Mechelany Advisors' WEEKLY MARKET REVIEW highlights the salient feature of the past week, details specific issues of the moment and reviews the Mechelany Advisors' MODEL PORTFOLIO, CHINA DEEP VALUE PORTFOLIO and the CHINA BANKS PORTFOLIO
Weekly Market Review 10th October 2021
With the earnings season starting next week, it is clear that the markets have gone into a more positive mood as investors bearisj^hness has reach a small climax last week. Most equity markets were in the green with Asian and Italy taking the lead. The Dow Jones rose 1.22 % while, as expected, the big US tech and the Nasdaq underperformed.
The Nikkei was still the big loser on the week, but most equity indexes recorded important bullish reversals last week, including Japan which rose 1.34 % on Fridays.
China’s domestic markets were closed until Friday for the October Holiday and the HSCEI confirmed its bottoming out.
The salient fact last week was the week data coming out of the US job market. The latest labour market data reinforced views that the US economic recovery is uneven and far from complete. The US economy added 194K jobs last month, the least this year and well below forecasts of 500K while the unemployment rate declined to 4.8% and average hourly earnings edged up.
At the same time, the energy crisis eased with Wladimir Putin proposing to open the natural gas spigots, easing somewhat worries over a spike in inflation prompted by soaring energy prices.
Washington reached a deal to raise the debt ceiling into December but bond yields kept crawling up
On a year to date basis , Sweden, France, Italy and Canada are leading the pack, with Switzerland the worst performer in Europe and Hong Kong Listed stocks the worst performers overall.
Most developed markets have recorded reversals but remain in a globally negative configuration, while Emerging Markets and Asian Pacific Markets are developing important BUY Signals, justifying an increased allocation to these segments.
Analysts are expecting a +14 % increase in earnings per share on the SP500 but the market is priced for perfection, but investors will be watching the earning releases with attention as concerns over the disruptions in the supply chain – chips -, higher raw material costs and wages, and significant changes to the business models of the big tech – privacy rules – could lead to negative surprises.
Bond yields were all marginally up last week, and the pressure on the FED to raise reduce tapering and raise rates is increasing. At the same time, the nomination of Jeremy Powell for a second term at the helm is diminishing with political pressure intensifying after the resignation of two Fed Presidents following the revelation of their personal trading activities during their tenure.
Several CENtral Banks have started raising rates, but the US, Europe and Japan are resisting the more.
Unfortunately, all the data that is coming out now is pointing to an economic deceleration while inflationary pressure remain prevalent.
US 30 year bond yields are still rising after having made a significant higher low and we expect them to exceed 3 % by Q1 2022. The yield on the benchmark US 10-year Treasury rose to above 1.6% on Friday, the highest in 4 months.
The main concern about inflation can be summarised by this chart detailing the behaviour of both acyclical and cyclical inflations.
Acyclical inflation is defined as exceptional factors. It is. much more volatile component and the sharp fall during the pandemic and the sharp rise in 2021 can be considered to be transitory.
But the real worry is the rise in cyclical inflation, components that are usually self-feeding and the sharp rise in this metric in the past few months to the highest level since 2007 is a matter of real concern for Central Banks.
A weak recovery and rising inflationary pressures are the hallmark of stagflation, even if the stag part may not be present and Central banks will ultimately have to withdraw liquidity and raise interest rates to contain persistent inflation.
Bonds should be avoided as an asset class, and risk spreads in the credit marketshare still not reflecting this state of affairs.
Commodities are sharply up year to date and some commodities are still making significant headways while some others are showing signs of plateauing.
Natural Gas has now clearly peaked in our view, but oil prices may rise further.
Dutch Natural Gas futures settled 9.3% lower at 87.61 euros a megawatt-hour on Friday, extending declines for the third session on easing concerns about tight supplies after Russia, Europe’s biggest gas supplier, pledged to send more gas via Ukraine than it’s contracted to this year. Yet, the natural gas market remains highly volatile after breaking records above 160 earlier in the week, amid a strong rebound in demand and reduced inventories. At the same time, heating demand is expected to increase next week due to forecasts of below-normal temperatures while wind generation is set to drop.
Oil WTI crude futures rose above $80 a barrel on Friday for the first time since November 2014, as demand outstrips supply. The US oil benchmark is on course for an over 5% weekly gain, its seventh consecutive week of gains and the longest winning streak since December 2013. The crude market has been spurred from substitution effects amid soaring natural gas prices and as OPEC+ decided early in the week to stick with its planned 400,000 bpd increase in crude output quota for November, despite pressure from some countries including the US and India to add more supply to stabilize prices. Meanwhile, the US Energy Department said it has no plans to tap the nation’s oil reserves at the moment following a report on Wednesday suggesting it may have been considering that option to curb rising prices.
Lumber staged a comeback to a 3-month high above $708 per thousand board feet and are more than 50% higher from their August low adding to concerns of lingering inflation.
The late run-up in lumber prices is mainly attributed to supply disruptions from the tightening labor market and wildfires in western Canada leading to a shortage of materials and labor, transportation problems and expensive logs. Still, the cost of lumber remains more than 55% below a record high of $1,711.2 hit in May.
Oat has been rallying since July to top a fresh record of 647 USd/Bu in early October, amid lower crop production in North America due to drought and increasing global demand. Production in Canada, the world’s biggest exporter, fell by 43.6% from a year earlier to an 11-year low of 2.6 million tonnes. The USDA said the 2021 US oat crop was the smallest on record at 39.836 million bushels, 39% less than in 2020, due to decreased planting across the oat growing region, either due to weather or producers switching to more profitable crops.
The Baltic Exchange Dry Index fell 2.2% to 5,526 on Friday, snapping a five-day winning run, but still near a 13-year peak. The capesize index, which tracks iron ore and coal cargos of 150,000-tonnes, decreased 3.6% to 10,112, but remained close to its highest level since September of 2008; and the panamax index which tracks cargoes of about 60,000 to 70,000 tonnes of coal and grains, fell 0.5% to 3,8866 its lowest in three weeks. Among smaller vessels, the supramax index rose 16 points to 3,417. For the week, the Baltic Dry Index booked a gain of 6.2%, its fourth straight weekly rise, supported by robust demand and ongoing pandemic-related constraints, in particular congestion in China.
Precious metals have turned the corner as we expected.
Gold prices extended gains above $1,770 an ounce on Friday as markets digested a lower-than-expected increase in U.S. Nonfarm Payrolls, which eases the pressure from the U.S Federal Reserve to cut back on monetary stimulus. The World Gold Council tweeted on Thursday that global gold-backed exchange-traded funds saw net outflows of 15.2t in September, where outflows in Europe and North America were only partially offset by inflows in Asia. Gold is stil down more than 4% since August highs.
Platinum and Palladium rose by 7 % o the week and Silver confirmed a major Bottom.
Our timing in recommending them was rather accurate.
The US dollar is trading at crucial levels
The DXY dollar index could not sustain its strong momentum after a disappointing jobs report, moving away from a one-year high to bottoming around the 94 level.
Most currencies are testing the US Dollar’s resolve and sitting on important moving averages.
It is still too early to call the final top in the US Dollar rise, but we see the end to be very near.
The Crypto world had another up week, with the BBG Galaxy Crypto Index rising by another 11 % last week. The technical configuration is positive but the momentum is fading and Bitcoins is not managing to make more headways. It made a strong move on Wednesday as someone bought 1.6 Bln worth of the coin in one day, but follow up was weak going into the week-end.
We see Cryptos nearing a breaking point very soon and are totally out of the space- see SYSTEMIC RIKS below.
The Week Ahead
Third-quarter earnings season gets underway next week, with updates expected from major banks such as JPMorgan Chase, Citigroup and Wells Fargo, while minutes from the last FOMC meeting will be watched for further cues on the Fed’s tapering timeline.
Other important releases to follow include US, China and India inflation data; US retail sales, UK and Australia jobs report; Eurozone industrial output; and Japan machinery orders.
Cryptos have become a gigantic casino with 9610 tokens in circulation and US$ 2.41 trillion invested in the space according to CoinGecko.
2.4 Trillion is nearing the size of the Indian or the French GDP, represents more than 10 % the GDP of the US and almost 1.7 % of the 142 Trillion of US household health.
Most of this money is invested in unregulated products, held through opaque platforms and owned by an entirely new generation of investors that have no history of losing money.
Price action has no longer anything to do with any kind of fundamentals.
Technical analysis, rumours, social media posts and supposed inside information are driving buyers and sellers in drove, impacting the coins with massive volatility.
In fact, apart from certain platforms that derive genuine revenues from providing services to the space, most coins are worthless in absolute terms as a piece elf coin.
Trading Cryptos is in fact a massive gambling platform where people are only betting on the up or down direction of prices in the confort that they all offer one characters in common : Limited supply and unlimited demand.
Everyone and your daughter wants to trade and invest in coins, taxi drivers, waiters, and pops and mod also want to trade bitcoins.
All the hallmarks of a massive investment bubble are present and this time round is no different than any other bubbles in the past.
IN TERMS OF MAGNITUDE, THE CRYPTO MANIA HAS NOW EXCEEDED THE DUTCH TULIP BULB MANIA OF THE 17th CENTURY;
IN TERMS OF ITS SIZE AND POTENTIAL ECONOMIC IMPACT, THE CRYPTO BUBBLE NOW EXCEEDS ANYTHING EVER SEEN IN HISTORY AND HAS BECOME A TRUE SYSTEMIC RISK TO THE FINANCIAL SYSTEM.
As we have argued many times in the past, this bubble will end in tears and the trigger will be state regulations and the ultimate criminalisation and taxation of the space.
China and a few other countries have already banned cryptos altogether. El Salvador is the only country in the world to have made it a mega tender
The SEC wants to regulate the financial markets again
The U.S. Securities and Exchange Commission chief is laying out one of the most ambitious agendas in the SEC’s 87-year history — some 49 proposals, many
already drawing opposition from hedge funds, stock exchanges, online brokers and public companies.
He has been similarly aggressive on agency enforcement cases, which can tank share
prices, spur fines and trigger embarrassing publicity.
Gensler, an ex-Goldman Sachs Group Inc. executive whose earlier Washington experience includes a hard-fought battle against big banks to bring oversight to the vast derivatives
market, says he’s confident the SEC can move ahead on many ssues at once. In an interview, he added that he sometimes thinks of the famous Martin Luther King Jr. speech about the “fierce urgency of now” when it comes to the regulator’s agenda.
Gensler has set up some 50 teams involving about 200 people to write rule
proposals. Each has staff from the general counsel’s office as well as economists to carefully weigh the costs and benefits, a key requirement of federal law.
Amongst the priorities are reining in special- purpose acquisition companies, or SPACs, responding to this year’s implosion of family office Archegos Capital Management
and getting a handle on the unchecked growth of cryptocurrencies.
One area vexing Wall Street is Gensler’s pledge to overhaul online platforms in response to this year’s meme-stock mania. The wild trading has prompted several congressional hearings and put firms, including Robinhood Markets Inc. and Citadel Securities, on edge because new regulations could hurt their lucrative businesses.
Executives who have met with SEC officials have been privately cautioned that the market structure rules being developed may be extreme, according to people familiar with the
More than two dozen people who have served in the government with Gensler or clashed with him when he ran the Commodity Futures Trading Commission during the Obama
administration say he won’t pare back his ambitions or shy away from a fight.
Gensler became one the youngest partners ever at Goldman Sachs and was able to force Wall Street to bring swaps out of the shadows after the 2008 financial crisis while leading the CFTC.
His crusade against social media, online platforms and cryptocurrencies will be ruthless, investors should be aware of it.
“Gamification” is one of his targets. The video-game like prompts that, critics say, encourage excessive trading by customers of Robinhood and other app-based brokerages
has led the SEC to scrutinise whether such nudges are akin to offering investment advice,
which would trigger a thicket of additional regulations.
A related issue is payment for order flow, in which trading firms pay brokerages to execute clients’ stock orders. Major online brokers rely on the practice to offer customers commission-free trades, but Gensler has suggested that it could be banned.
Crypto firms bristle at Gensler’s contention that they are peddling securities, which would trigger SEC oversight for the unregulated industry. Last month, Brian Armstrong, the chief
executive officer of the exchange Coinbase Global Inc., went on a Twitter rant, accusing the SEC of “intimidation tactics” after the agency threatened to sue if the company rolled out a product that would let customers earn interest on their token deposits.
The strategy was ultimately effective as Coinbase shelved the product.
Gensler is clearly targeting the crypto world and all the features that makes it even more volatile such as online trading, crypto trading platforms, social media and stable coins…
Heavier regulations could come as a massive knock on the chin of the entire space, especially if the SEC bans or controls the payments between the Official currency of the Usa and the Crypto trading and custody platforms.
Joe BIDEN may sign an Executive Order against Cryptos
The latest rally in the crypto space was triggered by Jeremy Powell again, when saying that the FED had no plans to ban cryptos.
But the US President is becoming wary of the massive speculation and systemic risk that this unregulated world is creating. and he U.S. government is weighing a regulatory crypto crackdown, according to reports relayed by FORBES magazine this weekend.
According to Forbes, the Biden administration is weighing an executive order that would see a raft of new rules related to bitcoin and cryptocurrencies.
The executive order, which is still under consideration, would see federal agencies charged with making recommendations on bitcoin and crypto and would touch on “financial regulation, economic innovation and national security,” Bloomberg was told by White House insiders who added a “crypto czar” could be appointed to “coordinate agencies’ work on digital currencies.”
A Biden administration official told the newsire that even if the executive order is not released, the overall U.S. strategy for cryptocurrencies will still be made public.
Over the summer, the crypto community revolted against a Treasury’s push for new tax reporting requirements on cryptocurrencies as part of president Joe Biden’s multi-trillion dollar infrastructure package.
Treasury secretry Janet Yellen has said the government should create a regulatory framework for stablecoins, cryptocurrencies pegged to traditional currencies or real-world assets that act as a major onramp for crypto investors, while influential U.S. senator Elizabeth Warren has called on regulators to accelerate a review of the impact of cryptocurrencies on the stability of the financial system.
Regulatory pressure is intensifying against the crypto space and investors would be foolish not to consider the history of such dynamics.
When Washington and the regulators start voicing that sort of concerns, the ultimate result is that they do act. The question is not and if, but a when, and as the pressure is mounting and speculation is reaching frenzy, the timing max be shorter than most think.
As wild price fluctuations are increasing, with many large investors touting Bitcoins at 100’000 the frenzy may accelerate in the near term, raising even more concerns…
Moreover, in the curent psychological and long positioning environment, it would take a simple but large scale technical glitch to send cryptos down the drain.
What we are saying in essence is that we have reached a stage of maximum danger in the space where extreme volatility could take place both ways, making cryptos extremely dangerous to trade, but the end result of the mania will be an extremely damaging bursting of the bubble.
What the systemic consequences of this bursting on the global financial markets could be stil remains to be assessed, but it goes without saying that major rule changes on line trading platforms could trigger a significant global bear market.
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