Comment of the Day
28th July 2023
Eoin Treacy
Jul 29
Please Note the Big Picture Long-Term audio and video will be posted on Saturday morning UK time.
A 'Dangerous' Consensus Has Traders Staking It All on Goldilocks
This article from Bloomberg may be of interest. Here is a section:
Fast-money quants known as commodity trading advisers have been amassing a big short bet since May. JPMorgan Chase & Co (NYSE:JPM). strategist Nikolaos Panigirtzoglou estimates that they are sitting on a $150 billion short bond position that they may unwind in a rally.
The flip side of the extreme shift is that negative surprises can have an outsize influence. In March, banking turmoil caused equities to sink and Treasuries to rally, forcing commodity trading advisers to unwind $200 billion of bonds in the span of a few days, according to JPMorgan Chase & Co. A growth scare could reprise this episode.
Nevertheless, it will be hard to stop the market momentum. Strategists have revised upwards their S&P 500 targets and economists have softened their dire predictions. Some of the biggest downside risks threatening the economy — inflation rising to a four-decade high, a looming recession — have since faded.
“It would require a massive rally in bonds that would probably only occur with some sort of growth scare from a data shock,” said Charlie McElligott, cross-asset strategist at Nomura Securities International. “We have seen economic growth data hold, labor staying firm, and even US housing recovering.”
Eoin Treacy's view
The first half of the year delivered a storming rally on Wall Street, from deep oversold conditions. Despite interest rates ramping higher, long-dated bond yields have been static with the 4% level continuing to hold. Stocks are rallying in anticipation of rates peaking and bond yields are static as inflationary pressures subside. It seems to me that overweighting when trends are already overextended is risky.
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Burning Ship's Operator Says Almost 500 EVs Are on Board
This article from Bloomberg may be of interest. Here is a section:
The car carrier on fire near the Netherlands coast has almost 500 electric cars on board, according to its operator, more than was previously reported.
The cause of the blaze on the Fremantle Highway is still unknown, according to the Dutch coast guard, which previously said the initial cargo list they received suggested just 25 EVs were on the ship.
Whether EVs had anything to do with precipitating the fire, the number on board is relevant to what’s likely to be a days-long effort to extinguish it. Lithium-ion battery fires burn hotter and last longer than gasoline. They can also be difficult to put out, sometimes reigniting hours or days later.
Eoin Treacy's view
Anyone who has ever seen the movie Fight Club will be intrigued by what goes into the decision to announce an automotive recall. How that applies when a single car goes on fire and the conflagration spreads to a neighbouring vehicle is probably beyond the scope of the typical calculus.
Perhaps it is something actuaries should be thinking about as the number of EVs on the road increases. It is well understood that lithium burns hot, and not much can be done to stop it. Therefore the safety of technology is something every potential buyer needs to have a view on.
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Most European Banks Fare Better in Key Test for Payouts
This article from Bloomberg may be of interest to subscribers. Here is a section:
Despite €496 billion ($547 billion) of combined losses in the test, European banks “remain sufficiently capitalized to continue to support the economy also in times of severe stress,” the EBA said.
Most of Europe’s major banks saw a smaller erosion of their common equity tier 1 ratio than in the last exam. Deutsche Bank AG (NYSE:DB) saw its hit narrow to 5.28 percentage points, from 6.2 percentage points, while the impact at BNP Paribas SA narrowed to 3.92 percentage points from 4.4 percentage points. ING Groep NV of the Netherlands faced a bigger erosion.
The European units of major US banks were included for the first time and faced bigger-than-average hits.
Eoin Treacy's view
The ECB gives with one hand is taking with the other from the European banking sector. The majority of banks hope to be able to raise dividends following the successful stress test results.
At the same time, the ECB is no longer paying interest on the minimum reserves banks are required to hold. That’s a slug of capital banks will no longer receive interest on. It amounts to a loss of €200 million for Deutsche Bank alone and €6 billion for the wider sector.
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Eoin's personal portfolio: July 20th stock index short initiated
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.
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© 2023 Eoin Treacy
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