Comment of the Day
Video commentary for May 11th 2022
A link to today's video commentary is posted in the Subscriber's Area.
Some of the topics discussed include: stagflation stalking markets, Dollar steady, bonds begin to steady, Apple & Microsoft break down and push NDX to new low, oil firms, gold steady, China begins to steady.
Please note - variable hours in late May and early June
I am flying to Ireland on May 25th ahead of The Chart Seminar in London on June 6th and 7th. I’m looking forward to taking some time off since it feels like a long time since I’ve had more than a couple of days break in a row. Between those dates updates will be sporadic but I aim to post regular audio/video updates.
Dollar Won't Be Haven Currency of Choice for Long
This note from Bloomberg may be of interest to subscribers. Here is a section:
This in turn takes us to an interesting observation by George Saravelos, Deutsche Bank AG (NYSE:DB)’s global head of currency research, who says that “we are perhaps now reaching the tipping point where further financial conditions tightening will start to place more severe headwinds to how much more we can reprice the Fed.” This will result in the dollar becoming less responsive to risk-off due to more dovish implications for the Fed path. And while it’s still early stages, Saravelos argues that “the market is starting to behave as if we may be approaching this tipping point.”
Now, even if inflation does peak this year, that won’t mean central banks will exit their tightening path, but will adjust it accordingly. Just look at the Bank of England’s latest forward guidance and the divide within the voting committee. At the same time, and if we talk stagflation or recession, we should consider that the yen may attract haven flows once again given its low inflationary readings, Japan’s current surplus and so forth.
My view - Today’s month over month CPI figure was 0.3%. Analysts expected 0.2% but the prior reading was 1.2%. That’s still a moderation in near-term inflation, even if it is still rising. Year over year the rate is still 8.3% which is in the middle of what was expected and the last reading.
Patience through Bumpy Final Leg of Bear Market
Thanks to a subscriber for this report from Morgan Stanley (NYSE:MS) which may be of interest. Here is a section.
My view - A link to the full report is posted in the Subscriber's Area.
COVID cases are finally coming down in Shanghai which is positive news for the domestic economy. China remains exposed to the risk of further outbreaks because of the size and age of the population and the reluctance to be vaccinated. That holds out the prospect of continued lockdown phases for the foreseeable future. That’s a recipe for volatility.
TerraUSD's Struggles Are a Concern for All Markets
This article from Bloomberg may be of interest to subscribers. Here is a section:
Much more important, if TerraUSD fails it will be a blow to the hopes of many traditional financial institutions that rely on liquidity to maintain stability. That includes central banks, exchange-traded funds, mutual funds, derivatives clearinghouses, securities dealers and many others.
TerraUSD is an “algorithmic stablecoin,” meaning it attempts to maintain a $1 market price via an algorithm rather than traditional methods such as backing each token with an actual dollar. TerraUSD can be exchanged for $1 worth of another cryptocurrency, in this case Luna. Therefore, if the price of TerraUSD deviates from $1, arbitragers should force it back.
The Federal Reserve, although it doesn’t officially target the value of the dollar, can use a similar strategy if it wants to influence the currency’s value. If the value of the dollar falls either in terms of purchasing power or foreign-exchange rates, the Fed’s two main policy responses are to raise interest rates to make the dollar more attractive to hold, or to sell assets to soak up dollars, reducing the supply, and pushing up the price. TerraUSD uses mainly the second strategy, selling Luna to reduce the supply of TerraUSD.
The strategy relies on there being a liquid market for the asset being sold — mainly US Treasury securities for the Fed and Luna for TerraUSD. Unfortunately for the Fed, if the dollar’s value is falling, investors may not be enthusiastic about buying Treasuries, which pay off in future dollars and whose perceived credit may be impaired if too many have to be sold to soak up excess currency. TerraUSD has the same issue, the value of Luna is tied to the success of the Terra suite of products, which would be impaired by TerraUSD’s collapse
My view - In a bull market leverage begets leverage. From the perspective of financial engineers there is no strategy that can’t be made better with leverage. Stablecoins are the crypto market’s version of money market funds. They aim to hold parity with the Dollar by buying near-cash items that pay a slightly higher yield than the Fed. Algorithmic stablecoins try to go one better and only trade in their own tokens. That’s great during a bull market. However, the value of any money market instrument is in its ability to redeem at par in times of stress. If it folds at the first sign of trouble it is not fit for purpose.
The Chart Seminar June 6th & 7th in London sold out
Now in its 53rd year, the first venue for The Chart Seminar in the post pandemic era will be in London on June 6th and 7th at the Army & Navy Club.
This event is sold out. A waitlist has now begun.
To reserve your place please contact Sarah@fullertreacymoney.com.
Delegate Rates:
Full fee: £1799
Each additional delegate: £850
Fuller Treacy Money Subscriber rate: £850
Prices exclude VAT where applicable