Comment of the Day
10th July 2023
Eoin Treacy
Jul 11
Video commentary for July 10th 2023
A link to today's video commentary is posted in the Subscriber's Area.
Some of the topics discussed include: gold stable as dollar eases but real rates breakout, bitcoin firms from $30,000, Nasdaq-100 stable amid reweighting, China deflation risk, Vietnam firm.
Goldman Analysts' Bearish China Bank View Draws Fresh Rebuke
This article from Bloomberg may be of interest. Here is a section:
At stake was a report published by Goldman analysts including Shuo Yang last Tuesday, which highlighted margin risks and potential credit losses from banks’ exposure to local government debt. Yang, a former official at the China banking regulator, estimated that the “implied loss ratio of credit portfolio in debt investment book” could reach 25% for Merchants Bank, compared with 6% on average for lenders under its coverage.
A representative for Goldman declined to comment.
Shares of Merchants Bank have lost 12% in Hong Kong since Goldman cut its target price for the second time in three months with a neutral rating. The US bank now has one of the lowest target prices for the Chinese lender, according to data compiled by Bloomberg.
Merchants Bank argued that Goldman’s report is “illogical” in the way it calculates the potential losses, “lacks basic common sense,” and also overestimates its exposure to the local government financing vehicles.
Eoin Treacy's view
The Chinese banking sector is independent in name only. The government has no qualms about using the sector’s resources to further its long-term development goals. When that means supporting infrastructure development to industrialise the economy, banks were forthcoming with loans and earned strong margins. Now that government priorities have changed, bank liquidity is constrained and asset quality is deteriorating.
This section continues in the Subscriber's Area.
Nasdaq 100 Plans Special Rebalance To Curb Dominance Of 'Magnificent Seven'
This article from Investor’s Business Daily may be of interest. Here is a section:
Based on Nasdaq 100 methodology, the combined weight of the five companies with the largest market caps will be set to 38.5%. The five-largest companies, Apple, Microsoft, Google, Amazon and Nvidia had a combined weight of 46.7%. That suggests some notable reduced weightings for these names.
Meanwhile, no component outside the top-five market cap companies can have a Nasdaq 100 exceeding the lesser of 4.4% or the weight of the stock with the fifth-largest market valuation. That points to at least a slight decline in TSLA stock's weight.
The official reweightings should be released on Friday, perhaps after the close. That will also include stocks that will see increased weightings.
Eoin Treacy's view
The Nasdaq-100 may have less money following it than the S&P500. However, many of the most liquid options are attached to the index and mega-cap stocks. The Invesco QQQ ETF has an NAV of $200 billion. Readjusting weightings away from the largest constituents over the next two weeks represents a clear risk of mean reversion while also favouring the smallest constituents of the Index.
This section continues in the Subscriber's Area.
Russia confirms BRICS will create a gold-backed currency
This article from Bloomberg may be of interest to subscribers. Here is a section:
"Talk of BRICS gold backed currency seems like an echo chamber. They do not have the gold to back a currency meaningfully," said Marc Chandler, managing director of Bannockburn Global Forex. "Have we not learned anything from the EMU experience of monetary union without fiscal union. Color me profoundly skeptical."
Many analysts have been speculating about a new global currency to challenge the U.S. dollar's role as the world's reserve currency. In late March, Former Goldman Sachs (NYSE:GS) chief economist Jim O'Neill wrote in a paper published in the Global Policy Journal that the U.S. dollar's dominance is destabilizing global monetary policies. He added that a BRICS currency, challenging the U.S. dollar's dominance, would bring stability to the global economy.
"Whenever the Federal Reserve Board has embarked on periods of monetary tightening, or the opposite, loosening, the consequences on the value of the dollar and the knock-on effects have been dramatic," he said.
Eoin Treacy's view
A competing reserve currency group to the US Dollar would act as a competing force and promote responsible monetary and fiscal action over the long term. In the short term, the scrabble to accumulate gold would be enormously disruptive and would result in a devaluation of every other asset relative to the metal’s price. That kind of pain tends to be sprayed around and would not be confined to the financial sector.
This section continues in the Subscriber's Area.
Eoin's personal portfolio: stock market leveraged long breakeven stop triggered June 26th
One of the questions subscribers ask most often is how to find details of my open trades. To make it easier I will simply repost the latest summary on a daily basis until there is a change.
This section continues in the Subscriber's Area.
© 2023 Eoin Treacy
548 Market Street PMB 72296, San Francisco, CA 94104