David Fuller and Eoin Treacy's
December - 152021
Commentary by Eoin Treacy
Some of the topics discussed include: Fed announces taper and rate hikes as expected, relief rally underway, fintech rebounds, ethereum upside key reversal, gold and oil steady, Wall Street rebounds, China property still under pressure and will require more urgent action soon.
Fed Doubles Taper, Signals Three 2022 Hikes in Inflation Pivot
This article from Bloomberg may be of interest to subscribers. Here is a section:
Heralding one of the most hawkish policy pivots in years, the central bank said Wednesday it will double the pace at which it’s scaling back purchases of Treasuries and mortgage-backed securities to $30 billion a month, putting it on track to conclude the program in early 2022, rather than mid-year as initially planned.
The faster pullback puts Fed Chair Jerome Powell in position to raise rates earlier than previously expected to counter price pressures if necessary, even as the pandemic poses an ongoing challenge to the economic recovery. The Fed flagged concerns over the new omicron strain, saying that “risks to the economic outlook remain, including from new variants of the virus.”
Projections published alongside the statement showed officials expect three quarter-point increases in the benchmark federal funds rate will be appropriate next year, according to the median estimate, after holding borrowing costs near zero since March 2020.
That marks a major shift from the last time forecasts were updated in September, when the committee was evenly split on the need for any rate increases at all in 2022. The new projections also showed policy makers see another three increases as appropriate in 2023 and two more in 2024, bringing the funds rate to 2.1% by the end of that year.
The abrupt change in the taper pace reflects “inflation developments and the further improvement in the labor market,” the policy-setting Federal Open Market Committee said in a statement following a two-day meeting. The Fed reiterated that it “is prepared to adjust the pace of purchases if warranted by changes in the economic outlook.”
Eoin Treacy's view
The Fed intends to follow through on what the bond and swap markets have been pricing in for the last month. Even though this statement is headline grabbing it is not sufficiently surprising to have had an immediate negative effect on the market.
However, the reality is liquidity is being withdrawn, interest rates will begin to rise next year and financial conditions are going to begin to tighten. The most interest rate sensitive portions of the market are short term oversold, so there is scope for a reversionary rally before the bigger challenge of sourcing more expensive liquidity comes to bear.
Meanwhile, as Iain Little points out in his latest fund manager’s diary, financials offer some of the best leverage to rising interest rates.
The Financials SPDR remains in a consistent uptrend while the racier portion of the market has sustained a deep pullback of late.
Visa (NYSE:V) is rebounding from the region of the trend mean,
PayPal (NASDAQ:PYPL) is short-term oversold and beginning to demonstrate support. This article discussing the surge in the company’s buy-now-pay-later volumes may also be of interest.
Buy-now-pay-later leader Affirm is firming from the region of the trend mean.
Ethereum rebounded impressively to post an upside key day reversal today, confirming short-term support.
Eoin's personal portfolio: profits taken on shorts
Eoin Treacy's view
One of the questions subscribers as most often is how to find details of my open traders. To make it easier I will simply repost the latest summary daily until there is a change.
The market has not pulled back in the manner I was initially expecting when I opened my shorts so I closed them today following the Fed statement. My Nasdaq-100 short in the March contract was closed at 15808 against my sale at 16,126.
I also bought sold my long in the Jan 21st 2022 Apple 175 put for $7.08 against my initial purchase at $6.
I increased my platinum long on August 27th paying $1002 for another position. My existing platinum longs were purchased at $1072 and $885. I remain of the view that precious metals are still cheap and are to be bought on significant dips.
I also continue to hold my silver trading position, initiated at $23.7. I will buy more if the current reaction deepens.
I have been saying for months that I have purchase orders below the market in gold and silver. The first of these was triggered on August 9th. I was filled at $1702.3 including spread-bet dealing costs. My original positions were opened in Q4 2020 at $1879.2 and $1818.6. That reduces by average purchase price to $1800.
I still have additional bids in the market below prevailing prices in gold and silver and will leave them in place to take advantage of any possible additional volatility. These are leveraged trading positions rather than medium to long-term investments.
With baby steps trading one must have high conviction prices will recover and the patience to buy on weakness before eventually being proved right; hopefully.
Among my investments, my original position in the VanEck Vectors Gold Miners ETF was purchased on March 25th at $20.12. I bought another unit at $35.79 on December 1st. I continue to shop for opportunities in the gold sector.
My two investment positions in Rolls Royce were purchased at 154.75 and 105p respectively. I also took up the rights issue which has resulted in an average purchase price of 54.63p. Rolls Royce continues to form a first step above the Type-2 base formation.
Email of the day on demand surges versus supply disruptions
The author of this article in the FT argues that the current rise in inflation is a demand side event and not due to supply shortages. He argues that the statistics show that global supply has risen in 2021 but not as fast as global demand.
Eoin Treacy's view
Thank you for this insightful email and related article. Here is a section:
There may be a case for such a policy turn, but the main factual premise of the new resilience-cum-autonomy doctrine is false. The pandemic put capitalist globalisation to the test, with sudden and enormous surges in demand, and it passed with flying colours.
Take durable goods. Headlines about shortages are the only thing that seem in ample supply, and everyone is experiencing delays in obtaining items, such as cars, that could previously be had with instant gratification. But the actual supply of durable goods is at record highs. Since the summer of last year, American consumers have been obtaining them in volumes much larger than the pre-pandemic trend. Many EU economies, including Germany, Italy and the Netherlands, have also matched or exceeded 2019 levels of durable goods consumption.
What about semiconductors? In a short paper published a month ago, Daniel Rees and Phurichai Rungcharoenkitkul of the Bank for International Settlements showed that semiconductor exports from Taiwan and Korea in 2020 exceeded the volumes recorded in 2019, and 2021 exceeded 2020. Exports currently appear to be running at a good 30 per cent above two years ago. The BIS’s Hyun Song Shin has added that semiconductor sales in the US are much higher than in the years before the pandemic.
When I think about my family. Since early 2020 we fitted out a whole kitchen, did some modest repairs, bought a couple of iPads, Macbook, Surface, a Quest VR headset, six new phones, a table tennis table and too many small household items to count.
There is no question demand surged during the pandemic. Millions of people moved home and more had to set up work from home environments. I’ve been living at work for 14 years and can testify that having a well laid out office makes all the difference to productivity. I suspect everyone understands that now, so demand for bigger homes is still strong.
The challenge for manufacturers is they are under a great deal of pressure to boost supply to satiate this rising demand. That doesn’t change the fact that the market for durable goods is cyclical. I won’t but a new phone for years, I expect my new kitchen appliances to last twenty years. The pandemic has pulled orders from the future into the present and that represents a significant future headwind for everything from semiconductors to consumer electronics and other durable goods. Even a modest dip in consumer sentiment could result in a significant retrenchment in the demand growth forecasts for durable goods.
The S&P500 Consumer Discretionary Index rebounded from above the previous peaks today to confirm a near-term low.
The Philadelphia Semiconductors Index has a similar pattern.
Taiwan’s TAIEX continues to pause in the region of the all-time peak and is susceptible to some additional consolidation.
South Korea’s KOSPI continues to encounter resistance in the region of the 200-day MA and has suffered considerable consistency degradation.
The Baltic Dry Index is easing back from the region of the 200-day MA following a brief reversionary rally. It needs to find support above 2000 if the return to medium-term demand dominance is to be given the benefit of the doubt.
China's Economic Slump Fuels Calls for More Stimulus
This article from Bloomberg may be of interest to subscribers. Here is a section:
The weakening of retail sales surprised analysts who were expecting a boost from the annual online “Singles Day” shopping festival. Spending in the restaurant and catering sector fell year-on-year in November, while car sales dropped for a fifth straight month.
China has been facing persistent outbreaks of the delta-variant and recorded its first cases of the more-contagious omicron variant this week, adding to pressure on authorities to implement local lockdowns.
What Bloomberg Economics Says...
China’s November activity data suggest the economy is still under strain, though the production side appears to be stabilizing. The pressure on the demand side was clear, with growth in both fixed-asset investment and retail sales extending slowdowns. We expect fiscal and monetary policies to become more supportive in the months ahead.
The central bank refrained from easing monetary policy on Wednesday. It kept the interest rate for one-year loans to banks unchanged and only rolled over about half of the maturing debts, withdrawing liquidity from the banking system. A recently announced cut to the reserve requirement ratio for banks takes effect from Wednesday, which should make it cheaper for them to extend new loans.
There was limited reaction in financial markets to the data. The CSI 300 Index was down 0.6% as of 1:45 p.m. in Shanghai. The yield on 10-year government bonds was flat at 2.88% and the yuan strengthened less than 0.1% to 6.3644 per dollar.
A weak labor market further worsened the outlook for consumer spending. The surveyed jobless rate inched up to 5% while the average number of hours worked per week fell slightly from the previous month.
“Domestic consumption remains weak with retail sales disappointing,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd. “The incremental increase in the jobless rate is concerning. The authorities should pledge more support and offer a stronger signal to the market.”
Eoin Treacy's view
The contrast between China and the rest of the world is growing increasingly stark. The demand surge during the pandemic has not yet ebbed in much of the rest of the world but is quickly receding in China. The key variable is liquidity. The USA and Europe spent inordinate sums to support their economies. China clamped down on personal freedoms and did what was necessary to ensure factories were operational, but did not engage in anywhere near the same level of monetary and fiscal accommodation.
That contributed to the trouble being experienced by the property sector. The determination of the administration to clamp down on overleverage pushed a rising number of developers into insolvency. The Party now appears to deem the property market a threat to the sustainability of the one-party system so they are clamping down on leverage. How sustainable this parsimonious approach to a sector in dire need of liquidity is debatable.
The result of this policy has been to heap further pressure on the CSI 300 Real Estate Index which is pulling back from the region of the trend mean as it distributes at the lower side of the six-year range.
The Renminbi by contract has been a tower of strength amid low supply. The time to tighten up on overleveraged portions of the economy is expending in a robust manner. China’s growth is slowing and unemployment is rising. This seems an odd time to try and combat excesses in the property sector. Ultimately, they will need to devalue the currency and pump more money into the economy or risk a recession. That may not happen until next year so there is scope for a global liquidity crunch in the short-term as the Fed prepares to accelerate the pace of tapering.
The Chart Seminar 2022
Eoin Treacy's view
With global vaccination rates rising, the prospect of anti-COVID pills on the horizon and the promise of travel restrictions being dropped, it is time to start thinking about venues for The Chart Seminar in 2022. Please drop sarah@fullertreacymoney.com a line if you would be interested in attending an event next year, as well as your preferred location. At present the two locations with greatest demand are London and Dubai.