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Mechanical correlations break down

It looks like we are in for a bit of a chop-fest in financial markets for the rest of the week, until Friday’s US Non-Farm Payrolls gives the street…

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This article was originally published by Market Pulse

It looks like we are in for a bit of a chop-fest in financial markets for the rest of the week, until Friday’s US Non-Farm Payrolls gives the street some clarity on the Federal Reserve taper. Asian equity markets have followed US markets south today, with US fiscal policy encompassing the debt ceiling and the soon-to-be-trimmed USD 3.5 trillion spending plan fraying nerves, although oddly, US yields edged higher overnight. Non-transient inflation leading to interest rate rises bashed technology stocks overnight as well, although I’d argue the world being long to the gunnels of them since March 2020 is probably the underlying driver.


OPEC+ was probably the biggest cause of volatility, as the grouping refused to bow to pressure from the likes of the United States and India to pump more oil. OPEC+ left their 400,000 bpd per month increases unchanged. Various reasons were promulgated including fears of fourth wave shutdown, a valid point, the rise in prices being a natural gas and coal issue, not oil. Again, a valid point. And that seasonal factors in Q4 usually temper oil consumption anyway, a marginal point that unsurprisingly, came from Russia.


Whichever way you cut it; it was bullish for oil which surged to seven-year highs. Rains in China and India appear to be affecting coal mining there deepening the supply woes of both giants and there just isn’t enough natural gas on the spot market to satisfy demand. Europe could probably alleviate its situation if it bowed to Russian requests and got on with certifying Nord Stream 2. But with winter on the horizon in the northern hemisphere, long-term weather forecasts are going to get a lot of attention this year.


Assuming the energy squeeze is the new normal, it is hard to see transient inflation being as transient as the world’s central bankers are forecasting/hoping it will be. The effect will be felt throughout the world’s supply chains. Tightening monetary policy in response to inflation not being as transient as hoped isn’t really an option for most countries. This isn’t a wage/price spiral. It is extraneous inputs to which monetary policy will have limited impact. The best solution to high prices is high prices, although citizens going cold due a combination of poor government planning/incompetence/stubbornness/strategic naivety/ intellectual arrogance/political stupidity/scare-mongering media, is inexcusable.


That doesn’t mean that central banks will do nothing and perhaps the most likely response will be tapering quantitative easing. That might explain why the US dollar headed lower overnight, despite risk sentiment rising, energy prices rising, US yields rising and stock markets tumbling. Notably, the Eurozone and Britain could do just that while leaving interest rates at zero. Even Japan could, wait, please pause momentarily while I Japan-slap myself back to reality. Realistically, though, it is the Federal Reserve that is on the taper track to start tapering in December, as long as the US Non-Farm Payrolls this Friday play the game and print at 500,000 or above.


Given the combination of US fiscal uncertainty, shaky stock markets, ballooning commodity prices, QE tapering by the Fed pushing up US yields, and the fact that the world’s energy markets are mostly priced and transacted in US Dollars, the retreat of the greenback is odd indeed and I believe temporary. That trend appears to be reasserting itself already in Asia today.


RBA, RBNZ in spotlight

One central bank that won’t be moving rates today is the Reserve Bank of Australia. The RBA announcement later this morning should be a non-event leaving rates at record lows while retaining the right to fence-sit on adjusting monetary policy depending on how the game plays out. The Reserve Bank of New Zealand tomorrow will almost certainly raise rates by 0.25%, but it will be the statement that matters. Against the background of Covid-19 jumping the fence and a government swing to “living with it,” will this be a dovish hike or a hawkish hike. The RBNZ has itchy trigger fingers, but I don’t rule out some RBA-style fence-sitting which will take the edge of any NZD rallies.


Mainland China remains on holiday today but another smaller China developer, the ironically named Fantasia missed repaying a USD 205.7 million bond yesterday. Thankfully, the counterparty is another China property giant, Country Garden, so the fallout should be limited. It probably isn’t what was envisaged when economists and sustainability gnomes talked about the circular economy though. Evergrande shares, to my best knowledge, remain suspended in Hong Kong ahead of an announcement of a pending sale of another part of the carcass. For today though, China’s property nerves have been subsumed in the noise from the US and the post-OPEC+ disappointment.


Similarly, that same noise has drowned out any response in Japanese markets to Economy Minister Yamagiwa’s announcement that he is preparing an economic package before the year-end. Some sort of box of fiscal goodies was expected and had been priced into the Nikkei 225 after former Prime Minister Suga announcement of his intention to step down. After 20+ years of such sequels, it could be that viewer fatigue is also setting in.


Finally, RBA aside, the data calendar remains mostly second-tier today. Sentiment is driving markets, as it will until Friday. The calendar is littered with European Services and Composite PMIs, but it is the US ISM Services PMI and associated sub-indexes that will garner the most attention. A number above or below 54.50 will elicit the usual short-term taper/no-taper market reactions.

Author: Jeffrey Halley

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Peter Schiff Warns Of Irrational Exuberance In The Stock Market Casino

Peter Schiff Warns Of Irrational Exuberance In The Stock Market Casino


The Dow Jones and the S&P 500 hit new all-time…

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Peter Schiff Warns Of Irrational Exuberance In The Stock Market Casino


The Dow Jones and the S&P 500 hit new all-time records on Tuesday (Oct. 26). In his podcast, Peter Schiff focused on a few speculative stocks that have had meteoric rises (and in some cases crashes) over the last few days. He said this is evidence of the speculative fervor in this massive bubble.

What we’re seeing today is just another indication of the casino-like nature of today’s stock market that is completely the byproduct of artificially low interest rates, the inflation that the Federal Reserve and other central banks have created.”

So far, this latest round of speculative excesses has not marked the top of the market. After all, the markets continue to set new records.

I don’t know that this latest iteration of the speculative fever means that the markets have topped out. But it does provide additional evidence of the bubble-like nature of this market. And eventually, it’s going to come crashing down. If not now, sometime soon. And if it doesn’t come crashing down, it’s only because the dollar came crashing down instead.”

If we end up going down the hyperinflation route, we won’t see a stock market crash in nominal terms in dollars.

But everything will crash even faster and further in terms of real money. So, if we have hyperinflation, yes, these bubbles will implode, but you won’t be able to see the implosion if your prism is the US dollar. But it will be far more visible if you’re looking at it through the lense of gold.”

The first stock Peter discussed was Tesla. The stock hit an all-time high interday Tuesday although it closed off that mark. Nevertheless, the market cap is over $1 trillion. Only four other stocks in the world have market caps of over $1 trillion. Apple and Microsoft have market caps of over $2 trillion. Google is at $1.8 trillion, and Amazon has a market cap of $1.7 trillion.

That means Tesla is the fifth most valuable company in the world even though its earnings pale in comparison to those other four companies.

None of this would be possible but for the monetary policy of the Fed.”

So, why did Tesla stock go up so much?

The stock price surged after Hertz announced it would buy 100,000 cars from Tesla. The projected revenue for the contract is $4 billion. That means even if Tesla makes a 25% margin (an unlikely scenario), the profit would be just $1 billion. Meanwhile, the value of Tesla stock increased by over $100 billion on the news.

It makes absolutely no sense. It went up by more than 20 times the added revenue of the deal, 100 times the added profit of the deal. Why is that sale so valuable to Tesla? Does the market just believe that everybody is going to give Tesla these kinds of orders, like all the rental car companies? But even if they got all the rental car companies’ orders, it still isn’t going to be worth the increase in the market cap of the stock. This is just pure speculative frenzy.”

The point to understand is the increase in the market cap of Tesla stock has no relationship to the news that drove the price up. Nobody cares. It’s “buy now and ask questions later.”

Peter discussed some other stocks with crazy valuations, including Donald Trump’s company Digital World Acquisition Corp. and Bakkt Holdings, which saw a big rise on news of a crypto partnership with MasterCard.

In this podcast, Peter also talks about Jack Dorsey’s hyperinflation warning, Stanley Druckenmiller’s failure to understand the Fed is the problem, and how politicians aim their weapons at billionaires but end up hurting the middle class.

Tyler Durden
Wed, 10/27/2021 – 11:25

Author: Tyler Durden

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A dovish ECB could weigh on euro

The euro is treading in calm waters on Wednesday, ahead of the ECB policy meeting tomorrow. Currently, EUR/USD is trading at 1.1595, down 0.01% on the…

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The euro is treading in calm waters on Wednesday, ahead of the ECB policy meeting tomorrow. Currently, EUR/USD is trading at 1.1595, down 0.01% on the day.

ECB policy meeting next

‘The times they are a changing’ are for major central banks. With the Fed, BoE and other central banks looking to tighten policy, there is pressure on the ECB, which remains in accommodative mode, to join the bandwagon. ECB President Christine Lagarde has insisted that eurozone inflation is transitory, a message we have heard often from Jerome Powell at the Federal Reserve. However, with no sign that inflation in Germany or the rest of the eurozone will ease anytime soon, it is becoming harder for the ECB to ignore the threat of high inflation, especially with the surge in energy prices only adding to inflation levels. Eurozone CPI hit 3.4% in September and is expected to rise to 3.7% in October, which would mark a 13-year high. In Germany, inflation has accelerated for three straight months and climbed to 4.1% (YoY) in September, its highest level since 1993.

Rising inflation is new territory for the ECB, as inflation has continuously fallen short of the bank’s inflation target of 2 per cent. In September, Lagarde said that the ECB was “pretty far away” from raising interest rates, but there is a growing belief in the markets that the ECB may have to raise rates in 2022 if inflation does not ease lower.

The upcoming ECB meeting is unlikely to shake up the markets, unless the bank unexpectedly veers to a more hawkish position. The December meeting should be much more lively, as policy makers may signal their plans for the Pandemic Emergency Purchase Programme (PEPP), which is set to expire in March 2022.


EUR/USD Technical

  • EUR/USD faces resistance lines at 1.1628 and 1.1685
  • EUR/USD tested support at 1.1588 earlier in the day. Below, there is support at 1.1531

Author: Kenny Fisher

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Loonie Soars After Bank of Canada Ends QE Early, Accelerates Rate Hike Timing To Mid-2022

Loonie Soars After Bank of Canada Ends QE Early, Accelerates Rate Hike Timing To Mid-2022

Another day, another hawkish surprise from a developed…

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Loonie Soars After Bank of Canada Ends QE Early, Accelerates Rate Hike Timing To Mid-2022

Another day, another hawkish surprise from a developed central bank.

While nobody expected the Bank of Canada to hike rates today despite soaring inflation, the BOC did surprise most most traders when it announced it is ending its bond buying stimulus program, and accelerated the potential timing of future interest rate increases amid worries that supply disruptions are driving up inflation.

In a policy statement on Wednesday, Canadian central bankers led by Governor Tiff Macklem announced they would stop growing holdings of Canadian government bonds, ending a quantitative easing program that has poured hundreds of billions into the financial system since the start of the Covid-19 pandemic, to wit: “The Bank is ending quantitative easing (QE) and moving into the reinvestment phase, during which it will purchase Government of Canada bonds solely to replace maturing bonds.” Then again, one look at the BOC’s balance sheet makes one wonder just how long this QE halt will survive…

The Bank of Canada will release details of how it will implement the “reinvestment phase’’ of bond purchases in a market notice at 10:30 a.m. That will be a situation where it acquires bonds only to offset maturities, keeping overall holdings and stimulus constant. Most recently, weekly bond purchases had been C$2 billion. BOC head Macklem will also provide more insight into his policy decision at an 11 a.m. press conference.

In any case, the BOC also signaled it could be ready to hike borrowing costs as early as April, as supply constraints limit the economy’s ability to grow without fueling inflation.

Macklem maintained his pledge not to raise the benchmark overnight policy rate until the recovery is complete, but officials now believe that will happen in the “middle quarters’’ of 2022, bringing it forward from the second half of next year as previously thought.

We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In the Bank’s projection, this happens sometime in the middle quarters of 2022. In light of the progress made in the economic recovery, the Governing Council has decided to end quantitative easing and keep its overall holdings of Government of Canada bonds roughly constant.

The language will reinforce market expectations the Bank of Canada is poised to quickly pivot to a tightening cycle amid growing price pressures. Investors are anticipating the Canadian central bank will start raising interest rates within the next six months, with markets pricing in four rate hikes next year.

The Bank of Canada has been using two major tools to keep borrowing costs low: maintaining its policy interest rate near zero and buying up Canadian government bonds from investors to keep longer-term borrowing costs in check. The benchmark interest rate was left unchanged at 0.25% on Wednesday. The central bank has increased its bond holdings by about C$350 billion since the start of the pandemic.

“Shortages of manufacturing inputs, transportation bottlenecks, and difficulties in matching jobs to workers are limiting the economy’s productive capacity,’’ the BOC said adding that “although the impact and persistence of these supply factors are hard to quantify, the output gap is likely to be narrower than the bank had forecast.’’

The more hawkish tone at the bank on Wednesday comes even amid a less rosy outlook for the economy. The central bank cut its growth estimates for both 2021 and 2022, but officials said much of that reflects worse-than-expected supply disruptions in the global economy.

Because of those disruptions, the Bank of Canada marked down estimates of “supply’’ by more than their downward revisions to output. That means the central bank now sees less excess capacity in the economy, and less reason to accommodate demand with cheap borrowing costs.  The build-up of inflationary pressures also appears to be testing the Bank of Canada’s patience. The Bank of Canada revised higher its forecasts for inflation — to 3.4% in both 2021 and 2022.

This means that the BOC is joining the Fed in tightening into a stagflation.

“The main forces pushing up prices — higher energy prices and pandemic-related supply bottlenecks — now appear to be stronger and more persistent than expected,’’ policy makers said. “The bank is closely watching inflation expectations and labor costs to ensure that the temporary forces pushing up prices do not become embedded in ongoing inflation.”

In the accompanying Monetary Policy Report that contains the Bank of Canada’s new forecasts, policy makers also said upside risks to inflation have become a greater concern because price increases are above the central bank’s 1% to 3% control range.

In response to the surprise announcement, the Canadian Dollar soared as much as 0.6%, rising to 1.2309 against the USD…

… while the Canadian 2Y yield spiked more than 24bps above 1.00%…

… in a day defined by violent treasury moves, first in the UK and now in Canada.

Tyler Durden
Wed, 10/27/2021 – 10:16

Author: Tyler Durden

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