actually put an end to the route. This could just be the calm before the storm, as some analysts say.

WSN: But they actually address all the five major issues that’s actually plaguing the market. They want to keep the stock market stable. Tech crackdown will be nearing an end, which you said resolve property risk support, overseas listings and also on us goods dialog on ADRs. So these are the things that have been plaguing investors, and they try to address all these concerns.

TCL: We will be asking Brock silvers These exact questions. He’s the chief investment officer Of Kayan capital to do tune in at 915. Maybe he might give us an indication of what to buy, actually, in regards to anything China related.

SM: All right. Well, it’s 7:14 in the morning. Stay tuned to BFM 89.9.

Categories
Week Ahead

Week Ahead 17 Jan 2022

This is the second 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. Among the topics: industrial metals, energy markets, natural gas, China’s flood of liquidity and property market, CNY, and bond market.

You can also listen to this episode on Spotify:

https://open.spotify.com/episode/1JGX3v5tpmQ5sS2wtOr0mK?si=3692162380a84ab0

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd

Tracy: https://twitter.com/chigrl

Nick: https://twitter.com/nglinsman/

Albert: https://twitter.com/amlivemon

Show Notes

TN: Hi, everyone, and thanks for joining us for The Week Ahead. My name is Tony Nash. We’re with Tracy Shuchart, Nick Glinsman, and Albert Marko. To talk about the markets over this past week and what we’ve expect to see next week. Before we get started, please subscribe to our YouTube channel so you don’t miss any of the upcoming episodes.

So, guys, this week we saw kind of a whipsaw in equity and commodity markets with a slow start, but a lot of action mid week. And commodities seem to kind of extend gains until the end of the week. We saw bonds really wait until Friday to start taking off, but they took off quite a bit today. And part of that may have been on the back of the retail sales print that we saw. That was pretty disappointing. So, Tracy, do you want to kick us off a little bit with talking about commodity markets and energy?

TS: Sure. I mean, obviously, we’ve seen a big push in the oil market. Right, in WTI and Brent this week. We’re definitely a bit overbought. But that said, what I think is happening here is we’re seeing a shift from sort of growth to value. I think the markets are pricing in the fact that OMA crime is over. Right. And the Fed may raise rates. That’s putting pressure on growth and giving kind of a boost to the value market. And we’re kind of seeing a chase here a little bit in the oil markets.

As far as if we look at the natural gas markets, it’s been very volatile this week, not only in the US, but global markets. I think that will continue. And we saw a big push up on Wednesday, and then we saw a big pullback, but that was due to weather. But now we’re looking at this weekend, we’re having another cold front. And part of that reason was also because we discovered that Germany had less natural gas in storage than initially thought. So that market, I definitely think it’s going to continue to be very volatile. So try lightly in that market there’s.

TN: You mentioned the Germany supply side of the market, but what does supplies look like, say in the US and other parts of Europe? Are supplies normal? Are they low? What is that dynamic?

TS: Yeah, we’re pretty much normal in the US, and we’re set to in this year. We’re set to pretty much overtake the market as far as the export market is concerned. That would mean taking over Australia and Qatar because of the amount that we’re building out in the delivery system in Texas. But the supplies here are okay. The problem is within the United States is that the distribution is uneven.

So you’re talking about the Northeast, where you’re seeing local natural gas prices a lot higher there. Then you’re seeing, say, in Henry Hub, which is the natural gas product that trade that you’re trading.

TN: So I saw some just to get a little bit specific on this. I saw some news today about some potential brownouts in, say, New York or something because of this winter storm. How prevalent will that be? Maybe not just say, this weekend going next week, but for the rest of the winter. Are the supply problems that extreme?

TS: Yeah, I think you’re going to have a lot of problems in the Northeast. And I’ve been alluding to this over the last few months saying that they have decided not to go ahead with pipelines. They’ve shut pipelines. They kind of cut off their supply because they don’t really want to pursue that Avenue anymore.

However, it’s turning out to be a particularly cold winter, and that’s a lot of pressure on that market. And that’s why we’re seeing $11 natural gas prices up in that area as opposed to $4 in Henry Hub.

TN: Right. Meantime, Albert’s warm down in Florida, right.

AM: Yeah. Well, I wanted to ask Tracy what happens if we have an extended winter where the winter temperatures go into late March or early April.

TS: Then that’s extremely bullish. That’ll be extremely bullish for domestic supplies because domestic supplies will be in higher demand than they are normally seasonally, especially at a time where we’re a giant exporter right now.

We just came to save the day in Europe with 52 now cargo. So we’re exporting a lot if we have an expanded winter here. Supplies are unevenly distributed. We’re going to see I think we’ll see higher prices in out months that we normally see a pullback in those markets.

TN: Great. Texas, thanks you for those cargo, by the way. We really appreciate it. Okay. What about the broader commodity complex? What are we seeing on, say, industrial metals and precious metals?

TS: So obviously, those have been very bullish are going to continue to be bullish because they’re in deficit. As far as if we’re talking about battery metals and such, I think we’ll continue to see that we’re seeing a little bit in the platinum markets. We’re seeing some demand. I think there’s going to be bigger demand this year.

TN: So we’ll show some platinum on screen here so our viewers can see kind of where the platinum price is and where it’s expected to go.

TS: Yeah. So platinum demands expected to grow because of the automobile markets and because of Palladium is so high they can substitute platinum for that. But that may be capped for the rest of the year, and then we may continue to see higher prices going into 2023.

TN: Okay. So when you say that’s growing because of automotive, is this growth in ice ice vehicles. Okay. And is that happening because and I don’t mean these leading questions, but is that happening because the chip shortage is alleviating and we’re having more manufacturing in ice vehicles?

TS: I mean, that’s part of it. But platinum is used for catalytic inverters Palladium. And because of the fact that there’s platinum happens to be a lot less expensive. Right now. And also there’s more of it right now. So we’re seeing kind of demand pulled to the platinum industry. And I’ve kind of been worrying about this for the last couple of years that this was going to happen.

And now we’re kind of seen that comes to fruition because it takes a couple of years to retool and everything to sort of switch that metal. So I think demand looks good right now for that. We may see it capped a little bit. That may go up again. But if we look at this chart, technically speaking, I would say anywhere between 1005 a 1010. If we kind of Zoom above that, then that market could go a lot higher.

TN: Right. So short term opportunities in platinum, medium term, not so much, but longer term back in.

TS: Yes.

TN: Okay, great. Now when you talk about industrial metals like copper and you say a lot is needed for batteries, these sorts of things, that’s a more medium, longer term term opportunity. Is that right?

TS: Absolutely. When you’re talking about things, I mean, we’re already seeing the nickel market, cobalt market, lithium market, aluminum markets all hitting new highs. Copper’s kind of waffling about. But that’s kind of more a marathon trade rather than a sprint trade, in my opinion. So I think we’re going to see more and more demand for that further out in the market. So it’s kind of a longer term investment.

TN: Okay, great. And then what about industrial metals demand in China? As we switch to talk about a China topic, are we seeing industrial metals demand rise in China, or is it still kind of stumbling along and it’s recovery.

TS: That is still kind of stumbling along. And so what I have said before try to emphasize is that I think a lot of these battery metals in particular demand is going to go going to be outside of China.

China won’t be the main driver of this demand anymore as the west policies want to change to EVs and greener technology. So I think you’re going to start seeing very much increased demand for the west. So China demand might not be as significant anymore in that particular area.

TN: Okay. So that’s interesting. You mentioned China demand, Dink and Albert, I’m interested in your view on that. We had the Fed come out last week and talk about tightening and reinforced some of that this week. What dynamic is necessary in China, if anything, for the Fed to start tightening?

AM: Well, I think first of all, Tony, China is going to have to stimulate. They’re starting to prioritize growth for the first time in a long time. They see the US in a bit in a little bit of trouble here with the Fed making policy errors. I don’t want to say heirs. We’re more about like throwing together against the wall and see what works. Right.

So China is trying to be the seesaw for the world’s finance sector. Money comes into the United States it goes out. Where is it going to go? It’s either Europe or China. Europe right now is a complete mess. So obviously you see that money going into China you will keep on leaning on businesses and look to control more than you should but they’re breaking up a lot of the old power structures and that’s actually bullish long term for China. We can debate many of these episodes that we’re doing now, Tony, about whether it’s a good or bad thing for the China power structure. But that’s for another day.

TN: Right. What kind of stimulus if we look at things like loan demand so we’ll put up that chart on loan demand. Can you talk us through can you talk us through the chart of what it means and what the PPO will likely do as a result of low demand or consumer credit? Sorry.

NG: Yeah, the credit impulse so that’s private sector lending as a percentage of GDP and that chart shows it may have based and that looks like what we’ve been hearing is that the PBOC has been encouraging the private sector to start extending credit into the system, particularly to find off the real estate market which is not a surprise.

My personal view and some of the people that I talked to on China is that’s just filling a hole. This is plugging holes or putting plasters on various holes. So what will be interesting is to see how that progresses further down the line along this year. I don’t think nothing’s going to happen before February 1, lunar new year and then you’re running into that plenum. Do they encourage that you’ve got the Olympics and then you’ve got the plenum? Do they encourage some sort of boost?

I don’t think there’s going to be much fiscal. I think there’s a reason for that. I think there’s a connection with the real estate sector. Real estate sector. As a source of great funding for the local governments.

TN: They spend fiscal on bailing out real estate already. Why would…

NG: You have to provide fiscal to the local governments just for the services?

TN: Right. So the central party meetings are in November, so there’s plenty of time between Lunar New Year and November to really tick off some monetary stimulus and get some feel good factor in, say, Q three or something. Is that what you’re thinking?

NG: There is a desire, as Albert rightly said, they are talking about the economy now, but it just feels like it’s one plug the bad, the big holes that have been appearing and they just keep appearing and now we’ve got Shamal. It just seems like it’s step by step plug every hole and then give a little bit of access to try and get the private credit rolling again.

AM: Tony, everybody is looking for a flood. When is the flood of liquidity going to come into China? Right. But that’s not going to happen until May or June until they see what the US Fed is going to do because nobody right now knows what the Fed is going to do.

Inflation is obviously a problem within China, specifically oil and other commodities, as Tracy was talking about. Their eyes are completely on the Fed. China will have to pop services sector as a real economy. It’s kind of a shambles there due to commodity prices and inflation.

The willingness is there to lend. There’s no question about that. But who wants property right now in China? They can force feed the economy via credit. But that’s inflationary also. So there’s another do move here within China. How do they boost their economy but still keep inflation down? Same thing the United States is going through. Okay.

TN: So let me give you a really simple trick here.

NG: Let’s not forget you’re seeing some majors. Shanghai now has Omikaron. Remember, China, supposedly, according to the World Health Organization, didn’t suffer the first route, but you got Dahlin is closed, Nimboa’s got problems now Shanghai, Shenzhen, and they’re worried it’s going to head up towards Beijing.

All these international flights to Hong Kong completely canceled. So that’s another problem if you extrapolate and equate it to what’s happened in the west whenever these outbreaks have occurred.

TN: Yeah, but I think the solution. Yeah, that’s a problem. I think everybody’s facing that and I think China is just very, very sensitive about that. We can come up with whatever kind of conspiracy theories we want about China, but I just really think that they’re very embarrassed by COVID and they’re trying to cover things up, not cover up, but they’re trying to offset the negative preconceptions globally by taking dramatic action at home. That’s my view.

TS: And they have Chinese New Year and the Olympics coming up, right?

TN: Yeah. And they’re being very careful about that now. My view for quite some time has been that they would keep the CNY strong until after Lunar New Year and after Lunar New Year, they could get some easy economic gains by weakening CNY just a bit. Is that fair?

AM: I think it’s fair. They don’t want the bottom to fall out of the economy. And the extent of their damage the extent of damage to the economy was pretty significant. So they’re going to have to pull off a few tricks. Like you said.

TN: It’s percentage wise, it’s a lot. But in reality, at 65667 CNY historically, it’s nothing compared to where that currency has been historically. And I think it’s pretty easy to devalue to that level. And I think they would get some real economic gain from that.

AM: Yeah. But again, it matters what the Feds are going to do with rate hikes. That’s the wild card.

NG: The devaluation not just look at the dollar, look at the CFA, because I think it pays them to value against the Euro more than the dollar.

TN: Yeah. Okay. We can have a long talk about the CFO’s basket at some point.

NG: My point is you got to look at the Euro CNY as well as the US, because I think that’s where they’ll go.

TN: Yeah. Okay. So does this present an opportunity for Chinese equities in the near term, or is it pushed off until Q two?

AM: I mean, from my perspective, I’ve been on Twitter saying that I’ve gotten into Chinese equities. They are de facto put on the US market, in my opinion. They don’t have the strength of the actual but does. But money has got to flow somewhere, and if it’s not going to the United States. It’s going to go to China.

TN: Okay. All right. Let’s move on to bonds. Okay. Nick, can you cover bonds and tell us are we on track? Are things happening as you expected? Do markets do bonds like what the Fed has been saying? What’s happening there?

NG: Well, the initial reaction after the testimony from Powell was you had a steadying and a slight rally in bond prices, slightly slower yields. But I thought today was fascinating because today we’ve across the York Cove. We’ve made new highs for the move, so we’re at the highest yield for the last year.

What was interesting is we had that disappointing retail sales. Okay. That would typically suggest if this Fed is sensitive on the economy, perhaps they won’t do much. Well, the bond market didn’t like that. So now you have what is typically good news for the bond market, creating a sell off. And that tells me that the bond market is beginning, especially with the yield curve. Stevening, the bond market is beginning to express more anything that suggests that the Fed doesn’t do what they’re talking about. The market wants to see action. Not words.

TN: We’re getting punished for now.

NG: And what’s interesting is if you think a little bit further forward, if the Fed does hold back and isn’t as aggressive as some of the governors have been suggesting, three to four hikes I didn’t think Ms. Bond Mark is going to like that.

TN: Or Jamie Diamond saying eleven heights.

AM: Jamie diamond is nothing that comes out of his mouth should be taken at face value. Him knocking the 30 year bonds down today, he’s just setting himself up to buy. I mean, the guys he talks his book always has.

TN: Hey, before we move on, before we move on to talking about next week, we did get a question from Twitter from @garyhaubold “Does the FOMC raise rates at the March meeting? And how much does the S&P500 have to decline before they employ the Powell put and walk back their lofty tapering and tightening goals” in 20 seconds or less going, Albert? Oh, 20 seconds or less.

AM: Well, the market needs to get down to at least the 4400, if not the 43 hundreds. That’s got to be done in a violent manner. And it has to put pressure on Congress to do it. And they can’t raise rates unless they get at least $2 trillion in stimulus.

NG: And also don’t forget the Cr expires on February 18. So we could be in the midst of a fiscal cliff.

TN: February 18. Okay. We’ll all be sitting at the edge of our seat waiting for that. Okay. So week ahead, what do you guys think? Albert, what are you seeing next week?

AM: Opec pump for Tuesday and then Biden dump for Wednesday as they set up a build back better push in Congress, along with probably a hybrid stimulus bill to try to get to that $2 trillion Mark. Otherwise, they got no fiscal and this market is going to be in some serious trouble.

TN: Okay. Can they do it? Can they do some sort of BBB hybrid?

AM: Yeah, they can do it. They can get ten Republicans on board as long as there’s a small business, small and medium sized business stimulus program. Okay. They’ll get that.

TN: And if they do market react and you say that’s $2 trillion. You say that’s…

AM: They need a minimum of 2 trillion to be able to even think about raising rates in March.

TN: Okay. And Nick, how does it matter?

AM: This is dependent on how bad inflation actually gets, because if we get an 8% print of inflation next month. Then everything is on the table.

TN: So can you say that you cut out just a little bit if we get what, an 8% print?

AM: If we get an 8% print on CPI the next time around and anything is on the table.

NG: Okay. I think what was happening with the bond market basically is it’s beginning to look a little bit longer term. And I’ve had this conversation, the big traders, the big fund managers are sitting there thinking, okay, look at crude oil now, 85 on Brent. Energy price is crazy in Europe.

That’s going to feed through from the wholesale level all the way through to the consumer via manufacturing goods, via the housing market, via service industries. Starbucks has to charge some more because they’ve got a much bigger overhead.

TN: Netflix just raised their prices by a buck 50 or $2 a month or something.

TS: Filters down to everything. Energy runs the world, right? So that’s going to higher energy prices are going to factor into literally everything you do.

NG: And my personal view, I think that sort of works is in sync with Tracy. I think crude goes a lot higher. I think this year we could see north of 100, perhaps as high as 120. This all feeds through, right? So the point is the bond market there’s a lot of conversations on a longer term plane right now. And the bond market is an expression if it’s higher yields, yield curves deepening.

Anything that says that the fed is hesitant, I think you get sent off. I think that’s why we sold off. We should have been running on week retail sales.

TN: Okay, Nick. Sorry. If we do get a $2 trillion bill, what’s going to happen with bonds?

NG: They’ll be sold.

TN: They’ll be sold. Okay. So they’re going to punish the fed if we get fiscal?

NG: They’ll punish the fiscal fed to start acting and acting in short order. And I remain unconvinced. We’ve only heard words. We got to see the action. They’re still doing. Qe. Right? It’s absurd.

TN: Yes. We’re going to keep the flow going over here, but we’re going to raise interest rates over here. I’m not sure I get it. There’s been that disconnect ever since they announced this in December.

Okay, guys. Thank you very much. We’ve hit our time. Have a great week ahead and we’ll see you next week. Thank you very much.

AM, TS, NG: Thank you. Bye.

Categories
Podcasts

Inflation, Just Transitory Not Hyper

The Fed just announced that hyperinflation is not happening in the US. Is this a transitory inflation and how long will this last? Where is the market headed now, then? What sectors and industries will be greatly impacted and how will they react to the vulnerabilities? Also, where is oil headed now that it reached $75 per barrel. Lastly, China’s clamp down on Bitcoin — how much impact does it have to crypto’s volatility? All these and more in this quick podcast with our CEO and founder, Tony Nash.

 

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/inflation-just-transitory-not-hyper on June 24, 2021.

 

❗️ Check out more of our insights in featured in the CI Newsletter and QuickHit interviews with experts.

❗️ Discover how Complete Intelligence can help your company be more profitable with AI and ML technologies. Book a demo here.

 

Show Notes

 

WSN: So to give us an idea of where global markets are headed, we have on the line with us Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Now, the big question, where do you think markets are heading? Which direction are they going to take after Powell’s House testimony that the specter of hyper inflation in the US is unlikely?

 

TN: First, I think hyper inflation in the US isn’t really possible because the US is a global reserve currency. It’s really, really hard to have hyperinflation in the US. Powell knows this. Everyone in the Fed knows that. But I think in terms of the importance of his speech with the House, it wasn’t really all that significant, partly because he came across as unnecessarily hawkish.

 

People have been trying to back off of that ever since his speech. Janet Yellen coming out today bringing things back to a middle ground on Friday. So we think we’ll see upside from here. We’re not going to see major upside. We do expect things to get a bit rocky later in the third quarter. But short of dump trucks of cash out on every corner or a major new breakout of Covid, I think we are on a gentle glide path for the next couple of months.

 

PS: So, Tony, can you help us distinguish the difference between temporary transitionary inflation and what is permanent inflation? Because Janet Yellen is in that transitionary stage. But at what point does it become permanent, in your view? Are the triggers there?

 

TN: Well, what’s misleading a lot of people today is we have what economists call these base effects. Last year, you saw really prices falling, right? You saw economic decline. So when you’re looking at prices today, people are giving you a price in year on year percentage terms. So things are up 30% year on year. Things are up 50% year on year. Actually, when you compare them to 2019 prices, depending on the asset, of course, plywood is different, these sorts of things.

 

But things are not really all that inflated given where they were in 2019, which was the last normal year that we had. And then when you look at the supply chain issues we’ve had, you do have some uptick in that. But some of this perceived inflation really is mostly a base effect more than anything else. And then when you layer the supply chain issues on top of that, then it’s really created a mess.

 

SM: All right. I hear you, Tony. That’s fair enough. However, rising prices in the US seem to be feeding into pockets of the real economy. Which sectors or areas do you see as most vulnerable to this?

 

TN: Housing, we’ve started to see people put off housing decisions as a result of this. It’s hitting food prices in a big way, especially protein. So pork, beef, chicken, these sorts of things. But we’re seeing corn, soybean and other crop prices rise pretty dramatically as well. Wheat prices are up pretty huge over the past week or so. And then automobiles, when you drive by a car lot, an automobile lot here, they’re really only half full because automakers have had to slow down for a number of reasons, whether it’s the metals prices or whether it’s the chip shortages, the auto manufacturers have had to slow down. So it’s really hit those three sectors very hard.

 

SM: These companies who are in these sectors, have they been able to actually pass on the rising cost to consumers?

 

TN: Some they have. But we’ve seen, some food companies or other folks pass them on in housing. Definitely, it’s been passed on directly and in automobiles, yes, but I think it’s a bigger supply chain issue than it is actually inflation issues. So they’ll pass on those costs in one certain form. But I don’t know that they’ll be able to get 100%  or recuperate 100% of those costs.

 

SM: So are we potentially seeing some margin squeeze from these companies who are impacted in the coming quarters when we look at the earnings?

 

TN: Oh, yeah, absolutely. I think for companies who are complaining about the costs, but if they don’t see their margins squeezed, then we’ll know this is definitely temporary. But talking to almost any manufacturer here from polypropylene or polypropylene to ordering, industrial metals to wheat or something, everyone is feeling the pinch. But again, it’s as much access to supply as it is the cost of supply.

 

PS: So, Tony, you go upstream from propylene to actually Brent crude, and I think that’s hit $75 highest in 2 years. OPEC is meeting next week to decide whether they’re going to increase production. What’s your take?

 

TN: The U.S. crude prices are up a bit based on the drawdowns from storage in the U.S. and that’s on economic activity. States are finally kind of the states that had been holding back or finally opening up fully, which is good news for consumption. But with this Delta variant, there’s a real risk. It’s possible that Europe starts to lock down again as possibly parts of Asia start to lock down. Of course, we’ll have certain states in the U.S. that will probably move toward lock down again as well if it starts to impact.

 

So that’s a real risk on the consumption side. But for the OPEC+ group, they’re sitting on about 5.8 or 6 million barrels a day of production that they had before Covid. So they decided to cut this production so that prices wouldn’t go too negative or too far down. So they have that capacity that they can bring back online any time. If they discuss that next week, I don’t think OPEC wants to see oil prices because of the resentment it creates and the damage it does to consumers.

 

So I think there’ll be a lot of pressure on OPEC members to open up supply and bring prices down just a little bit. It’s not as if we need to see prices down in the 40s again, of course. But I think there’s a lot of fear that we’re going to see $80, $90, $100 oil and it is giving people a lot of reason for concern.

 

SM: All right. Well, we’ll be watching that meeting next week, Tony. And in a little bit of time that we have, one last quick question. What are you making about the volatility in Bitcoin that’s been happening this week? How much of it can be attributed to China’s crypto clampdown?

 

TN: Oh, sure. A lot of it can. About 70% of crypto mining globally happens in China. So as China clamps down, it really brings down the demand for Bitcoin and it brings down a lot of the pressure on the market. So it’s a little bit of regulatory and tax threat in the West, but it’s mostly the supply in China. And so a lot of that’s on the back of electrical grid pressures. So once the summer passes, the enforcement of that will likely lighten up and we’ll likely see more pressure on bitcoin, upward pressure on crypto markets.

 

SM: All right. Thank you for your time. That was Tony Nash, CEO of Complete Intelligence, giving us his views on markets. And I think what was interesting is that we can potentially see some companies being impacted by a margin squeeze because prices of certain goods, like you mentioned, meat in particular, lumber, corn or even, you know, all these downstream materials or byproducts of oil have gone up incredibly. And not all this price increase can be passed on to consumers because face it, the economy is just beginning to recover.

 

PS: Yeah, you know, because the these shubha transition. Right. Is it an issue of demand and demand is very high. Right. So maybe that when you can pass the price, but if it’s things like supply chain logistics as a result of, you know, breakages and, you know, it’s just all screwed up because of covid. Yeah, I think that’s very hard to pass on to the consumer. And that’s where the margin squeeze is going to take place.

 

SM: That’s right. And Tony mentioned automobiles as one of the areas where you’re going to see price rises. And I listen to this really fascinating podcast not too long ago on Planet Money, where they were talking about the used car sector. And the fact is that the they don’t have enough used cars to fill up the lots right now. So it really has that trickle down effect when you can’t, you know, produce more cars. Yeah, the second hand market will also suffer.

 

WSN: Apparently, Malaysia, our second hand market has also seen an uptick because of covid-19. There’s a reluctance for people to take public transport. So in the past, maybe you were you know, you hadn’t decided whether you want to buy a car, but now you’re kind of in that zone where you’re like, I need I need it because, you know, public transport, I’m not comfortable. Maybe this, you know, you think at the end of the day, why don’t I just get it rather sooner rather than later?

 

Plus, actually, interest rates are rather low. It’s only whether the question of whether you still have a job or whether how you feel in terms of sentiment.

 

PS: It’s fascinating because we talk about rising car prices and it’s also a lift to many things, lithium, SEMICON chips and all that. But on the flip side, we also talk about high oil prices coming through at the pump.

 

WSN: So we’re not so much for us because we are still subsidizing you run 95 Batla.

 

PS: Yeah, some of it’s going to be some of us. Pomerol 97.

 

SM: OK, I’m not one of those there.

 

PS: Well I do admit I do because my Volvo requires it. OK, in any case that is a challenge. I think in the long term it will hit the paycheck. Yeah. And the pocket later.

 

WSN: Well up next, we’ll be taking a look at the papers and the pottle. Stay tuned for that BFM eighty nine point nine.

 

Categories
Podcasts

What’s Next For Crude Oil, Gold, And Cryptos?

As US and other markets decouple in terms of recovery trajectories, should investors adjust their portfolio? BFM spoke to Tony Nash, CEO of Complete Intelligence, on the major selldown of cryptocurrencies, as well as his thoughts on oil, gold, and inflation.

 

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/whats-next-for-crude-oil-gold-and-cryptos on May 21, 2021.

 

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Show Notes

 

RK: Well, choppy waters, to say the least. There is a little bit of a mixed day yesterday over in Asia. But right now, to talk more about global markets, we have Tony Nash CEO for Complete Intelligence for more insights here. Tony, good morning and thank you for joining us on the line. Now, it looks like the U.S. and other markets are beginning to decouple in terms of recovery trajectories. How do you think investors should allocate their portfolios according to this scenario?

 

TN: Well, obviously depends on the time, but I think that some action was taken yesterday in the U.S. around Fed comments as people were trying to decipher whether those comments were positive or negative. And today, I think they realized they were actually fairly dovish comments. So the U.S. is positioning itself to grow and other parts of the world say Europe and parts of Asia are still very conservative about opening until, you know, I think with the places that are being fairly conservative about opening, it really depends on investment, really depends on government assistance, monetary policy, you know, these sorts of things.

 

So investing in those markets depends on support that those companies are going to get and how how those investments will perform.

 

LM: Yeah, I’m just wondering, there has been increasing fears about inflation. Is that influencing or changing your views right now?

 

TN: Well, so, you know, we’re realizing that things like like lumber prices, which a lot of people talk about, that’s been a processing issue in sawmills. There’s a lot of raw lumber out there. Those prices in many cases are the same as they were like, say, 10 years ago. OK, it’s the process into their bottom and making issues in a number of other areas. One area that we’re keeping an eye on is crude oil, which I know is important later, of course.

 

And we’re not we don’t expect a dramatic rise in crude oil prices, partly because I still have six million barrels a day on the sidelines right now. So even if we saw a dramatic uptick in travel and other activity, power generation and so on, there’s spare capacity on the sidelines for a lot of countries to be holding down. So we don’t expect to see and short of having production cuts, we don’t expect to see dramatic oil price rises because that that supply will come on the market as needed.

 

RK: Right. And beyond crude, Tony, do you know crude oil in general is quite correlated to inflationary pressures and prices, but beyond crude oil, are you paying attention to any other commodities out there? Because, you know, we’re seeing a surge in all of them. Which ones particularly catch your eye?

 

TN: For industrial metals are the ones that have really rallied from, say, November or December through this month? What we expect is not pricing to continue to stay strong, but the rate of rise will will slow down.

 

OK, so we’ll continue, for example, to see high copper prices, but we don’t expect copper prices to rise at the same rate as they had been for the past five or six months. We see that across the board in a lot of commodities where we have seen really dramatic rises based on, you know, government spending, monetary policy and also uncertainty about the direction of the dollar when these things are positioned in or denominated in U.S. dollars. We’ve also seen over that same time, because it’s so going that in China we saw the Chinese renminbi appreciate pretty dramatically, which made the dollar denominated commodities really cheap.

 

And so there’s been accumulation of those commodities in China, whether it’s food or whether it’s industrial or metals. And we’ve seen that stuff accumulated in China because these things are really kind of pretty cheap for them in China in terms.

 

RK: And one more commodities. Want to get your views on here, Tony, is gold because it’s seen some strengthening over the last few weeks. In fact, you know, it was more towards the high single digits. Now it’s at the one percent range. Do you expect it to break into the green? And what kind of range do you expect for the year?

 

TN: You know, we do expect gold to continue to rise at least through August, August, September. We think that there’s kind of a sweet spot and people take a pause on, say, cryptocurrency. And as people look at some of these other metals and other commodities where the growth opportunity has slowed, we do expect attention to gold as well as kind of other inflation and currency risk type of focus will turn to gold as well. We expect there to rise through those then kind of a pause late Q3 and then we expect that to continue toward the end of the year.

So we’re not looking at a doubling of prices or looking at a know, low double digit type of price rises in.

 

LM: And Tony, twenty twenty one was supposed to be a bumper year for U.S. IPOs. Is it still buoyant or has sentiment turned more south?

 

TN: No, no, even seems like like Robin Hood starting to offer fractional IPO shares on their platform. So where IPO are typically restricted to a select few? We’re starting to see some things happen where where smaller investors are given opportunities in some of these IPO. So we do expect that to continue as long as investors are there to invest in IPO. And we don’t necessarily expect that that will taper off dramatically. We may see some hesitation if we see markets turn south in June, July, but we won’t necessarily see a dramatic taper off to the end of the year.

 

NL: So we have seen the major sell down of crypto currencies. How is the volatility affecting crypto companies like Coinbase and market confidence to gain legitimacy with institutional investors?

 

TN: Yeah, no doubt it’s hurting their credibility because cryptocurrency has kind of become a bit of a mockery over the past week or so, we assume on tweets and a number of other things. But I don’t necessarily believe that crypto currencies are a thing of the past. They haven’t been retired yet, but we do expect to see cryptocurrency is more regulation, more explicit regulation and kind of soft infrastructure around cryptocurrency like Coinbase that goes along with it. They’ll have the infrastructure to be able to help in that crypto investors who along with regulation and do just fine.

 

TN: So I don’t think crypto her dad the new not necessarily realize that they thought they may, but but I do think it’s still something that’s viable within the broad based interests.

 

RK: Thank you so much for your time this morning. That was Tony Nash, CEO of Complete Intelligence. And let’s take a quick look over at the coin prices right now. Bitcoin thing, a little bit of a recovery. It’s up two point six per cent now, forty one thousand dollars and on a year to date basis, up to forty one point six percent year to date, still far off from the 100 percent or 90 percent year to date gains we saw earlier this this year.

We take a look at Etha. It is now two thousand seven hundred and seventeen dollars, or seventy two thousand two hundred eighty dollars a coin up a little bit, point four percent year to date, up 275 percent.

 

NL: Yeah, very quickly as well. Taking a look at a piece of news, the first quarter of 2021 doesn’t appear to be working out in a week’s favor. According to the F.T., Quarterly losses almost quadrupled on year to over two billion dollars.

 

RK: We work not working. Yeah, that’s a headline in the making right there. The losses incurred as so far this year, three point two billion dollars in 2020. Revenue fell almost 50 percent on year from one point one billion to six hundred million dollars. And the company lost around 200000 customers from a year ago. And this, of course, all information, according to the Financial Times, because this is not a public listed company just yet. In fact, they’re looking to try and go public again later this year after their first failed attempt a year to be eighty nine point nine.