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Bond Traders Uncover Secret to Rates That Fed Just Does Not Get

Bond Traders Uncover Secret to Rates That Fed Just Does Not Get

Bond Traders Uncover Secret to Rates That Fed Just Does Not Get 

This article by Daniel Kruger for Bloomberg may be of interest to subscribers. Here is a section:  That pessimism has been reflected in yields on the 10-year note, which are still well below their most recent peak of 3.05 percent last year. They were at 2.18 percent as of 6:30 a.m. in New York on Tuesday, according to Bloomberg Bond Trader data.

“The Fed has opinions; the market has positions,” said Jack McIntyre, who helps oversee $45 billion at Brandywine Global Investment Management in Philadelphia. “If the data doesn’t show marked improvement soon, they’re going to get pushed back into 2016.”

Fed Chair Janet Yellen said Friday she still expects to raise rates this year if the economy meets her forecasts, with a gradual pace of tightening to follow.

Eoin Treacy's view 

Everyone seems to be talking about when the Fed’s first rate hike will be. However I don’t think this is the most relevant question. The bigger question is when the Fed’s second rate hike will be. The economy is doing a bit better and wages are beginning to rise. One the other hand the disinflationary pressure of lower commodity prices and the stronger Dollar has so far stayed the Fed’s hand. 

The Fed will need to begin to remove monetary accommodation if it wishes to avoid inflating an asset price bubble. This might be the deciding factor in whether they decide to raise rates in September or not. Following the first hike they will then probably wait and see what effect it has on asset prices. It could be a while before they raise rates again and it is reasonable to assume the pace of the advance will be slower than what we saw from 2003 onwards. 

 

IMF Says Yuan No Longer Undervalued Amid Reserve-Status Push 

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

The yuan still has some way to go before it can become a major reserve currency, former Federal Reserve Chairman Ben S. Bernanke said Tuesday in Taipei. The IMF requires that a currency is “freely usable” to be included in its SDR basket.

Endorsement by the Washington-based lender would lead to about $1 trillion being switched into Chinese assets over the next five years, according to an estimate this month from Standard Chartered Plc. AXA Investment Managers estimated some 10 percent of the $11.6 trillion of global reserves would flow into yuan assets, though it didn’t give a timeframe.

China should allow greater flexibility in its exchange rate, with intervention limited to avoiding disorderly market conditions or excessive volatility, said the IMF’s China mission, which is led by the lender’s deputy director of Asia and Pacific Markus Rodlauer. The statement said it contains the views of the IMF staff involved and has not yet been endorsed by the institution’s board.

The yuan rose 0.6 percent versus the dollar in the past 12 months, while Brazil’s currency dropped 28 percent and Russia’s slid 32 percent. China’s productivity will probably rise more rapidly than the rest of world so its exchange rate will need to appreciate to take account of that, David Lipton, the IMF’s No.2 official, said at a briefing Tuesday in Beijing.

Eoin Treacy's view 

By remaining relatively steady against the Dollar over the last year, the Renminbi has appreciated against a wide basket of other currencies not least the Euro, Yen and Korean Won which account for more of its trade than the US Dollar. The currency has unwound almost the entire 1993 devaluation suggesting that the CNY6 level relative to the US Dollar is probably about as strong as the Chinese want to see the currency. 

 

Email of the day on London housing prices 

Dear David, As you are based in London and well placed to view the situation do you agree with Jim Mellon's opinion that the London real estate sector is both overheating and over leveraged? He is also positive on Some areas of European property which is probably fairly consensus due to the current global QE game of pass the parcel from USA/UK to the EU. I can personally report from Spain a notable pick up in real estate activity from foreign buyers and the re emergence of many high street estate agents (closed since 2008/9) which is almost always a leading indicator on property activity (in both directions as I saw in Dublin 2008). I am currently happily invested in Foxtons which is still benefiting from the election feel good factor but watching it like a hawk (AKA Estate agent). best regards

Eoin Treacy's view 

David is on holiday at present in the beautiful Welsh countryside but I’ll bring your email to his attention when he returns. Here are my thoughts:

As a truly global capital London property has benefited from its attraction to foreign investors, the proximity of the City with its outsized pay structure, low interest rates on a global basis, an expanding population and the absence of a building boom have all contributed to London’s high price environment.

This chart of London property prices highlights the fact they have risen by 140% in 13 years from 2002. They have paused over the last year in what is so far a reasonably gradual process of mean reversion. 

This chart of UK Nationwide Average House Price Index has been largely rangebound since 2007 and will need to hold the £180,000 level if the breakout to new highs is to be given the benefit of the doubt.

 

Email of the day on robotics and the Eoins Favourites section of the Chart Library: 

Regarding your optimism of the robotics and tech story and the prospects of the likes of FANUC in Japan, could you recommend a UK based investment vehicle to access FANUC and its peers? Also could you explain the criteria on the "Eoin’s favourites" section of the chart library?, I am assuming that they are favourites as in best of class as opposed to just favourites/watchlists from a both long and short perspective? Best regards

Eoin Treacy's view 

Thank you for these questions which I’m sure will be of interest to subscribers. Let me take them in reverse order. 

Over the years every time I have posted a review of a stock market sector I created a section in my Favourites so that I could easily return to the list in future. At The Chart Seminar I use my Favourites to go through examples of Commonality and to review sectors of interest to delegates. One of the most common requests in the feedback we get is that subscribers would like to have access to my Favourites list rather than recreating their own. With that in mind I started recreating the various sections from my Favourites in the main Chart Library about six months ago.

All of my lists of Dividend Aristocrats, Dividend Champions and Dividend Contenders can be found here.  

The Eoin’s Favourites section contains the lists I have so far entered. It’s not complete yet but it is meant to function as a resource rather than a recommendations list. 

 

Audi claims first synthetic gasoline made from plants 

This article by Eric Mack for GizMag may be of interest to subscribers. Here is a section: In late 2014, Global Bioenergies started up the fermentation unit for a pilot program to produce gaseous isobutane from renewable biomass sugars such as corn-derived glucose. Gaseous isobutane is a sort of raw material for the petrochemical industry that can then be refined into a variety of plastics, fuels and other applications.

The next step in the process was to run the material through a conditioning and purification process, allowing it to be collected and stored in liquid form under pressure. Some of it was then sent to Germany to be converted into isooctane fuel, creating a pure, 100 octane gasoline.

"To me this is a historic moment," says Global Bioenergies CEO Marc Delcourt. "It is the first time that we have produced real gasoline from plants."

Isooctane is currently used as an additive to improve fuel quality, but could also be used a stand-alone fuel. Audi calls the final, refined form of the fuel "e-benzin" and claims that it burns clean due to its lack of sulfur and benzene. Also, its high grade enables it to power engines using high compression ratios for more efficiency.

Audi will test the fuel composition and conduct engine tests to see how it performs before eventually trying it out in vehicle fleets. Delcourt says he could see it being used in consumer cars on a large scale "very soon."

"We thinking we're bringing green-ness to a field that desperately needs green-ness," says Rick Bockrath, vice president for chemical engineering at Global Bioenergies. "It's basically how we're moving away from an oil-based economy towards something that has a renewable, sustainable future to it."

Eoin Treacy's view 

This follows a story from a month ago talking about how Audi produced a diesel fuel from air and water through a chemical process. Today’s story is a further iteration of this concept.

In the last month we have also learned that artificial photosynthesis has been achieved. Here is a section from an article by Lynn Yarris for Lawrence Berkeley National Lab: 

Scientists with the U.S. Department of Energy (DOE)’s Lawrence Berkeley National Laboratory (Berkeley Lab) and the University of California (UC) Berkeley have created a hybrid system of semiconducting nanowires and bacteria that mimics the natural photosynthetic process by which plants use the energy in sunlight to synthesize carbohydrates from carbon dioxide and water. However, this new artificial photosynthetic system synthesizes the combination of carbon dioxide and water into acetate, the most common building block today for biosynthesis.

“We believe our system is a revolutionary leap forward in the field of artificial photosynthesis,” says Peidong Yang, a chemist with Berkeley Lab’s Materials Sciences Division and one of the leaders of this study. “Our system has the potential to fundamentally change the chemical and oil industry in that we can produce chemicals and fuels in a totally renewable way, rather than extracting them from deep below the ground.”

 

Email of the day on posting webinars 

I enjoyed your presentation on Webinar very much, very interesting and relatively easy for me to follow. Is it possible you and David can post this type of visual and audio presentation daily, or at least on Friday's for the big picture long term outlook, instead of audio only presentations you do at the moment. Thanks for a great service, from a veteran subscribe.

Eoin Treacy's view 

Thank you for your kind words. I agree that creating a chart illustrated talk would be helpful and we just need to work out the mechanics. One of the greatest impediments would be making sure the audio is captured as a separate file so that it can be uploaded for subscribers who only wish to listen to the mp3 while on the go. I’ll look into how to generate a screencast and save it as a link we can make available to subscribers. If anyone has suggestions on how this might be achieved I be happy to hear them.

 

The Markets Now 

Monday 15th June, at the East India Club, 16 St. James’s Square, London SW1Y 4LH

David Fuller's view 

Here is the new brochure listing some of our topics and the important questions most investors face.  I think all investors will benefit from guest speaker David Brown’s new presentation. I learned from it, not least how to assess some familiar data more clinically.  In other words, he shows us how to think a little more clearly, particularly in terms of identifying bear markets near their tops.  This is never easy given all the emotions involved.  Many people jump the gun, as you will have seen over the last few years, which can leave them susceptible to overstaying when the important and often overlooked warning signs are flashing.  Note also Iain Little’s challenging topic summarised in the penultimate question.  I look forward to their presentations and also to hearing the views of friends and subscribers.  

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