Comment of the Day
Video commentary for July 6th 2022
A link to today's video commentary is posted in the Subscriber's Area.
Some of the topics discussed include: stocks quiet, oil and copper trim declines, gold extends decline, Treasuries pause, Dollar firm, yield curve inverts again.
Boris Johnson fights on but hit by new wave of resignations
This article from the BBC may be of interest. Here is a section:
New chancellor Nadhim Zahawi has urged unity after his predecessor, the health secretary, and several junior ministers walked out.
But the prime minister has been hit by six further resignations, taking the total to 16 in the past day.
It comes as he prepares for PMQs later and a grilling by senior MPs.
Mr Johnson's premiership has been plunged into crisis following the dramatic resignations of Chancellor Rishi Sunak and Health Secretary Sajid Javid.
They quit within minutes of each other on Tuesday following a row over Mr Johnson's decision to appoint Chris Pincher deputy chief whip earlier this year.
Their departures triggered a wave of resignations from more junior roles that has continued on Wednesday.
In six further departures ahead of PMQs, education ministers Will Quince and Robin Walker, Justice Minister Victoria Atkins, Treasury minister John Glen, and ministerial aides Laura Trott and Felicity Buchan have all walked out.
My view - Boris Johnson is a proven vote winner, but it was widely reported when he became Prime Minister that he is not well liked by his party colleagues. That later point is now becoming relevant as demand for solutions to unfolding economic issues are in high demand. Regardless of efforts to remove him, the range of possible options to mounting economic, inflationary and energy challenges will be the same.
EU parliament backs labelling gas and nuclear investments as green
This article from Reuters may be of interest to subscribers. Here is a section:
The new rules will add gas and nuclear power plants to the EU "taxonomy" rulebook from 2023, enabling investors to label and market investments in them as green.
Out of 639 lawmakers present, 328 opposed a motion that sought to block the EU gas and nuclear proposals.
The European Commission welcomed the result. It proposed the rules in February after more than a year of delay and intense lobbying from governments and industries.
My view - I wonder if we are seeing the end of an era of idealism and the return of harsh Cold War realism. This is particularly relevant for Germany’s Green Party. The decision by the European Parliament gives cover to the Greens to embrace nuclear as a suitable alternative to coal. That’s not to ignore the fact that it would be a monumental step. However, since Annalena Baerbock is both the leader of the Green Party and is also the German foreign minister, she has firsthand experience of the lengths Russia will go to achieve its geopolitical aims. If the Greens are to embrace nuclear, now would be the ideal time.
A Battle of Inflation Versus Recession: Views on US Yield Curve
This article from Bloomberg may be of interest to subscribers. Here is a section:
“The 10-year yield may have been depressed for a large part of the past 15 years or so because global central banks have increased their balance sheets substantially and have reduced the term premium at the long end of the curve. And so you can get around these possible distortions by focusing more closely on how the market is pricing central bank policy.”
“What you will see is, three to six months from now, most if not all of these recession-probability metrics that we get from the yield curve will begin to start flashing at least orange, if not red.”
No Sense
“The Fed is telling us that they want to go to 3.8% sometime in early 2023; the two-year yield is over 100 basis points below that level right now,” noted Jim Caron, chief fixed-income strategist at Morgan Stanley (NYSE:MS) Investment Management.
“This doesn’t make any sense whatsoever -- unless one of two things: one, the market just doesn’t believe that the Fed is actually going to be able to hike in the way that they’re saying they will, or, something’s going to happen along the way.”
More broadly, “the markets are right now are surrendering to the fact that we’re likely to have a hard landing or a recession,” he said.
My view - Long-dated yields have generally tended to rise during periods of quantitative easing because the Fed crowds out other investors and reduces the risk in other asset classes. Therefore, there is less inclination to hoard bonds and more incentive to buy risk assets; both public and private. That suggests the argument QE depresses long-dated yields is wrong.