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Russian Ruble Slips on Higher Producer Prices, Capped by Energy Rally

The Russian ruble weakened against its US peer on Tuesday as higher producer prices and weaker industrial production weighed on the currency. The ruble has recorded modest gains against the greenback, driven by rising energy prices and broader…

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The Russian ruble weakened against its US peer on Tuesday as higher producer prices and weaker industrial production weighed on the currency. The ruble has recorded modest gains against the greenback, driven by rising energy prices and broader optimism in the nation’s economic recovery.

According to the Federal State Statistics Service, the producer price index (PPI) advanced 6.7% year-over-year in January, marking the fourth consecutive month of higher producer prices. This also represented the largest increase in the annualized PPI since May 2019, driven by manufacturing and mining. But inflation in utilities eased.

On a monthly basis, producer prices jumped 3.5% last month, up from 1.5% in December.

The statistics agency reported on Monday that industrial production slumped at an annualized rate of 2.5% in January, following a 2.1% boost to finish the year. Output contracted for manufacturing and raw materials extraction. Utilities production surged faster.

Industrial output plummeted 21.1% on a monthly basis in January, down from a 13% gain in December.

Later this week, the gross domestic product (GDP), retail sales, and unemployment data will be released.

The ruble has found support on soaring energy prices this year. Brent crude oil has soared about 20% so far in 2021, topping $60 a barrel. Natural gas prices have also climbed roughly 20%, surpassing $3 per million British thermal units (btu). The energy sector is critical to the Russian economy, maintaining a vast reservoir of oil and natural gas supplies.

On the coronavirus pandemic front, Russia has seen a noticeable decline in COVID-19 infections, with the seven-day average falling from more than 28,500 to just above 14,000. In total, Russia has reported 4.04 million cases, with a death toll of nearly 80,000.

Financial analysts are bullish on the Russian economy as the government continues to roll out its coronavirus vaccine, forecasting considerable growth in the economy and the ruble.

In other news, the Russian government announced that a permanent floating duty on wheat exports would go into effect on June 2. Moscow first introduced a tax on wheat shipments to curb domestic prices. After food inflation failed to subside, officials expanded and extended the levy, only for grocery prices to remain high. Industry observers are warning that wheat prices could increase even with an export penalty since it would discourage farmers from producing more wheat.

The USD/RUB currency pair rose 0.65% to 73.7819, from an opening of 73.3325, at 15:55 GMT on Tuesday. The EUR/RUB advanced 0.46% to 89.32, from an opening of 88.93.


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Author: Andrew Moran

Economics

Grantham’s Super Bubble Leading To Doomsday Forgets The Fed Put

Grantham’s Super Bubble Leading To Doomsday Forgets The Fed Put

By Ven Ram, Bloomberg markets live cross-asset strategist

It’s not quite…

Grantham’s Super Bubble Leading To Doomsday Forgets The Fed Put

By Ven Ram, Bloomberg markets live cross-asset strategist

It’s not quite the message you would perhaps like to hear going into a Friday, but picture this: an adrenaline junkie who is bungee-jumping off Victoria Falls discovers halfway during the drop that they don’t have a cord attached to the hip. Stocks, warns legendary investor Jeremy Grantham, are headed for a similar destiny.

The S&P 500, he says, is headed for a plunge of 50%, taking it all the way down to 2500 — sorry about your spilled tea if you are reading this at breakfast! Grantham’s research is fascinating, yet straightforward and simple: stocks are caught in a super bubble, which he defines as a three-standard deviation move away from trend. For our bungee-jumping adventurist who has no time to calculate such arcana, that would be the equivalent of a nasty shock occurring less than once in 100 times during a jump.

Grantham goes on to say that super bubbles always fall back to trend, based on the five previous occasions it’s happened — citing the U.S. stock market before the Great Depression, then in 2000 and Japanese stocks in 1989; and two in real estate — the U.S. in 2006 and Japan in 1989.

MLIV has often pointed out that equity valuations are way too excessive, eclipsing even the dotcom bubble, so I would readily agree with Grantham. While, for instance, I see the possibility of the Nasdaq 100 and S&P 500 falling more, I find it hard to see a drop to 2500 on the latter. With global savings near a record and pension funds waiting to pounce on every correction, it’s hard to imagine a plunge of that magnitude in the absence of systemic shock (as happened with global financial crisis).

Let’s also not forget that the Federal Reserve and other global central banks are only ever willing to turn their lender of last resort status to become a buyer at first retort if the markets start feeling the pull of gravity too heavily (to be fair to Grantham, he does concede that to some extent). Just yesterday, we visited a scenario where a Fed official went on record to say that policy makers don’t want to surprise the markets.

In short, Grantham’s observations are indisputable. His conclusions, less so. That means our bungee jumper may, after all, get a reprieve — for the merchants of central bank will help put a net underneath.

Tyler Durden
Fri, 01/21/2022 – 11:42





Author: Tyler Durden

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Energy & Critical Metals

Without a Doubt, Lithium’s “White Gold” Label is Merited

2022.01.21
Electrification and decarbonization are anticipated to be one of the biggest investment trends of 2022.
Just two weeks into the new year, we’re…

2022.01.21

Electrification and decarbonization are anticipated to be one of the biggest investment trends of 2022.

Just two weeks into the new year, we’re already witnessing a big rally in EV battery minerals, perhaps a precursor to what could be a historic year for metals considered vital to the energy transition.

Nickel prices last week surged to its highest in a decade, with investors betting on a global scramble for supplies of the EV battery material.

Another key battery mineral that has seen its prices soar is lithium, which started 2022 on a record high, continuing its strong form from last year. Data from S&P Global Platts last week showed that lithium carbonate prices in China have now risen 35% on month and are up 531% on the year.

And this uptrend in lithium (and other EV battery metals) is only going to continue, according to those within the battery metals industry.

Caspar Rawles, chief data officer at Benchmark Mineral Intelligence, the world’s leading lithium price reporting agency and EV supply chain data provider, notes that the early transactions from 2022 suggest that “lots of legs” are left in this rally.

Gavin Montgomery, research director for battery raw materials at Wood Mackenzie, recently said in a Financial Times article that lithium prices are unlikely to crash, as they did in previous cycles.

“We’re entering a sort of new era in terms of lithium pricing over the next few years because the growth will be so strong,” he added.

According to a December report from S&P Global, further demand growth in 2022 will mean a lithium deficit this year as use of the material outstrips production and depletes stockpiles.

Supply is forecast to jump to 636,000 tonnes of lithium carbonate equivalent in 2022, up from an estimated 497,000 in 2021 — but demand will jump even higher to 641,000 tonnes, from an estimated 504,000, the report said.

Lithium Supply Problem

Driving the latest lithium rally are near-term risks that are threatening deeper shortages in the metal’s supply, from plant maintenance and Winter Olympics curbs in China to pandemic-related labor shortages in Australia.

“The lithium market is extremely tight at present, so spot prices are very sensitive to any supply disruptions,“ Alice Yu, analyst at S&P Global Market Intelligence, recently wrote in a note to Bloomberg.

As we speak, lithium prices are still rising in China as consumers look to restock ahead of the Chinese New Year festivities at the end of the month and early February. The high level of buying in the world’s biggest EV economy also pushed prices higher in other regions such as Europe and the US, according to Fastmarkets.

Beyond the short-term issues, there are challenges for lithium supply to expand fast enough to avoid a prolonged market squeeze over the coming years.

Skeptics point to Rio Tinto’s controversial lithium project in Serbia, which is now on hold due to environmental protests, and the growing concerns around the sustainability credentials of South America’s brine-based production, as long-term threats to global supply.

“Customers are realizing that new supplies are very difficult to bring on,” said Tony Ottaviano, CEO at Australian lithium miner Liontown Resources, in the Bloomberg report. His company recently signed an agreement to ship lithium to South Korean battery giant LG Energy Solution from 2024, when its project is scheduled to start.

Last week, BlackRock’s Evy Hambro, global head of thematic and sector-based investing, told Bloomberg TV that commodity prices may stay high for decades as mining companies struggle to keep up with demand from the energy transition.

“We’ve got decades worth of high rates of investment into infrastructure as the world seeks to decarbonize. That’s a widely held consensual view,” he said.

Among the key raw materials listed was lithium, which is set to face fresh demand from the creation of a “greener world”.  Bloomberg New Energy Finance (NEF) estimates that, by 2030, consumption of lithium (and nickel) will be at least five times current levels.

Hambro still sees the mining sector as remaining undervalued, given its importance in providing the materials like lithium needed to decarbonize the global economy.

“It seems as though this core element of the transition has been completely ignored by many investors,” he said. “At some point people will realize how essential these businesses are for the transition and capital will flow into them, and that should change the valuations.”

More Expensive EVs

The tightening supply of metals is happening just as EV uptake around the world is about to explode, which is exerting serious cost pressure on battery production.

In fact, we could see the first rise in battery prices since 2010 this year, potentially undermining global efforts to speed up the adoption of EVs and clean energy technologies, analysts say.

Between 2010-2021, battery pack prices had dropped a staggering 89%, from above $1,200/kWh to $132/kWh in real terms, BloombergNEF’s annual battery price survey showed in November.

Li-ion battery prices dropped by 6% from $140/kWh in 2020 to $132/kWh in 2021, but could now rise to $135/kWh in 2022 in nominal terms due to higher raw material prices, BloombergNEF estimated.

According to the research provider, even low-cost chemistries like lithium iron phosphate (LFP), which have been used more in 2021 and are particularly exposed to lithium carbonate prices, have felt rising costs throughout the supply chain in recent months.

Since September, Chinese producers have raised LFP prices by between 10-20%, according to BloombergNEF estimates. Indeed, the average price of these cells is now the same as the average price of high-performing nickel-based cells in the first half, at around $100/kWh.

If other technology improvements cannot mitigate the higher cost of raw materials, the point of breaking below the critical threshold of $100/kWh battery pack price could be pushed back by two years from BloombergNEF’s current expectation of 2024.

“This would impact EV affordability or manufacturers’ margins and could hurt the economics of energy storage projects,” the research provider warned.

“Higher battery price creates a tough environment for automakers, particularly those in Europe, which have to increase EV sales in order to meet average fleet emissions standards,” said James Frith, BNEF’s head of energy storage research and lead author of the report.

Automakers may now have to make a choice between reducing their margins or passing costs onto consumers. Either way, some carmakers are likely to lose out in the global race to produce affordable EVs after failing to meet their ambitious targets.

In the grand scheme of things, the clean energy transition could be costlier and more distant than initially thought. Fatih Birol, executive director of the International Energy Agency (IEA), said last year:

“Today, the data shows a looming mismatch between the world’s strengthened climate ambitions and the availability of critical minerals that are essential to realizing those ambitions.”

US Falling Behind

The United States still lags behind both China and Europe when it comes to the production and domestic uptake of EVs, and the world’s biggest economy has made it loud and clear it wants to challenge its rivals’ dominance.

In an executive order, US President Joe Biden has already set a national goal for 50% of new car sales by 2030 to be electric. Jumpstarting his EV initiative is a proposed $7.5 billion spending package to build a network of 500,000 EV charging stations across the country.

Meanwhile, its EV industry is also making more noise than ever. Nearly every major automaker in the US has announced a transition to electric vehicles; Tesla delivered almost one million cars in 2021, while new electric vehicle companies like Rivian and Lucid are rolling out new models off the line.

However, to power these new EVs requires more batteries — and the materials to build them.

According to Benchmark Mineral Intelligence, EV growth will be responsible for more than 90% of demand for lithium by 2030. The UK-based consultancy forecasts that demand for lithium is set to triple by 2025, rising to 1 million tonnes and outpacing supply by 200,000 tonnes.

So for the US to really become an EV powerhouse, it needs to first solve its lithium supply problem.

Over 80% of the world’s raw lithium is currently mined in Australia, Chile and China. Moreover, China controls more than half of the world’s lithium processing and refining, and has three-fourths of the lithium-ion battery megafactories in the world, according to the IEA.

The US, meanwhile, mines and processes only 1% of the world’s lithium, according to the US Geological Survey (USGS). There is only one lithium mine in operation, Albemarle’s Silver Peak, which extracts lithium from brine outside of Tonopah, Nevada, outputting a paltry 5,000 tonnes of lithium carbonate a year.

However, this is not to say we can rule out the US as a major producer of lithium, dubbed “white gold” for its vital role in rechargeable batteries and high demand.

Next Lithium Hub?

The US had been the leading producer of the metal until the 1990s, so scarcity is not a problem.

Within its borders are almost 8 million tonnes of lithium in reserve, ranking it among the top five countries in the world, according to the USGS.

So, with the right amount of investment, a burgeoning domestic “mine to battery to EV” supply chain is certainly within reach. Several projects are already in the works across the states of Nevada, North Carolina, California and Arkansas.

Nevada looks to be the focal point of the next “white gold rush” given the abundance of lithium-rich brines and clays, plus its history of lithium production dating back to the 1960s. It currently hosts the only US lithium mine, for now.

Conclusion

Lithium prices have already set new records to begin the year; China’s lithium carbonate prices jumped to over $47,500 last week, representing a six-fold increase over January 2021.

The BMI lithium index has already shot up by 280% year-on-year, and nearly 12% over the past month alone.

Some are predicting that this run is far from done. Australian lithium miner Allkem told Reuters this week that lithium carbonate prices could explode in the second half of the year, rising by about 80% to over $20,000/tonne in the six months to December.

“It’s a very, very tight supply market and as a result of this we’re seeing this very rapid increase in pricing,” the company representative said.

Strong demand for lithium-ion batteries for EVs and other applications is expected to put a strain on the global supply of battery raw materials, which will likely invoke a string of new investments.

China’s biggest battery makers and miners are already gobbling up lithium assets left, center and right, with more deals still left to be done. Without a doubt, lithium’s “white gold” label is merited.

With the global race to secure minerals in full throttle, there will be calls made to companies holding lithium projects within the most prolific regions of the world.

Richard (Rick) Mills
aheadoftheherd.com
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Author: Gail Mills

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Economics

Dip-Buyers Beware Ahead Of The Fed

Dip-Buyers Beware Ahead Of The Fed

This week has seen carnage at the surface and below the index level in US equity markets, capped off by…

Dip-Buyers Beware Ahead Of The Fed

This week has seen carnage at the surface and below the index level in US equity markets, capped off by the chaos around the open today and the start of a $3.1 trillion options expiration, that we have detailed previously.

An ugly week…

And a chaotic open…

However, what really matters is what happens next? Is it time to buy-the-f**king-dip? Or is Fed fear too much to overcome in the short-term?

First things first, in order to judge what happens next, we need some color on WTF happened yesterday as markets puked with barely a bid. Nomura’s Charlie McElligott lays out exactly how things happened…

  • The PTON shock headline was important to “get the ball rolling”—it had been a “Growth Darling” on the public equities side (+498% from 2019 IPO into early 2021 highs), and for many funds, was once a private-side holding–which optically and sentiment-wise VERY MUCH MATTERS right now, as those “unicorn” books are finally getting an MTM “come to jesus” which is crushing performance now for many funds, instead of previously carrying it—so there was fear of cascade into other “legacy” growth names with stupid valuations

  • So shortly thereafter (about 15-20 minutes), when the critical 100dma in ES of 4570 I mentioned in the morning note couldn’t hold, that was first “ruh roh”…bc up to that point, the Dealer Delta covering HAD been a rocket ship

  • At this point, our internal Equities Futures “pressure” / imbalance monitors began showing that same heavy ongoing “vwap-style” de-risking seen in prior days, hitting bids, particularly in ‘large lots’—meaning big institutional / asset-manager –type size

  • We then saw some really really big cash “sell” baskets which started going off at 2:30pm and escalated into the close, with TICK (proxy for large notional “program” flows from customers across single-name equities) hitting -1850 a few times in waves, and actually printed -1875 at the peak, which is largest “downtick over uptick” impulse across NYSE Equities since 9/20/21

  • From there, the kill-shot from the FLOW-perspective was when we began approaching the CTA “sell trigger” in S&P at 4507 I wrote about in the morning, when stating that it “had to hold”…..i had about 50 bberg chats pop-up once we moved down below 4520, as Traders were clearly “keying” on it / front-running it

  • And we absolutely BLEW through the flip level (4507 to the cash close of 4474 in about 20 minutes), which by our estimates meant $25B of Spooz to go from CTA Trend

  • This flow then took-out the 4500 strike with ease (notably the largest $Gamma strike)—where at that spot level also saw us near yesterday’s point of Dealer “max short Gamma,” in the area of ~ -$22B per 1%

  • And of course, the coup de grace was the NFLX outlook whiff after the cash Equities close, where this (former?) “General” of the FANGMAN / mega-cap Growth -era was slaughtered like a Microcap Lamb, -20% after-hours—which then further spiraled fears ‘liquidation cascade” fears across the Fund universe, where so many “thrivers / survivors” of the past decade simply overweighted 5-10 of these names and watched their “returns vs benchmark” drive asset growth

So now we know how we got down here, we should remember that into today’s Op-Ex, the set-up is as follows: massively short $Gamma and vs spot…

but with a huge percentage of $Gamma set to roll-off thereafter, which means potential for Delta relief next week.

The majority of the (negative) Gamma set to roll-off today is in client downside / Puts, meaning that Dealers will have MUCH less Delta exposure to hedge / sell futures against come next week…i.e. if we are now closer to the end of client de-risking and there is “less hedging required on smaller underlying books = downside not rolled-out,” Dealers will be buying-back their “short futures” hedges.

As SpotGamma highlights, yesterday certainly felt like some forced liquidations, which fed into large negative gamma and an accelerated drop. 4500 is the major gamma strike currently on the board, but all strikes are very put-dominated. As such we think today’s flows will be hyper sensitive to shifts in implied volatility (vanna) and decay (charm).

We show >=33% of total S&P + QQQ gamma expiring today, which will lead to put covering. We therefore anticipate some relief rally today (or an attempt at one).

Its likely that a lot of put flow is rolled out due to the FOMC (+ volatility & other general risks), and still feel that a meaningful, multi-session rally cannot take place until after Wednesdays Fed.

In other words respect the magnitude of possible rallies today, but we advise not to consider them stable.

SpotGamma concludes then that the clearing of puts is supportive of markets, and may spark a short cover rally. However, because of the FOMC we do not think implied volatility will be offered in large supply as traders hedge the event risk. While we do give an edge to “pre-Fed” S&P lows being in, but anticipate large directional swings into Wednesday.

This is very risky, fragile market with lots of large flows that can shift price rapidly.

But, McElligott notes that CTA shorts are now in-place for US and could act as further “fuel for a squeeze” on spot stabilization / client monetization…as for now, “buy to cover” triggers in S&P, Nasdaq and Russell 2k futures are far more proximate than next “sell triggers”

…the case for at least a short-term “mechanical” rally (meaning not one really built on bullish sentiment improving, per se) following Op-Ex and out-of the Fed next week still largely stands.

But the Nomura strategist concludes with a warning not to get too excited:

“Bigger picture however, the above is just providing a temporary “mechanical relief” and little more…because there is undoubtedly a sense we are in a new-regime from the Vol-sense”

We are forcibly transitioning to a world that requires “tightening” of still-too-easy financial conditions which requires simultaneously policy hiking and balance-sheet unwind

And that’s why all I keep hearing about from clients is a resumption of the “4Q18 Playback,” as the scar-tissue from that QT + hikes experiment is the backtest people are drawing on…

…but this time, with just so much more extensive speculative & valuation excess as a starting point

…but this time, due to the inflation issue, a “Fed Put” which is now struck much lower below spot…

…meaning no “dovish pivot” relief unless things get much, much worse from the markets-side.

Tyler Durden
Fri, 01/21/2022 – 10:45



Author: Tyler Durden

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