Comment of the Day
Video commentary for November 7th 2022
A link to today's video commentary is posted in the Subscriber's Area.
Some of the topics discussed include: global money supply contracting, Dollar at risk of breaking down, bond yields continue to march higher and stocks recovery rally remains in force, oil pauses at $100 and platinum breaks higher.
Billions in Capital Calls Threaten Forced Sales of Stocks, Bonds
This article from Bloomberg may be of interest to subscribers. Here is a section:
Capital calls are not the only problem for investors in private markets. Even their successes are creating headaches.
As many alternative assets outperformed public markets in recent years, institutions have broken past fixed limits on the proportion of their portfolios that can be allocated to private markets.
While this so-called denominator effect may be exaggerated -- because there is a lag in revaluing private assets to reflect the very latest market conditions -- it does have the potential to trigger increased selling at a time when it is least wanted.
And the sums involved could be huge. A significant amount of the easy money pumped into the financial system by central banks during the pandemic found its way into unlisted assets, which grew to $10 trillion globally by September 2021, a fivefold increase from 2007, according to figures from investment data firm Preqin.
“There’s a regime change of sorts in the macro world and in markets that we need to take hold of,” Stephen Klar, president and managing partner of Wellington Management Co., said at the Global Financial Leaders’ Investment Summit in Hong Kong on Nov. 3. “We’re working with our clients on thinking through how to really get that asset allocation back to a more diversified and rebalanced manner.”
Eoin Treacy's view - There are two separate issues affecting the private asset/alternatives markets. The first is tightening liquidity. As global money supply growth contracts the weight of money argument for supporting private asset prices is much less compelling. The second is the technical issue described above.
Debt Limit Will Complicate Bill Supply Normalization, BofA Says
This article from Bloomberg may be of interest to subscribers. Here is a section:
Treasury bill supply could rise by $1 trillion by the end of 2023, but the impending debt ceiling episode will complicate the timing, according to Bank of America strategists.
Strategists Mark Cabana and Katie Craig estimate Treasury will issue about $193 billion of bills in 4Q 2022 and $257 billion in 1Q 2023, with particularly strong months of supply in November, February and March because they are typically heavy deficit months that require additional issuance to sustain the cash balance
However, bill supply projections and the associated market impact are complicated by uncertainty around the timing of the debt limit, another round of money-market reform and the Federal Reserve’s quantitative tightening
Positive quarters of bill supply should help cheapen bills relative to overnight index swaps, and strategists estimate spreads should narrow by 10 basis points or more
Still, the monthly path of bill issuance is “much less clear” because of the debt ceiling, which could become constraining as early as December 2022
At that point Treasury would enter a debt issuance suspension period, which would restrict their ability to issue debt -- likely cutting bills to keep coupon sizes unchanged
Strategists project the potential default, or x-date, would be in August or September 2023. After that, there would be a surge of bill supply to replenish the cash balance
Eoin Treacy's view - The big question for anyone issuing debt is whether there is a sufficiently large pool of willing buyers to support the market. The Bank of Japan has been buying bonds for so long that it has largely crowded out the domestic market. Liquidity in the 10-yeasr is at an all time low. This condition raises important questions for the US government because $1 trillion deficits appear to be the norm.
China reopening playbook
Thanks to a subscriber for the report from Goldman Sachs (NYSE:GS) which may be of interest. Here is a section:
The light at the end of the tunnel?
China’s Zero-Covid Policy (ZCP) has kept Covid cases at low absolute levels but at rising economic costs as the virus becomes more transmissible. Reported cases are rising but more signs of Covid policy relaxation have been made available post the Party Congress, and our economists expect China could start to reopen in 2Q23 on political and public health considerations.
China could rally 20% on (and before) reopening
Cross-country empirical analysis shows that equity markets tend to pre-trade reopening (as defined by the peak of activity disruptions) about a month in advance and the positive momentum typically lasts for 2-3 months. We estimate that a full reopening could drive 20% upside for Chinese stocks based on empirical, top-down, and historical sensitivity analyses. Importantly, equity markets usually react more positively to local policy relaxation than to international reopening, with Domestic Cyclicals and Consumer sectors outperforming.
Eoin Treacy's view - The prospect of China opening up has enlivened risk appetites among traders who are tempted by the low absolute valuations on Chinese stocks listed in Hong Kong. The Beijing marathon went ahead as planned over the weekend and is being taken as evidence of some easing of COVID restrictions. It will be interesting to see if the Shanghai and Chengdu marathons pass off as planned later this month.
The Chart Seminar London November 21st and 22nd 2022
We are living through fast moving markets so the next venue for The Chart Seminar will be November 21st and 22nd this year in London.
In the meantime, if you have any questions, would like to attend, or have a suggestion for another venue please feel to reach out to Sarah at sarah@fullertreacymoney.com.
The full rate for The Chart Seminar is £1799 + VAT. (Please note US, Australian and Asian delegates, as non-EU residents are not liable for VAT). Annual subscribers are offered a discounted rate of £850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates.
Eoin's personal portfolio: commodity long initiated and investment position increased
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 daily until there is a change.