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23 February 2021
Video commentary for February 22nd 2021
A link to today's video commentary is posted in the Subscriber's Area.
Some of the topics discussed include:further rotation out of stay at home winners into reflation candidates, yield curve spread expends, oil and Pound extend recovery,
Yellen Shift on Vast Treasury Cash Pile Poses Problem for Powell
This article from Bloomberg may be of interest to subscribers. Here is a section:
In an effort to provide a floor for the money markets, the central bank could lift the rate it pays on excess reserves parked at the Fed by banks and on its reverse repurchase agreements, from 10 basis points and zero, respectively. Tweaking these administered rates is something the Fed has done before.
“If the Fed decides that it wants overnight rates to move away from zero, the most effective approach in my view would be to raise” those two rates together, said former New York Fed official Brian Sack, who is now Director of Global Economics for D. E. Shaw & Co.
But that decision -- which could be made at next month’s policy making meeting -- would come as officials try to convince markets that they’re not about to reduce support for the economy. While any rate rise would be portrayed as a technical adjustment, there’s a risk investors wouldn’t see it that way.
“The aesthetics of having to hike these rates, I’m not sure how well the market will digest that,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York. “It might be complicated.”
What to do about the supplementary leverage ratio the Fed and other regulators impose on banks is also tricky. In order to ease market strains in March, the Fed temporarily exempted banks’ holdings of Treasuries and reserves from the ratio’s calculation. That exemption expires on March 31, just as banks’ cash balances at the central bank will be ramping up.
Bank leverage ratios are the big impediment to the financial system absorbing an additional trillion in liquidity. The easy answer would be to unshackle the banks but that is very unlikely given the current political environment.
Therefore, the most likely course of action is for the Fed to increase the rate it pays banks to hold reserves. This means the money leaving the Fed will quickly make a return journey through the economy and back to the Fed but would now command a higher return for banks.
China's Yield Appeal Catapults Yuan to Global FX Big League
This article for Bloomberg may be of interest to subscribers. Here is a section:
There have been many false dawns in China’s quest for the yuan to challenge other major currencies. But underpinning the explosion this time lies a torrent of capital flowing into China’s markets, fueled by a frantic search for returns with over $14 trillion of debt globally paying less than 0%.
That appetite for some of the highest-yielding government bonds in the Group-of-20 countries has elevated interest in China to fever pitch and is generating demand for liquidity from investors looking to finance and hedge their investments. It’s also spurring volatility and attracting speculators who overlooked the market for years.
“It’s certainly a top currency in terms of the flow that we’re seeing,” said Kevin Kimmel, New York-based global head of electronic FX at Citadel Securities, one of the world’s biggest market makers. “Trading activity in the yuan has increased significantly.”
The shift comes as China continues to relinquish control -- albeit slowly -- of its tightly-managed currency, a linchpin of Beijing’s long-term plan to encourage its greater global use. China is considering easing restrictions on citizens investing in securities outside its mainland, a move that would facilitate two-way capital flows.
Capital is both global and mobile and it will always flow to the most attractive assets. There are no developed markets where one can pick up a yield above 1% in an appreciating currency. Investors have no other choice than to look elsewhere.
In doing so, they have to weigh how likely it is that tensions with China are likely to escalate. With a new US administration, the potential for surprises is lower and therefore the risk from investing in the renminbi is reduced but not eliminated. This trend of Renminbi strength has been very persistent since March and some consolidation will occur eventually.
Gold Extends Rebound on Wavering Dollar, Inflation Concerns
This article from Bloomberg may be of interest to subscribers. Here is a section:
“I think the strong buying in gold stems from a sharp bounce from new lows and strong close on Friday,” said Tai Wong, head of metals derivatives trading at BMO Capital Markets. “And a softer dollar negates the impact of higher U.S. yields.”
A revival in Indian gold imports could also indicate some physical dip buying of bullion, according to Marcus Garvey, head of metals and bulk commodity strategy at Macquarie Group Ltd.
Meanwhile, Democrats begin the final push for President Joe Biden’s $1.9 trillion stimulus bill this week, and the Biden administration may unveil a multitrillion-dollar recovery package in March centered on infrastructure.
Perhaps gold has been overshadowed by bitcoin during the latest bull run. The continued strength in cryptocurrencies is attracting interest from all manner of sources internationally. Everyone is aware of the strength the sector is capable of but few are willing to consider bitcoin is also capable of pulling back by 90% following its accelerations.
Eoin's personal portfolio - stop triggered on hedge position
One of the most commonly asked questions by subscribers is how to find details of my open traders. In an effort to make it easier I will simply repost the latest summary daily until there is a change.
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