FUBAR? – 2021wk37

Reading Time: 10 minutes

This Week

• Opinion piece – FUBAR
• MACRO
  • US latest macro data, FOMC review
  • German Election update
  • China: update on port bottlenecks and Evergrande time ticking bomb
• TECHNICALS
  • chart updates across bonds/rates, FX, commodities, stock indices: US Treasuries, Bunds, EURUSD, AUDUSD + AUDJPY, Gold, Silver, Palladium, Iron Ore, SPX, NDX, VIX, SSEC, HSI, FXI, EWH, GDX
  • UK Energy crisis & NatGas special
  • Cross Assetclasses Performance heatmaps, Momentum/Trend/Exhaustion scores 
• “…one more thing… ” – splashdown ! 

* this is not a trade recommendation and for educational purpose only. please do your own research.

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Opinion Piece

FUBAR

FUBAR – in case you don’t know what it stands for: F*cked Up Beyond All Recognition (or Repair from the original US army meaning WW2)

From one crisis to the next, while so many keep dancing “to the moon” song, while possibly cover their ears, eyes and mouths.

From the China Covid19 virus spread, to the politicians response with national/global lockdown and economic shutdown, to supply-demand imbalance and bottlenecks in ports, to now the latest energy crisis Natural Gas/Electricity, soaring consumer prices, and the upcoming potential Evergrande earthquake.

How can politicians and regulators again and again fail to foresee this ?

How many times in the financial history are overleverage & real estate coming into play of a global financial meltdown ? Let’s see how this time the Chinese version will play out on the global scale.

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MACRO

CV19 lockdown fear-o-meter

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US

• NFIB Small Business Optimism ticked up to 100.1 (last 99.7)
• Uni of Michigan Consumer Confidence ticked up to 71.0 (est. 72.0, last 70.3)
• New York Empire State rebounded to 34.2 (est. 18.0, last 18.3)
• Philly Fed rebounded to 30.7 (est.18.8, last 19.4)

FOMC next week

Will they or won’t they ? 

• Recent CV19 new cases and underwhelming last jobs report means kicking the can down the road.
• I will remain at my current stance: the US is not at any emergency status anymore since quite a while, thus, there is no need for the full emergency tool pack. Taper and gradual reversing to normality. Announce taper plan, while first rate hikes are not to be seen until late 2022 anyway. For me, as I said previously, they are already behind the curve and could have announced tapering a few months ago. Or are they really waiting for a global chain reaction regarding Evergrande potential default ? 
• September meeting will also see the latest projections for GDP, Unemployment rate, CPI and dot-plot 

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EUROPE

 

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China

China pulling all the strings.

The Ports Bottleneck update

During the week, headlines from Maersk CEO, who said:

• ~10% of global container ship capacity is still waiting to be unload
• No indications the current situation will change this year

Yes, the major shipping ports bottlenecks continue the supply chain disruption. Some Chinese ports are still partially shut down (“due to new CV19 outbreaks”) and create these knock-on effects for global flow. And clearly it’s just not all about container freights, all types are affected, including dry bulk carrier freight cost, everything is soaring.

What it also shows: China is the one pulling all the strings they want. (Intended or unintended): The start of the CV19 virus, the global shutdown, now the bottlenecks in their ports, and as always anyway the demand for raw materials, the OBOR strategy, the new role in Afghanistan.

EVERGRANDE ticking time bomb

On the other hand, they have the ticking time bomb: the real estate bubble and e.g. Evergrande. Not so ever grand is it ? Huge debt bubble bursting, and/or gigantic restructuring. The contagion to other real estate developers, to banks is large. Some even talk about Lehman 2.0 global effect. Will or can China bail them or others out ? According to Bloomberg, “Evergrande starts repaying wealth product investors with discounted properties”. OMG, LMAO. Before they can pay loan and bond coupons, let alone repay them, they give away (unfinished?) properties instead ?

Very interesting FinTwit thread LINK on this topic

Next week this Senior Secured bond is due for coupon payment (semi-annual). Noticeable: usually credit leads stocks, and in this case share price already diverged negatively vs bond price action in Q1/Q2 2021.

So, how to build up even more tension ? While all this is happening – nobody shall forget China’s pressure on Taiwan and the ongoing contest in the South China Sea – Australia will build eight nuclear-powered submarines under an Indo-Pacific partnership with the US and Britain. wow.

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NEXT WEEK HIGHLIGHTS

Macro Data / Events

• Monday: Canada general election
• Tuesday: US building permits, Housing starts, 20Y US treasury auction
• Thursday: flash MPMI/SPMI data release, AU, EU, DE, FR, UK, US… KC Fed regional
• Friday: UK GfK, Japan CPI, German IFO, France INSEE, Belgium NBB, flash MPMI/SPMI JP, Jay Powell speech
• Sunday: German general election
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• public holidays:
  • Monday – public holidays Japan, China, South Korea, Taiwan
  • Tuesday – public holidays China, South Korea, Taiwan
  • Wednesday – HK, South Korea
  • Thursday – Japan
  • Friday – South Africa, Thailand
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• Central Banks this week
  • Tuesday – Sweden, Indonesia, Hungary (+25bp?)
  • Wednesday – China PBoC, Japan BoJ, US Fed (taper?), Brazil (+100bp?)
  • Thursday – BoE, SNB, Norway, Turkey, South Africa, Philippines, Taiwan 

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TECHNICALS

RATES

• Nobody is perfect I guess as my thoughts were US long duration yields should drift lower for various reasons: a) as stocks having a correction, rotation into bonds, b) potential China slowdown and the Evergrande story looming: flight to safe haven. However, US 10s yields keep pushing upwards and testing 1.35/1.38 zone. Ok, NFIB, NY empire, Philly Fed all saw a positive rebound. Or the market is playing a new reflation theme/ super taper expectations ?
• The US yields gave some momentum to the European bond markets and German Bunds/Buxl – still on a trading short theme – pushed lower, yields rose higher.
• GBP STIR 2022-23 maturities sharp moves, indicating markets expect BoE rate hikes possibly Q3/Q4 2022
• NZD STIR had quite a movement last week, suggesting RBNZ is further expected to hike in 2021
• CHARTS:

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CREDITS

• “All Quiet On The Western Front”… fair enough, the title of that novel has absolutely nothing to do with the credit swap indices, but it’s worth to keep an eye on now given the potential spill over / contagion of China’s problem. Let’s see. But CDX EM widened slightly at 4wk high to 155bp
• China’s sovereign bond yields finally had some movement. (by the way – I prefer to show this here in “credit” section than above in the “rates” section). It puzzled me how international investors were or still are so bullish on Chinese credit, 10Y yields had a heck of a RiskON run from 3.34% down to 2.82% or 52bp. Given the risks, yields should be higher with a proper 3-handle. 
• CHARTS:

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FX

• US$ has seen a positive momentum the week , IMHO risk-off mode and upcoming FOMC meeting expectations. 
• However, focus should also be on Australian Dollar. AUDUSD or AUDJPY for many reasons: a) CV19 cases kept rising to new ATH, and the government is very much in the lockdown favour camp, thus slowing any recovery in the economy . b) China slowdown & Evergrande issue c) with this the collapse on Iron Ore and other relevant commodities. 
• CHARTS:

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COMMODITIES

• NatGas:
• US:
  • the good news, US drillers add rigs for second week, Gulf coast energy companies restart after storms
  • the bad news: storage is still well below 5Yr average thus with higher demand and autumn/winter approaching, there is still a substantial demand/supply imbalance. (I highlighted the gaps on the first chart)
  • Another very volatile week, another short squeeze rally low-high +14%, probably also initiated by call option buyers and market maker hedging. As hurricane Nicholas eased off and companies restarting supply, NG fell high-low -11%. Exhaustion score eased from +3.0z to +2.9z
• UK/Europe:
  • The storage problem in UK/Europe is much more severe, e.g. NG prices here soared +390% since April (compared to +116% in the US), or doubled since August (compared to +50% in the US)
  • The UK regulator Ofgem said price cap for default domestic deals would be raised by +12% to cover suppliers extra costs and will again be reviewed in a few months.
• This begs the question: is NatGas UK price the anomaly or is NatGas US actually cheap ? The last time both markets went into the orbit was 2005, then 2008. Of course with the global shutdown in 2020, prices tanked to multi-decades low. 
• The cold winter 2020/2021 left global storage levels completed, Brazil dry weather forced the country be more reliant on gas power as hydroelectric dams were not able to produce as much electricity. The summer in the Northern hemisphere faced hotter weather (with heat domes over North America, Greenland, Southern Europe, Siberia), that increased demand for gas to generate electricity for air conditioners. Also lack of wind reduced capacity to generate power via the wind farms. As a result, here in the UK, 4 smaller energy providers mismanaged and ceased to trade (People’s Energy, Utility Point, PFP Energy, MoneyPlus Energy). Every other provider either won’t be able to take on all new customers and/or monthly bills will explode into the winter. Reduced profit margins usually will be transferred to the end customers.
• (Last chart in this section) Also: apparently there is second-year cold La Nina in progress (El Nino = warm phase, La Nina = cold phase). These patterns have major impact and complex interaction of the ocean-atmosphere system. Here is a lengthy explanation link. 
• Germany is taking off the nuclear power plants, accelerating this process since the Fukushima disaster, but they are also ever so reliant on Russia’s gas supply (Nord Stream pipeline1+2 completed in June/Sep 2021).
• So much for “transitory”. From one crisis to the next. 

• Precious Metals:
• Silver and Gold took a beating this week, one factor the rebounding strength of US$.
• Palladium -5.7% w/w, Silver -5.6% w/w and new 52wk low, Gold -1.9% w/w, Platinum -1.5% w/w
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• Iron Ore continues to getting absolutely destroyed. China and Australia mirror image. Iron Ore Dec2021 futures are now -50% off July peak, sold off -35% in the recent down wave since late August.

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STOCKS

• Hmm, the “predictable OpEx dip” – is still dipping ? 
• SPX & NDX continued their correction mode and closed on the low last Friday. Not even a weekend / short cover rebound. Large Tech underperformed Small caps. 
• VIX spot moved from 17 week low to 21, indicating short term nervousness. 
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• China and HK naturally at the bottom performer list.
  • SSEC -2.4% w/w , FXI -4.0% w/w 
  • HSI -4.9% w/w, EWH -5.5% w/w
• With China weakness, materials ETF under pressure too, XME ETF -5%, COPX ETF -5.6%, PICK ETF -6.5%, STOXX 600 Basic Materials North America -5%, Europe -7.7%.
• Goldminers GDX closed -2.9% and new 52wk low, Gold & Silver perma bulls need even more patience.
• CHARTS:

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GLOBAL CROSS ASSET PERFORMANCE TABLES

weekly performance snapshot wk37

monthly performance snapshot wk37

outright Momentum/Trend/Exhaustion snapshot wk37

spread/ratio Momentum/Trend/Exhaustion snapshot wk37

STIR snapshot wk37

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…oh, One More Thing…

YEAH ! One of the most enjoyable splashdown in history. Great idea, perfect execution, great cause for the fundraising “Inspiration 4” mission ! Welcome back to planet Earth, guys !

*  as always, please check the DashBoard for the bigger Macro picture and connect the dots

Das war’s , thanks for reading, vielen Dank und good luck, Kai