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The Week Ahead – 24 Jan 2022

The Week Ahead Jan 24 episode

S&P is down about 8% from the highs of Jan 4 — why are we seeing a fall that sharp? Are we nearing the bear market? Why is the Fed standing by and what are they going to do for this coming week? Is a 50 basis point hike realistic in March? Where is the crude heading for the next week and why have natural gas calmed down? And why are gold and copper slightly up this week?

This is the third episode of The Week Ahead for January 24, 2022, 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

Tracy: https://twitter.com/chigrl

Nick: https://twitter.com/nglinsman/

Albert: https://twitter.com/amlivemon

Show Notes

TN: Hi, everyone, and welcome to The Week Ahead. I’m Tony Nash. And I’m joined today by Albert Marko, Nick Glinsman, and Tracy Shuchart. Before we get started, I’d like to ask you to subscribe to our YouTube YouTube channel. It helps us get exposure and it helps you get reminded when a new episode is out. So please go ahead and do that.

Tracy, Nick, Albert, I hope you survived the week. Well, I hope everything went well on your side. I know we’ve all been talking about market activity, and it seems like you guys survived pretty well. So if we look at last week’s show, it kind of played out exactly as we said. We talked about a stock dump, thanks to Albert. We talked about a bonds dump, at least for most of the week, thanks to Nick. And we talked about crude’s nude highs, thanks to Tracy. So well done. And Congratulations, guys.

AM: Thanks.

TS: Thank you.

TN: So let’s talk about what it means for the Week Ahead. So, Albert, let’s look at equities first. It looks like the S&P is down about 8% from the highs from the peak on Jan 4. In general, what’s moving the market right now? Why are we seeing a fall that sharp?

AM: Well, the better question is what’s not moving? And that’s pretty much the Fed pump list. I mean, there’s nine to twelve names that they generally use to pump the market, and they’ve just been absent. And you’ve seen that with Netflix.

The last 18 months, whenever one of these tech names missed earnings or showed some kind of weakness, they still rallied. But this is the first week that you’ve actually seen these names just with no bid. Zero, whatsoever. And the market absolutely just cratered. And I’ve got some statistics out here that are quite interesting. Like only 24 stocks in the United States above a $3 billion cap are up 100% year over year. Right.

Only 114 up immediately 50% out of 1400 are up year over year. The last time we even tested the 200 day moving average was June of 2020.

TN: Okay.

AM: So what you’re seeing is just this super massive bubble in equity that is just deflating at the moment. And it’s because the Fed doesn’t have a bid up.

TN: I look at a company like Peloton, right. It’s about a $9 billion valuation. So it seems to me like this thing has a ways to go. Is that fair to say?

AM: Oh, yeah. I think honestly, I really think we should be at 4100 or even 3900 to 3950, to be quite honest with you. Do they let it go down that low? I don’t know. Because at that point, things can get crazy and get out of control. And the last thing they see, some kind of complete market collapse.

TN: So 3950 would be about 17% fall or something like that?

AM: 17% fall? Yeah, that’s about right.

TN: Okay, so that would be considered a real bear market.

NG: 20%.

TN: Well, I know, but I think it’s close enough. I know technically bear market is 20%, but I think people would be panicking if we crossed. Yeah.

AM: This is a perception game. Nick is right. 20% would be a bear market thing. But in this market, in the perception of this market, anything under 4300 would be Armageddon for these people.

I mean, can you imagine how many bag holders there are and tech names and meme names.

NG: Trap longs. There’s huge both professional retail there are trap longs. And you can see that today 61 minutes was the difference between the Bloomberg headline that said down 2%, Nasdaq recouped all the losses. 61 minutes recoup the losses straight packed out. That tells you there’s a lot of trap long.

TS: I think what also happens is because everything was so tech weighted, right, and that the puke basically in tech is causing margin calls, which in effect makes you forcibly makes you have to get rid of other positions. Right. So what you have to so because that sector was so overweighted and fees were so ridiculously high and everybody was piled into that sector. That brings down the rest of everything, basically.

TN: It’s interesting, Tracy, you said the PE were so ridiculously high.

TS: Well, they still are.

TN: Kind of. Right.

TS: They still are. I don’t mean to say that. We haven’t had that big of a correction. Yeah.

NG: I think the margin point was very important. Came out with a chart. And the margin that we have in the market is still massively, exceeding what we saw in the peaks in 2008 and even in the peak that crossed over the year 2000. So that means again, I go back to the point that’s clearly suggestive of trap longs and Tracy’s right. People will sell what they can as a profit first to get their margin calls. What we haven’t seen, and that’s where you get a capitulation.

I think we’re far away from capitulation. It will be much longer and deeper is where people are then forced to sell those equities where they have the margin calls being hit.

TN: Right. But with the degree of margin that we have right now, if a capitulation were to come, could actually come pretty quickly. Right.

NG: Bear markets are always that much quicker than the Bull market.

TN: Yeah. That’s not a prediction. It’s just a what if. Right?

NG: Yeah, absolutely.

TN: Okay. So where are we looking at next week? Do you think we’re continuing to. Do people want to hold equities over the weekend? Obviously, we don’t think many wanted to because today was a sell off. But do you think people come into Monday and Tuesday feeling like, okay, we’re ready to play again and we want to get long again?

AM: I think it’s a chop day for the first two days of the week, honestly. Seeing what the market’s done, I don’t think the Fed can be really too hawkish at this point, which would probably make the market rip another 100 points up. But there’s really nothing to rally about in this market until some fundamentals get sorted out.

TN: From your perspective, Albert the Fed seems to be standing by right now. Is that fair to say?

AM: Yeah, they have to stand by. They’ve threw out all their Arsenal of pumping the market for the last 18 months that at this point, what possibly more can they do without just causing systemic risks on the line?

From their perspective, why would you keep this show going without some kind of, especially when you’re looking at a fiscal cliff coming in March or February, March.

TN: I don’t want to talk bonds yet, Nick. Do you see a scenario where the Fed does come in, say, next week to save the day, or do you think they’re just going to sit passively and kind of wait and see? And Tracy, do you guys see the Fed coming back in to say, oh, you know, 10% from the high, we’re good for now. We just want to pause it and we’re going to intervene a little bit to make sure things are okay. What do you think they’ll continue to stand by?

NG: I’m sitting here, I wrote today, Equating JPOW to the captain of Titanic flying through all these icebergs and not really worried about navigating through.

They’ve got a lot of problems here. So they’ve got Joe Biden, “please get rid of inflation.” You’ve got the chat that runs fiscal now, Joe, Manchin, I’m not talking about anything until this inflation is sorted out. So they’ve got the political backing to actually start to do something.

The bond market today’s price action was partly in reflection of the stock market. But actually with what’s going on for the last couple of days in the stock market, the bond market should have done a lot better. So the bond market is sort of on hold, and they’re waiting to see one of three scenarios.

One is the Fed tells you they’re going to rate hike rates in March, and that’s when QE will finish. The alternative is they’re going to change policy guidance to indicate the mileage rate hike at and end QE immediately because remember, they’re still doing QAE. Third is to raise rates next week.

TN: I’m going to stop you right there, and I’m going to say we got a viewer question from @FedChairmanB, and he says, what’s the Fed’s end game, push interest rates back and live with inflation or hike rates, crash the markets and let the economy enter recession. And what happens to the high yield and bond issuance market?

So you’ve kind of already spoken to those first two in your scenarios. So what happens to the bond issuance market in the scenarios that you’re talking about?

NG: Well, we’ve seen enormous amount of bond issues right at the beginning of this year. And towards the end of last year. That tells me that corporate treasurers were actually getting nervous that the Fed was going to start to take notice of the inflation and react accordingly.

High yield will underperform as I think will emerging market dollar credit for a variety of reasons.

TN: Underperform, you said.

NG: Well underperformed in terms of the emerging market dollar credit, that’s also dollar point. I’ll stick by my comments of last week and I keep reiterating them and everything I write.

I’m not convinced yet of this Fed’s fighting credentials. I haven’t seen the inner Volcker in JPOW so on that basis action more than words and those words come in the guise of Ford guidance until we I’m really fast. Wednesday is a real crapshoot, okay? We just don’t kno.

TN: When you say real crapshoot. What do you mean?

NG: We don’t know what the fed is going to do. They could do it. I think the most likely thing is they’re going to indicate guys that they’re going to hike rates in March and nqe then which is not really anything new despite all the whole Orkish talk from some of the other boards members.

TN: You say end QE. Do you mean stop purchases or slow purchases?

NG: Stop purchases. They’ve already started slow anyway. So stop purchases. There’s no reason for QE. From all the data that they give us and all the guidelines that they’ve given us for inflation, unemployment, they don’t need to do QE.

AM: Well, I disagree with that because if they don’t get fiscal, they’re going to have to continue with QE. I’ll tell you that right now.

They don’t get fiscal in March. They’ll just unleash more QE.

TN: Okay. That’s a Q two issue, right? That’s not a Q two necessarily. So let me ask you this. Over the past week or so, I’ve seen people talking about a 50 basis point hike in March. Is that realistic?

AM, NG: No.

TN: I don’t think it is. That would bear the anti inflation teeth of an aggressive inflation fighting Fed.

TN: Right.

NG: Absolutely.

TS: You know, it would be really interesting if they watched what BOC meets on the 26th as well and has a rate decision.

So if I were the Fed, I would be watching what Doc does. And how does that affect the economy? And then we’ll wait until March to make a decision.

TN: So first, Tracy, are you saying something nice about Canada?

TS: No. Let them be the guinea pig. Right. So let them raise rates first. Let’s see how bad goes, because really what the to do administration has done is let this go. Amok.

TN: Right.

TS: So if I were the Fed, I would say, let’s see what POC does. Let’s see them raise rates. Let’s see how that happens to the environment. That’s what I would be thinking. And then make your decision in March.

TN: Is there any chance I think it’s close to zero, but is there any chance that the Fed could do something like a ten basis point hike instead of 25? Because that’s what Voe did, right?

NG: Yeah.

AM: It’s a waste of time, but at least it shows that they’re doing something in their minds anyways.

TS: Look, we did something, but we didn’t really do anything.

NG: Yeah. The bond market would not be impressed.

TN: Good. Okay, good. So the bound of 50 basis points or ten basis points, like neither of those extremes is going to happen?

AM: I don’t know. I would say it’s more likely they do ten basis points and 50 by a long shot. I can see them doing ten basis points just to say that they did something. That’s what this Fed does is show that they do something but not really do anything.

TN: Yes, it is. So that’s perfect. Okay. Staying with inflation, I guess. Let’s talk about energy markets and commodities markets. Tracy, you called a new high and crude this week. We saw it. We’ve seen those prices come off a little bit. Kind of. Why are we seeing things come off a little bit now?

TS: Well, I think in general, the broader markets are coming off. Right. So sell what you have to. In addition, I mean, this market was way overbought. Right.

So personally, being an oil bowl, that I am, I welcome kind of this pullback. And I think that this is healthy for the market. Right. And so I wouldn’t be surprised, especially because we’re not even in high demand season.

So I would like to see this market kind of go sideways for a bit because I think we got a little bit overextended it falls through in that $80 to $87 range for a little bit, at least until we reach the new seasonal tendency higher.

TN: So that’s later in Q one.

TS: It starts late February.

TN: Okay.

TS: That starts that demand season. That’s when usually seasonally, you tend to go long oil.

TN: Okay, very good. So you think we’re sideways or on a pause at least for the next, say, four weeks or something?

TS: Yeah, I would like to see that from a technical standpoint, I would like to see some of that bullishness kind of being worked out of the market a bit.

TN: Okay. Very good. I like that. I think that’s solid. Now, what about Nat gas? Because a few weeks ago we were talking about nat gas surging, and we’ve seen things really calm down despite some cold fronts in North America and Europe. So what’s happening there?

TS: Right. So we had two major things happen in the market. Where is the 46 vessels carrying that gas are starting to arrive in Europe, and that’s alleviating pressure on that particular market. And then we also had China Sinopec flood the market with cargo for 2022. They put out 46 cargoes for sale. So that alleviated pressure for 2022. So that alleviated pressure for JKM or the Asian market.

So in general, we’re seeing supply hit those markets. So we’ve seen a pullback in those two markets. As far as the US is concerned, it’s still a range bound market. We are up a little bit today because we have very cold weather in the northeast into Canada, and they share partial grids. And here Texas is going to have some sleep. But that’s pretty much why that market really hasn’t gone anywhere and why we’ve seen some pull back in the Asian and European markets.

TN: Okay. But we’ve seen some action in coal last couple of days, right?

TS: Yes. Coal is surging once again. So we’re at $300 coal in the Asian markets. We’re at about 270 in the Australian markets. We’re at about 165 in the spot market in the US.

So that is surging because it’s being used as an energy alternative rate, which is incredibly crazy.

TN: Yeah. Okay, interesting. Okay, let’s talk about metals for a minute. We’ve seen some chatter about gold this week, and gold is ending up slightly this week. Some industrial metals. Copper is also ending up slightly this week. So what’s happening there as well? Is that just a slight rotation away from equities or is there a real demand there?

TS: I mean, if we’re talking about precious metals, obviously that is a completely different trade than if we’re talking about base metals or industrial metals such as copper.

What I would like to see is like for gold, for example, I would like to see a solid close over 1835 to really put this into a Bull market, even though I’m bullish minors in general because of lack of capex, et cetera, et cetera. But really that market has not flipped bullish yet.

TN: Right.

TS: And then if we’re looking at something like copper is still sideways too, although long term, I’m very much a copper Bull because of reasons that I’ve stated another right before.

TN: Very good. Okay, guys, so aside from Wednesday with the Fed, what are we looking for for the week ahead uncertainty with equities? Is that a downside bias or an upside bias? With that uncertainty.

TS: I think what will be really interesting if we had $3.3 trillion worth of options notional expiring today. So I think next week will be to tell really what direction this market is going. Do we bounce next week? I’m not giving a day. Specifically, was it an options thing or are people going to buy the dip because that’s the second largest options X ray ever in history, options X Ray.

I think we need to be looking next week to really see where we stand as far as the markets are concerned.

TN: Okay, very good.

NG: Options expiry was long Delta. The market makers were all having to sell their Delta positions rapidly. Which is why you saw. I think, yesterday late in the session. It really accelerated on the downside, having been up during the day, and then today it just couldn’t get a bid, which I think combined with, I think the thing that holds this market down is possibly the trap logs. They’ll be nervous this weekend.

TN: Yeah.

AM: Yeah. I’d like to see what happens Sunday night in Apex. Still Sunday night going into Monday morning. But like I said, I think that we chop Monday, Tuesday, and then probably rise up with the Fed being a little bit more dovished than people think they’re going to be.

TN: I think so. Okay.

TS: Yeah, I agree.

TN: Yeah, they may have to.

NG: It’s consistent with what I think until I’ve seen.

AM: The anti inflation teeth have been a little bit dulled down, especially with yelling today saying that we’re going to be living with inflation for at least until 2023.

TN: That was notable.

AM: She didn’t no indication that they’re going to take it on head on.

TN: Yes, that’s right. Okay, guys, hey, we’re out of time. Thank you so much. Have a great week ahead, and we’ll speak next week. Thank you.

AM: All right, thanks.

NG: Bye. Okay. Do I look okay? Am I evenly lighted everything else?

AM, NG: Yeah.

TN: Really? All right, thanks.

TS: Oh, my God. You guys are seriously worse than I am.

TN: Of course, we’re middle aged men.

AM: We’re like obviously, it’s all we got.

TS: I took 2 hours to take a shower and get ready. Don’t tell me about that.

TN: Okay. All right. Are you guys ready?

TS: Yes.

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
Week Ahead

The Week Ahead 09 Jan 2022

The Week Ahead - 09 Jan 2022

This is the first 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

Tracy: https://twitter.com/chigrl

Nick: https://twitter.com/nglinsman/

Albert: https://twitter.com/amlivemon

Show Notes

TN: Hi, everyone. Thanks for joining us for the week ahead. My name is Tony Nash. We’re joined today with Tracy Shuchart, Nick Glinsman and Albert Marco to talk about the markets for this past week and what’s going to happen this next week.

Guys, we saw a really dramatic market this week, a lot happening around the Fed announcements around inflation in Europe. We saw some real action around bonds. So can we talk about some of those things as well as what’s happening in energy markets? So, Tracy, could you actually get us started with what you’re seeing in energy markets?

TS: Well, obviously, we had big bounce this week in the energy markets, and a lot of that had to do with we had problems in Libya with some production offline 500,000 barrels. We also saw some big drop in Ecuador production and then Nigeria ongoing problems. And of course, we had Kazakstan, which these protests put potentially 1.6 million barrels at risk. So that was another geopolitical risk factor.

And then what we were seeing at home is because of weather, because of the cold snap we were seeing. We had Keystone down for about a day. And that brings Canadian crew to the United States. And then we’re also seeing production problems in the back end. So there were a lot of things going on in this market that propelled it higher.

TN: Okay. And what about the geopolitical problems with Europe and Russia? Is that still tightening? Do we see that still affecting gas prices in Europe?

TS: I think actually, we’ve actually seen a pullback ever since the US Calgary came with the initial 46 vessels. And then we’ve also seen countries such as the Netherlands come and say that they’re going to provide more gas, so the market is going to be volatile. It’s definitely going to remain volatile. But we have definitely seen it pull back off the highs.

TN: Good. Okay. Very good. Nick and Albert, can you talk to me a little bit about the Fed? What’s your view on the Fed remarks? And will they actually raise three times in 22?

NG: Well, actually, might be on the Fed remarks. Is it was nothing new. We knew absolutely everything. December the 15th, it was statement and then the press conference. It was very clear people just wanted to ignore it. So it’s come home to Roost. What was interesting that treasury market was already acting first day of trading and had a really good sell off. And it’s just carried on.

Now I’m wary of this Fed. Have they got the guts to actually take inflation on, or are they worried about the stock market? And there is obviously that correlation between the stock market and the economy. However, at this high level on the stock market, one wonders whether that correlation is a bit little bit looser because we have from a data point of view, whether it’s reality or not, it’s a booming economy.

And I actually had a conversation with a very well known economist on the street. It’s his own shop. And he said a couple of people he respects are talking about unemployment going sub 3% by their measure.

TN: But, Nick, that’s just a denominator function.

NG: I understand. We all know it’s not really less than 3%. But we all know that inflation is a 7.2% the forecast for next week. Okay. So I mean, this data has issues, and I’m very much aware of this issue. But the point is, if this carries on going that way and the seasonal adjustments accentuate the situation.

Plus, you’ve got to, you know, Albert mentioned this last year. There is a huge number of people retiring. So there’s a supply shortage of the labor side. It’s not just supply chains causing inflation, that labor has a supply shortage.

TN: We’ve been waiting for this for about a decade, right? For the baby to start. Really?

NG: They wanted a bit more inflation. They wanted a moving economy. They got it. Now the Fed has to show whether if the Fed goes all in on it to fight inflation, 170 is not the terminal rate on Fed funds. I think it’s going to be between two and a half or three and a half. Clearly, I’m just concerned about this Fed. In that respect, they’ve shown no willingness.

TN: Sure.

AM: I just want to add a real quick thing about that. Tony, I agree with what Nick is saying pretty much being clear on that. But from my perspective, the story is, are they going to go with inflation or are they going to have a recession? This is zero rates or rake hikes.

This market is realistically built on zero rates. Everybody knows this for them to hike. They would need some sort of stimulus program. And even then, you need lower job reports, which I think probably are coming. But even then, we have a physical flip coming in March that we have to address.

TN: Right. But, Albert, we would need a stimulus program with hikes just to stay neutral.

AM: Of course.

TN: Here’s what I don’t understand. Okay. And maybe you guys can fill me in. But the Fed has a massive balance sheet. Why even mention rates when there’s so much they can do with the balance sheet in terms of tapering being neutral and then tightening that on its own is a massive task. It seems to me that interest rates were kind of premature for that.

NG: I think they’re fearful of tantrums. My view on the tantrum side of things is either the Fed does deal with inflation. So you get then risk assets like equities will have a tantrum. It’s quite possible. And people wouldn’t expect that the bond market will have a tantrum, but it will be an inflation tantrum.

You’re right on QT quantitative tightening. I mean, they’ve got so much in the short end if they just let it roll off that’s $3 trillion in two years off the balance sheet. But then that would cause problems in the short end of the market.

TN: Yes. Previously, they didn’t start tightening for four years, right. QT didn’t start until four years after 2011 or whatever. So it was a long time, and I wouldn’t expect them to start selling off the balance sheet for an extended period of time. It’s just a matter of stopping the flow onto the balance sheet.

NG: This is the biggest hedge fund leveraged in the world.

TN: Yeah, it is. Okay. Speaking of funds, we’ve seen a little bit of rotation start in the market this week. So can you talk to us a little bit about that? And, Tracy, can you guys both talk a little bit about the rotation that’s underway in markets and how far will it go?

AM: It’s pretty clear that we’re rotating out of the US markets and out of tech going into China, possibly even Indonesia. The US market is nearing almost 60% of the entire global market. And that’s simply absurd. And just can’t go on.

Some are talking about disinflation, but the wage inflation continues to rise and the supply chain stress isn’t really getting any better. So where does the money go? Really, in my opinion, it goes to China right now. The European Union is a mess. Can’t go there. Indonesia is a likely candidate. But unless the Fed, they can’t hike rates, they need massive stimulus, everything’s rotating out of the United States and out of tech for the time being. I don’t know how long it’s going to last. I mean, I think the tech sales are maybe a couple of weeks.

The Fed needs that to pump the markets via Nasdaq. So I give it a couple of weeks, Max.

TN: Okay. Tracy?

TS: I’m looking at the rotation within just the US market and not the global markets. But we are kind of seeing a rotation from the tech sector from growth to sort of more value real assets. Right. So all week, we’ve seen the Nasdaq pull back. But oil and banking have remained very strong all week.

So I think that’s kind of where just internally where we are seeing the markets, the commodity markets have done really well this week. Metal is included.

TN: And how long does that last? Is that something that’s just a couple of weeks, or is that something that we see happening through Q1?

TS: I mean, I think it really depends on what the Fed decides to do. So if they decide to raise rates, that’s going to kill the tech market. Right. So that’s why I am of the opinion it’s going to be a one and done, because what do you sacrifice? You sacrifice the market. Right.

And are you going to do that? Is the Biden administration going to allow that sort of to happen during an election year? Right.

AM: Tracy is absolutely correct. They’re not going to let that happen. I mean, right now, the entire perception of the economy is doing well is based on the market performance for them to raise rates or rotate. And right now they’re rotating into reflationary names. I mean, that helps now, but they need the market to act. It is solid.

NG: There is a dark with that view because, as I said, either you get a tantrum equities, particularly on growth, or you get a tantrum in bonds, which then feeds into account. Because if they don’t deal with inflation, everybody’s saying, well, January base effects are fantastic. They’re high, but we’re going to benefit from thereafter.

And I’ve got this and Tracy, but I think we will attest to this. And Alberto, there is this point that as things get normalized, crude oil is going to go up because jet fuel will be in huge demand and people are going to be out moving.

In Europe, there’s no normalization of energy prices. They’re already way above normalization. You’re looking at five to six times the price of energy from last year. So this is all going to feed through the system. It goes. Fee through manufacturing services and comes out as core CPI as opposed to full CPI.

AM: Yeah, but I mean, this week, Nick, we’ve seen a 4.5 wage gain causing issues in the market. There’s…

NG: Actually my fault on the date of the day was it was actually the unemployment. They have said the natural rate is 3.6%. If you look at what happened the last time we had unemployment here, we had inflation at I think it was 4% ten year yields with 270%.

AM: Yeah, I understand that, Nick, but everyone right now is talking about disinflation thinking that inflation is going to come down because the bet is going to help push it down. But how do you get rid of wage inflation? There is no way you can sit there and take…

TS: You’re not going to get rid of supply chain issues either.

NG: Push inflation. This is where it’s changed. And I don’t think these central bank staff has realized have accepted this that everything prior to the pandemic was demand poor cost push. So whole different ballgame. They’ve already said they can’t control price of commodities.

Actually, they can because they can. That’s the point. But the point I’m making is we’ve crossed the Rubicon from something that I’m not saying demand hall has gone away. But we’ve crossed the Rubicon from something that would be affected by monetary policy and financial tightening to something that is not going Redux is rough to charge.

TN: Okay. Before we go on there, there are two questions. First, Nick, you said either there’s an equity side tantrum or there’s a bondside tantrum, which is worse.

NG: Oh, the bondside tantrum. Okay. That will also be feed through to the equity market.

TN: Right. Okay. So the bondside tantrum is worse.

NG: For everybody that Feds behind the curve and London control.

TN: Right. And I think that’s well understood. The other question I have is Tracy mentioned one and done. Do we all think the Fed is kind of going to do a one and done? I mean, that’s my view. It sounds like it’s Tracy’s view, Albert, is that what you think?

AM: So I absolutely think so. They can’t let this thing melt down. They’ll bring it down to, like 4400, but that’s it.

TN: Okay. Nick, do you think it’s one and done?

NG: I’m putting my old hat on as a bond market person. Yeah, because they’ll then have to do QE because the bond market won’t sit there.

AM: They will do QE. They will absolutely do QE. They haven’t signed up and they control the bond market as it is anyway, so they can do whatever they want right now. There’s nobody else in the world that can hold us accountable for what they do.

TN: Are you saying QE and Q two? Do you expect QE and Q two?

AM: Absolutely.

TN: Okay. That’s very interesting. All right. I like that. I think that as a thesis is very interesting.

NG: By the way, the rest of the world may need it.

TN: Absolutely. I think they will.

AM: Of course they do.

NG: I’ve got a great piece of trade Union wage claim in Europe. This is hysterical. So the ECB says inflation is going to trend back to the forecast. 2%. It’s all transit free. The guard still on holiday, but she’ll never die by that.

Every person at the ACB by the governors is a member of the ECB trade Union. Do you know what their claim is right now for this year?

TN: They need wage acts.

NG: I think that’s a tell. Oh, yeah, it’s a tell, right. I think other countries may need the Fed’s help. That’s where I veered back towards Albert. In that respect, I don’t know my traditionalist central bank.

TN: Yes, I don’t doubt that at all. Okay, let’s start looking ahead to kind of next week. We’ve got wholesale inventories, NFL, small business, CPI. We’ve got retail sales coming on. What do you expect to happen next week?

Do we expect, say, retail sales to kind of be moderate or do we expect the CPI to moderate, or do we think things will continue as they have been?

NG: I’m an inflation. So I think CPI will be problematic and we’ve seen this inflation data. The estimates have been lower than the actual. So I’m sort of expecting that to occur.

Retail sales. I’ve not really got a view. To be honest.

AM: I think retail sales are going to come in a little bit higher than most people think. I think the luxury market right now is just absolutely on fire. A lot of free money has just been floating around the system and people have been buying things left and right.

I mean, even the credit card data show that consumers have just used more credit. It’s pretty clear.

NG: Okay, so we’re 2% ten year yield. It’s a possibility next week there.

TN: So also the small business survey, the small businesses that I know from auto manufacturers to other things. They’re having a really hard time. So do you think NFIB is going to continue to be positive, or do you think it’s going to trend out?

AM: I think we’re going to go down. I think the entire reason that they’ve been talking about a new business stimulus program in DC.

TS: Exactly 100%. I think we’re definitely going to go see that slowing down, slowing economy.

AM: They need it because they need stimulus anyways in March. So might as well start throwing money around everywhere.

TN: Right. So build back better. Is that dead, or are they going to try to take another run at it this month?

AM: They’ll take another run at it, but it’ll be toned down and probably separated into different pieces.

TN: Okay. Do you think it will ultimately pass and be one and a half trillion or something like that?

AM: I think it’ll be a part of a stimulus hybrid program of build back better with business stimulus program in mind. So it’ll probably be around two and a half trillion.

TN: Two and a half trillion. Okay. Anybody else have a view on that?

NG: With the emphasis on the stimulus as opposed to the build back better.

TN: I think you’re right now.

TS: Yeah, I personally don’t think build back better is going to pass anytime soon.

NG: Great question for Albert Finabaster won’t be broken with it.

AM: No, they’d be absolutely insane for them to try to do that. They know the GOP is going to have the House and the Senate for them to sit there and break the filibuster. It would just lead to absolute chaos for a lot of different policies.

TN: Bad news. That’s really bad news.

AM: If they get rid of the filibuster and they pass that voting law, the next thing that’s going to happen is the GOP is going to use the same method to have voter ID for the entire country and under the same reason and why they want to get rid of the filibuster. It’s a car bout. Really. It’s not an entirely.

NG: Voter ID in Europe is good to go. Everybody has it.

AM: Yes, I know. But this is the United States. I mean, nowhere in the world does about the United States. So we have to differentiate what happens in Europe.

TN: Yes, we do. All right. So what are you guys expecting to see next week? Are we expecting to see this rotation intensify. Nick, what are you expecting to see in say, bonds? Do you see further action in bonds or are we kind of at two for now?

NG: Well, look, I think think we ten years can go from. I always look at the ten year and in fact, many institutions is five. But the ten years gives you enough of the long bond and the inflation out of it. We’re at 176. 77 today close. If the data is strong, we go to two. Yeah. That becomes very interesting.

I mean, we travel a long way this week, right?

TN: Yes.

NG: And if you look at the CFTC data, the market is not short. A lot of blood was built for cause of last year people slowly stepping themselves in where I’m really interested. I mean, if that happens, we continue to see growth to that value.

What I’m interested in is I think the dollar rebounds on Monday. The dollar seems to have days with that lag to what the interest rate markets do. Albert and I have been speaking about this, but I’m interested to see, even with dollar strength, we’ve seen strength in the commodities market. And this is one of our thesis is China is going to be replaced by the Green Revolution.

We found a wonderful study in France that was reported in one of the French dailies that was talking about 60% of copper will be used up in about two or three years. And then he went through all the other key metals for the metal. I think actually, copper go quicker because of the new left winger in Chile.

TN: So you think dollar appreciation and commodities at least industrial metals appreciation for the, say foreseeable future.

NG: I think the whole complex crazy, and that’s where this time around will be rather like people’s disbelief in equities. How can we keep going this time around? We can have the whole commodity complex elevated.

TN: That’s really scary.

TS: I absolutely agree. Absolutely. Well, I mean, my three main themes in the commodities markets since last year and going into at least 2025 is metals, oil and gas and agriculture.

TN: Fantastic. Okay.

AM: I actually think the tech market is going to make a rebound next week just because the Fed is probably defending the 50 day moving average. I think we see a rebound up until the middle of the week next week.

TN: Wonderful guys. Thanks so much for this. Look forward to doing it again next week for everyone watching. Please, like our Twitter page or our YouTube page. Sorry. So you can get alarms for next week. All right.

Thanks, guys. And have a great week ahead.

TS , AM, NG: Thank you.