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Asset allocation highlights: Removing the crutches

After a good start, September saw equity markets take a hit, particularly in emerging Asia. Investor concerns about the pandemic and weakening global growth…

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This article was originally published by BNP Paribas Asset Managment Blog ( Investor's Corner)

After a good start,
September saw equity markets take a hit, particularly in emerging Asia.
Investor concerns about the pandemic and weakening global growth momentum were
compounded by the news that tapering of asset purchases is coming.
 


This is an extract
from our Asset allocation monthly – Removing the crutches


In September, the main issue affecting long-term bond yields
in the US and Europe was major central banks beginning to talk of a gradual end
to the emergency monetary policy measures, put in place to protect economies
from the consequences of the pandemic.

These measures included massive asset purchases: EUR 1 337
billion from March 2020 to the end of August 2021 under the ECB’s pandemic
emergency purchase programme (PEPP); USD 120 billion per month since March 2020
for the US Federal Reserve. The message from both leading central banks is now
clear: Tapering is coming.

US Federal Reserve: More hawkish

The Fed’s long awaited monetary policy meeting on 22
September generated no major surprises, but did raise some questions. As
expected, chair Jerome Powell indicated that the criteria required to start
reducing (tapering) the pace of asset purchases had been met, at least on inflation.
The trend on employment is somewhat less clear, but the drop in the
unemployment rate from 6.7% in December 2020 (when the criteria were first laid
out) to 5.2% in August (the latest data point) brought it sufficiently close to
the equilibrium unemployment rate, estimated at 4.0%.

As a result, if the economy progresses as expected, tapering
should be announced at the 2-3 November policy meeting. Powell said that
tapering should end sometime around mid-2022.

The Fed’s inflation forecast for 2021 has risen sharply from
3.0% to 3.7% for the core PCE. The Fed now expects its preferred measure of
core inflation (personal consumption expenditures excl. food and energy) to
remain slightly above 2% from 2022 to 2024. Powell has defined this as a ‘very
modest overshoot’ of the Fed’s 2% target. However, the dot plot, which shows
the level of the policy rate deemed ‘appropriate’ by Federal Open Market
Committee members, indicated a split committee: Six members expect a rate rise
next year, while the other nine are pencilling in a later ‘lift off’ in rates.

The initial reactions of financial markets after the 22
September meeting suggested that the Fed chair had communicated his intentions
clearly. In the days that followed, it appeared that the FOMC was divided not
only over the date of the first rate increase, but also, more fundamentally,
over the interpretation of the flexible average inflation targeting framework.
Some members believe that key rates can remain low (at around 1% in 2024) with
inflation slightly above 2.0%, while others, such as Fed Vice-President Richard
Clarida, believe that much of the path towards the longer-run rate will have to
be travelled by 2024.

These divergent views could partly explain the upward
pressure on US long-term bond yields since the FOMC meeting and the renewed
expectation that key interest rates may begin rising next year. Furthermore,
even if the pre-announcement of tapering went well, there is a difference
between the notions of the Fed reducing its purchases and having to accept that
it will happen soon.

European Central Bank: Beyond September adjustments

Following the Governing Council meeting on 9 September, ECB
President Christine Lagarde said that “favourable financing conditions can be
maintained with a moderately lower pace of net asset purchases under the
pandemic emergency purchase programme than in the previous two quarters”. The
PEPP envelope remains at EUR 1 850 billion and the programme is due to end in
March 2022. The ECB has not communicated yet on the future of the PEPP nor on
changes to its asset purchase programme (APP). Investors will have to wait for
the December policy meeting.

In the meantime, the ECB, like the Fed, risks being faced
with upward pressure on long-term bond yields. In Q4, the monthly rate of PEPP
purchases will be reduced to between EUR 60 billion and EUR 70 billion from EUR
80 billion in Q2 and Q3. However, uncertainty over the amounts that will be
bought after March 2022, while government bond issuance remains significant,
are beginning to worry investors.

Recent weeks have been marked by statements from several ECB
members who want to distance themselves from the inflation forecasts released
in September, which they consider to be too low. In particular, one press
article referred to a private meeting between ‘German economists’ and ECB chief
economist Philip Lane, in which he mentioned an internal scenario showing the
return of inflation to 2% after 2023. Although partially denied, this story
fuelled the idea that the mood may soon become a little more hawkish within the
ECB.

While bond markets appear to have finally accepted that the
recent acceleration in inflation is ‘transitory’, discussions at the central
banks on this theme now seem to be giving rise to further upward pressure on
long-term yields. Furthermore, although the Fed and the ECB are cautious in
their official communications, other institutions have spoken out more clearly.
For example, the Central Bank of Norway, which recently raised its key rate
from 0% to 0.25%, indicated that a further increase was likely in December and
that the rate could rise to 1.25% by the end of 2022 as home prices have risen
sharply in recent months. The Bank of England, for its part, has indicated that
recent developments reinforce the need for a ‘medium-term’ rate rise and
multiple hikes rate next year are now priced in. Meanwhile, several emerging
market central banks have already had to raise policy rates in the face of
accelerating inflation.

As William McChesney Martin, Fed chair in the 1950s and
1960s, put it, the time has come for the chaperone to consider removing the
punch bowl; bond investors seem upset about having to leave the party.

Is the reflation trade back?

Perhaps one way to look at recent events is to consider that
central banks are removing the crutches that carried economies through their
gradual recovery from the Covid crisis. The Organisation for Economic
Co-operation and Development (OECD), the International Monetary Fund (IMF) and
others have already pointed out that the exceptional recession of 2020 will
leave deep scars, notably on employment, and that emergency treatment does not
heal those scars.

For that to happen, it is up to governments to implement
structural fiscal policy measures. Such decisions depend on the legislative
timetable and will take longer to show their effects – longer than financial
markets have patience for. Moreover, while parliaments had no hesitation in
voting for one-off support for households and companies in 2020, further action
could be trickier, which in turn could worry investors. Discussions in the US
Congress on the ambitious infrastructure investment and major social reform
plans proposed by President Joe Biden are taking longer and are more difficult
than expected, even among Democrats.

While the White House announcements on the large-scale plans
at the start of the year fuelled the reflation trade, the reality of the
protracted debates in Congress has now taken some of the shine off this theme.
At the same time, economic indicators have shown that the peak in the global
growth recovery has passed. Although supply chain bottlenecks have limited
industrial production, and services are suffering as the pandemic persists,
demand remains high. The resolution of both these issues should lead to a
strong recovery in both the services and the manufacturing sectors and the
expansion should resume at a robust pace. However, investors do not seem to be
focusing on this positive prospect, but rather on the short-term risks.

The current edginess could be heightened by the upcoming
debt ceiling debate in the US, but once it has passed, the reflation trade
could return. Our analysis of market dynamics indicators shows that technical
configurations on many assets already reflect this

Asset allocation 

The autumn of 2021 is likely to remain a transitional phase,
making predictions more difficult. It was easy to foresee the recession that
followed the first great Covid lockdown and governments’ subsequent measures to
help economic activity recover. The large-scale roll-out of effective vaccines
should allow many economies to return to pre-pandemic levels of activity. The
lockdowns of spring 2020 triggered a supply and demand crisis. Demand has
recovered strongly, sparking persistent supply difficulties that are putting
upward pressure on commodity and other input prices.

In response, major central banks are cautiously considering
‘normalising’ their monetary policy, reflecting reasonably optimistic economic
growth scenarios. The recent announcements by the Fed would seem to largely
explain the upward pressure on bond yields, which in turn led to erratic equity
market movements in September.

Investors, too, need to accept that policy rates and bond
yields will return to levels more in line with the fundamentals, while
acknowledging that the medium-term economic environment remains supportive of
equities. The elimination of supply bottlenecks should enable companies to meet
strong demand.

Our asset allocation reflects these convictions: we are long
equities, short bond duration, but in this transition phase, we reduced our
risk exposure on these two major asset classes in September. These adjustments
to our core positioning, and other changes, reflect our constructive view on
risk assets.

For a full analysis
of our latest asset allocation and the positioning in various asset classes,
click here


Any views expressed
here are those of the author as of the date of publication, are based on
available information, and are subject to change without notice. Individual
portfolio management teams may hold different views and may take different
investment decisions for different clients. This document does not constitute
investment advice.

The value of
investments and the income they generate may go down as well as up and it is
possible that investors will not recover their initial outlay. Past performance
is no guarantee for future returns.

Investing in emerging
markets, or specialised or restricted sectors is likely to be subject to a
higher-than-average volatility due to a high degree of concentration, greater
uncertainty because less information is available, there is less liquidity or
due to greater sensitivity to changes in market conditions (social, political
and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Writen by Christophe Moulin. The post Asset allocation highlights: Removing the crutches appeared first on Investors’ Corner – The official blog of BNP Paribas Asset Management, the sustainable investor for a changing world.










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Economics

Robusta Coffee Prices Hit Decade-High As Supply Woes Mount Ahead Of Peak-Demand Season 

Robusta Coffee Prices Hit Decade-High As Supply Woes Mount Ahead Of Peak-Demand Season 

Robusta coffee prices soared to decade highs Tuesday…

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Robusta Coffee Prices Hit Decade-High As Supply Woes Mount Ahead Of Peak-Demand Season 

Robusta coffee prices soared to decade highs Tuesday spurred by dwindling stockpiles ahead of peak coffee season. 

January futures in London rose more than 5% to $2,325 per ton, the highest price level since September 2011. Arabica coffee prices also rose 2.4% in New York. 

The tightening supply of robusta, coffee beans generally used for instant coffee, is “making it difficult to get hold of immediate-delivery coffee,” Kona Haque, head of research at commodity trader ED&F Man in London, told Bloomberg

“Winter is coming in Europe, which is peak coffee drinking season – that is the time when the roasters want to be sure their warehouses are suitably supplied with coffee,” Haque said. In South America, “you’re also finding that much of the robusta crop is being consumed internally, which is inevitable when you have a shortage” of arabica beans.

Dwindling supplies of the beans have been due to devastating drought and frosts in Brazil this year. The South American country is the world’s largest coffee producer. As for the world’s second-largest coffee producer, Vietnam, sky-high container costs and congestion at ports hinder stockpiles’ drawdown. 

“Cheaper robusta-coffee beans, used widely in instant-coffee beverages such as Nestle SA’s Nescafe brands, are sold out in Brazil. After drought and frost ruined crops of the higher-end arabica variety favored by cafes like Starbucks Corp., local roasters are racing for robusta replacements and driving prices to new records each day,” Bloomberg recently wrote. 

Last month, Nestle SA’s CFO Francois-Xavier Roger revealed the company is bracing for cost inflation to worsen into 2022. Spiking commodity prices like robusta and arabica, plus soaring transportation, labor, and packaging costs, will be pushed along to consumers in the form of higher coffee prices. 

“If we look at 2021, it was certainly much more about dairy and meat and grains. Next year, it will be more about coffee as well. But once again, the large part cannot be hedged, which has to do with transportation, which has to do with packaging material,” Roger told Barclays Global Consumer Staples Conference. 

Earlier this year, we warned readers that cheap coffee is no more, and a global deficit is coming. Coffee prices may still have higher to climb. 

Tyler Durden
Tue, 10/26/2021 – 20:30

Author: Tyler Durden

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Economics

Florida Jobs Grow At Three Times US Rate, Report Shows

Florida Jobs Grow At Three Times US Rate, Report Shows

Authored by Jannis Flakenstern via The Epoch Times,

Jobs in Florida are growing much…

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Florida Jobs Grow At Three Times US Rate, Report Shows

Authored by Jannis Flakenstern via The Epoch Times,

Jobs in Florida are growing much faster than the national rate, according to a September employment report.

The office of  Gov. Ron DeSantis (R) estimated the job growth at three times that of the nation. Florida has recorded 17 months of continued private-sector job growth.

The Sunshine State gained 84,500 jobs in September, with 73,000 of those in the private sector, according to the governor’s office.

The figures showed an increase of 5.6 percent compared to the same time last year.

In a press release, the governor’s office said: “Florida’s labor force increased by 540,000 over the year, with 423,000 of that increase occurring in the last six months.”

Most jobs were created in the leisure and hospitality industry, adding 26,600 positions.  Trade, transportation, and utilities gained 19,200 jobs; professional and business services added 10,400; construction went up 6,900, and education and health services increased by 6,300 jobs.

Figures from the Florida Department of Economic Opportunity (FDEO) show there are more than 520,000 jobs listed online, giving Floridians a wide choice of work opportunities.

The FDEO secretary Dane Eagle said these figures demonstrate the success of the state’s “Return to Work” initiative, as Florida’s unemployment rate has “lowered over the year, decreasing by 2.3 percentage points.”

“Florida continues to provide meaningful job opportunities for individuals moving to our state and entering our labor force,” Eagle said in a written statement.

“With our unemployment rate decreasing and labor force increasing, we will work to further this great success by making investments that continue to strengthen our economy and increase our state’s resiliency.”

Gov. Ron DeSantis said he is pleased with what he is seeing with growth and added it was not an easy task to achieve considering the national economic climate and inflation.

“Despite tremendous national headwinds and economic uncertainty, Florida has reached a level of job growth only seen on four other occasions in the past 30 years,” DeSantis said in a press release.

“We will continue to work hard to keep Florida open, free, and built for opportunity.”

The department reports that “Florida’s unemployment rate of 4.9 percent for September 2021, dropped 0.1 percentage point from August 2021.”

While Florida has seen consistent gains in the labor force, the nation saw a drop in job-growth rates.

Tyler Durden
Tue, 10/26/2021 – 20:50

Author: Tyler Durden

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Economics

Jack Dorsey Predicts “Hyperinflation”

Dorsey and Yellen offer conflicting views of inflation … what’s for sure is that earnings will be more important than ever … how a quant-approach…

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Dorsey and Yellen offer conflicting views of inflation … what’s for sure is that earnings will be more important than ever … how a quant-approach zeroes in on earnings power

Last Friday, Jack Dorsey, the CEO of Twitter and Square, sent out a frightening tweet in keeping with Halloween this weekend:

Source: Twitter – @Jack

If you’re having trouble viewing the tweet, it reads “Hyperinflation is going to change everything. It’s happening.”

After receiving some questions/pushback online, Dorsey took it a step further, tweeting “It will happen in the US soon, and so the world.”

Meanwhile, on Sunday, U.S. Treasury Secretary, Janet Yellen, said the United States was not losing control of inflation:

I don’t think we’re about to lose control of inflation. It’s something that’s obviously a concern and worrying them, but we haven’t lost control.

***These are opposite sides of the same highly-exaggerated coin

On the hyperinflation side, yes, it appears we’re in for a period of high and persistent inflation. And the inflation rate could eventually settle at a higher baseline level than we want.

But the idea of hyperinflation ignores how the eventual end of our supply chain issues will be a major deflationary force. And what about the deflationary effects of technological advancement?

On the other end of the spectrum, “the Fed has got it under control” from Yellen is laughable on its face.

Does anyone remember the Fed’s attempts to increase inflation during the 2010s? They failed miserably, year-after-year, as inflation remained stubbornly low. Was the Fed in control then?

And now, does anyone remember the various Fed presidents’ comments from about a year ago, pointing toward how much inflation they’d be willing to tolerate?

Let me remind you.

There was Dallas Fed President Robert Kaplan saying he would be comfortable with inflation running a “little bit” above the 2% inflation target if the economy were to return to near full employment.

“And for me, a little bit means a little bit,” or about 2.25%, Kaplan said during an interview with Bloomberg TV. “I still think price stability is the overriding goal and this framework doesn’t change that.”

St. Louis Fed President James Bullard was open to slightly higher inflation.

From Bullard:

Inflation has run below target, certainly by half a percent, for quite a while, so it seems like you could run above for a half a percent for quite a while.

That would have meant a 2.5% inflation rate.

Then there was Philadelphia Fed President Patrick Harker, also pointing toward an acceptable overshoot of a 2.5% inflation rate, but suggesting that the speed at which we got there was the real issue.

Here was his take:

It’s not so much the number. … It’s really about the velocity.

Harker suggested that inflation “creeping up to 2.5%” is quite different than inflation “shooting past 2.5%.”

Umm…so, how about an inflation rate that doesn’t “creep” up to just 2.25% or 2.5%, but has now exploded to 5.4%?

By the way, news this morning is that former Federal Reserve Chairman, Alan Greenspan, sees sustained inflation well above the Fed’s 2% goal.

But Yellen assures us the Fed has everything under control. Phew, that’s a relief.

***We don’t need to know where inflation will ultimately land to know that it’s going to act as a huge sifting machine for the stock market

As our CEO, Brian Hunt, once wrote, “It’s not so much a stock market as it is a market of stocks.”

While it’s easy to think of “the market” as one big monolith that rises or falls in unison, the reality is that it’s made up of thousands of companies with widely-varying fortunes. And rising inflation will compound the differences in how these companies perform.

On one hand, you’ll have the businesses that adapt to an inflationary climate and continue operating well. Their products and services are so in-demand that consumers will pay for them, even at higher prices.

On the other hand, buyers will look at some products and services and say “nope, too expensive. Not buying it now.”

If this sounds familiar, it’s the concept of “price elasticity of demand” you read about back in Econ 101. And it’s going to have a major impact on corporate earnings.

Take Unilever. It owns a vast portfolio of famous brands including Dove, Lipton, and Ben & Jerry’s.

Last week, we learned that Unilever raised prices 4.1% in the third quarter to offset soaring production costs. Are you comfortable paying 4.1% more for your Ben & Jerry’s Chocolate Fudge Brownie? Probably.

But what if it rises to 6%? Or 7%? Or 9%? And what if it’s not just ice cream?

When the entire cost side of your budget is approaching a double-digit increase while your income hasn’t risen a dime, at some point you’ll be forced to pick and choose your purchases.

And what gets the axe? Your Chocolate Fudge Brownie indulgence? Or, say, your baby’s diapers?

I could wager a guess.

This “to buy or not to buy?” decision will mean one thing – it’s every stock for itself.

***If that sounds familiar, it’s because Louis Navellier recently suggested this is the type of market we’re moving into

For newer Digest readers, Louis is a legendary quantitative investor. “Quant” simply means he uses numbers and algorithmic-rules to guide his investment decisions. Forbes actually named him the “King of Quants.”

In essence, Louis uses powerful computers to scan the market for the quantitative fingerprints of high-performing stocks. And these fingerprints usually all point toward one underlying trait…

Earnings strength.

In the short-term, all sorts of factors can drive market prices – a CEO stepping down, a big new customer, perhaps even a rumor.

But in the long-term, what drives a stock price is the company’s earnings. Plain and simple. And today, given the various concerns weighing on the market, Wall Street is refocusing on earnings.

This “every stock for itself” environment means Wall Street is rewarding companies that are maintaining strong earnings, while punishing those with poor earnings.

We’ve already seen this. Last week, we noted how JPMorgan posted decent numbers, but the stock sold off because most of the $2.3 billion profit increase from last year to this year wasn’t driven by growth in JPM’s business segments; it was driven by an accounting maneuver.

Given this, as inflation continues dragging on our economy and shaping the investment markets, it’s more important than ever to make sure your portfolio is filled with stocks that can endure – even thrive – in such conditions.

***Last week, Louis held a special event that explains how he identifies stocks with significant earnings strength

In his Project Mastermind event, Louis detailed his quant-based market approach that targets quantifiably strong stocks.

It’s a system he’s refined over four decades of investing, based on one core takeaway: better investing comes through a computerized market analysis that focuses on fundamental strength.

Over the weekend, Louis provided an example of a company uncovered by his Project Mastermind system:

Daqo New Energy Corporation (DQ) is one of the lowest-cost producers of high-purity silicon in the world. So, it’s not too surprising that the company’s polysilicon and solar wafers are in top demand with the solar photovoltaic (PV) industry, which utilize Daqo’s products to develop solar power solutions.

Given the worldwide boom for solar power and strong demand from leading companies, Daqo New Energy has achieved stunning earnings.

After detailing some of Daqo’s huge earnings beats in recent quarters, Louis pointed toward the company’s third-quarter earnings report coming this Thursday…

Analysts expect Daqo to report earnings per share of $3.11, which would represent an incredible 1,051.9% year-over-year increase. Revenue is expected to be $517.5 million, up 312.3% from last year’s third quarter.

Earnings analysis is a big part of my Project Mastermind system… so you can see why Daqo New Energy made the cut!

Louis will be releasing a new Project Mastermind stock recommendation this Thursday. Here he is with a few more details:

The stock is well-positioned to post stunning earnings results in its coming earnings report. I look for its earnings report to dropkick this stock and drive it higher… so now is the time to get in before it starts firing on all cylinders.

For more on this stock as one of Louis’ Accelerated Profits subscribers, click here.

Bottom-line, let’s be realistic about the future. While hyperinflation is unlikely, the Fed most certainly doesn’t have inflation under control. That means it’s critical that your portfolio can handle inflation that’s here for longer – and higher for longer.

And for that, it’s all about earnings.

Have a good evening,

Jeff Remsburg

The post Jack Dorsey Predicts “Hyperinflation” appeared first on InvestorPlace.






Author: Jeff Remsburg

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