MIDDAY MACRO - DAILY COLOR – 6/11/2021
PRICE MATRIX
OVERNIGHT/MORNING RECAP & MARKET WRAP
Narratives:
Equities are flat to slightly higher, with Russell leading and recouping some of yesterday’s losses
Treasuries are flat, pulling back slightly from new recent highs overnight
WTI is higher, hitting post-pandemic highs at the NY-open
Price Action:
Russell outperforming (thanks to “meme Reddit brigade” on a heavy OPEX day) as S&P and Nasdaq chop sideways
Russell outperforming S&P/Nasdaq
Small-Cap, Momentum, and Value factors outperforming
Technology, Materials, Consumer Discretionary sectors outperforming
Zero Gamma Level is 4202 while Call Wall is 4250, technical levels have support at 4225 while resistance is at 4260
Major Asian indexes are mixed: Japan flat. Hong Kong +0.5%. China -0.6%. India +0.3%.
European bourses are mixed, at midday, London +0.6%. Paris +0.6%. Frankfurt +0.3%.
Treasuries flat with a slight bull flattening
5yr = 0.74%,10yr = 1.47%, 30yr = 2.15%
WTI higher by 0.6% to $70.70
Opec kept its forecast for global oil demand growth unchanged for this year while GS raised its WTI price target to $80 due to summer demand
Copper higher by 1.3%to $4.54, but off highs post-NY-open
Substantial declines to weekly stock inventory on Shanghai Futures Exchange
Aggs are significantly lower
WASDE report was more supportive for corn but heavy selling is occurring across the complex
DXY higher by 0.5% to 90.50
Gold slightly lower by -0.8% to $1880
Bitcoin higher by 1.7% to $37.3K
Econ Data:
Univ. of Michigan Survey of Consumers: Sentiment rose in June, recovering some of May’s loss. The increase came mainly from middle and upper-income households while future economic prospects improved. Rising inflation remained a top concern of consumers, although the expected inflation rate declined in early June. Spontaneous references to market prices for homes, vehicles, and household durables fell to their worst level since the all-time record in November 1974. These unfavorable perceptions of market prices reduced overall buying attitudes, specifically among those with incomes in the top third, who account for more than half the dollar value of retail sales.
Why it Matters: As consumers emerge from the pandemic, they are temporarily less sensitive to price increases due to pent-up demand and record savings as well as improved job and income prospects. The current acceptance of price increases makes inflationary psychology more likely to gain a foothold.
Analysis:
Equities and Treasuries are quiet, with small-caps catching up a little after missing yesterday’s rally while Treasuries are retracing some of that rally.
Both the S&P and 10yr Treasury broke out of recent ranges temporarily but are now drifting back into them, signaling that momentum is not strong enough to take us to new/next levels/ranges.
Growth has been tactically outperforming this week as inflation data yesterday did not “shockingly” miss estimates (unlike April’s data), and markets continue to believe the Fed will be patient.
Growth’s outperformance is supported by lower yields but may also be foreshadowing increased expectations for a weaker winter as the U.S. economy begins to hit the coming fiscal cliff.
Today’s University of Michigan’s Consumer Survey brought further evidence that consumers are not only worried about increasing inflation but are beginning to alter their behavior because of it.
Elderly and low-income households are expressing concerns that increases in inflation would disproportionately hurt them.
Unfavorable “perceptions of market prices” reduced overall buying attitudes for vehicles and homes to their lowest point since 1982.
Declines in buying conditions perception were worse among higher-income consumers who significantly impact retail sales.
Finally, we highlight the outperformance of MLPs in the Technicals/Charts section below.
The low-for-long perception the market has regarding Fed policy and the continual grind higher in oil prices has helped this sector significantly outperform.
MLPS are still relatively cheap compared to historical valuations and are increasingly being seen by investors as an excellent source of needed yield.
Although currently, MLPs need a cooling in momentum (as RSI indicates a highly overbought condition) they will likely continue to do well if there is no significant sell-off in rates or oil.
TECHNICALS / CHARTS
FOUR KEY MACRO HOUSE CHARTS:
Growth/Value Ratio: Growth Outperforming on the Week
Chinese Iron Ore Future Price: Iron Ore Higher on the Week
5yr-30yr Treasury Spread: Curve is Flatter on the Week
EUR/JPY FX Cross: Yen Higher on the Week
MLPs:
MLPs have displayed particular strength in recent weeks on the back of declines in yields and increases in oil prices.
The American midstream sector is expected to continue to improve thanks to recovering U.S. and Canadian oil & gas production helped by higher prices.
Lower CAPEX budgets have boosted cash flow profiles, and the 2021 median FCF for midstream looks positive.
Investors will continue to look for high-yielding products like MLPs in the current low-rate environment.
$AMLP, an ETF focused on MLPs, is currently yielding 8.80%.
Even when adjusted for distributed capital and changes to the industry, prices and valuations still look low.
HOUSE THEMES / ARTICLES
MEDIUM-TERM THEMES:
Real Supply Side Constraints:
Shipyards: Ship Orders Surge as Carriers Rush to Add Capacity - WSJ
Orders for new container ships in the first five months of this year were nearly double the orders for all of both 2019 and 2020, with the biggest gains going to shipyards in South Korea and China. The order tally has been so strong that some yards have stopped giving quotes for new vessels and are trying to renegotiate existing orders for more than 20 ships as the price of steel plates used to build vessels has doubled since the end of 2020
Why it Matters:
Big profits at container ship operators are triggering moves to renew and expand their fleets. Increases in steel prices, which account for 30% of a vessel’s cost, have moved up far and fast enough to make some existing contracts unprofitable with at least 22 ships on order to be renegotiated at big Asian yards. “I’ve never seen such demand in 20 years,” an executive at South Korea’s Hyundai Heavy Industries said. We highlight this as another example of herd-like behavior by an industry that is exacerbating inflationary pressures first with price increases and now with a new CAPEX cycle.
China Macroprudential and Political Tightening:
Alarm Bells: Top Banking Watchdog Warns of China’s Growing Financial Risks - Caixin
Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, made it clear there would be no letup in financial regulators’ campaign to prevent risks and set out five priorities for their work; responding to a rebound in NPLs, preventing a resurgence of shadow banking, rectifying the illegal public issuance of securities disguised as private placements, preventing risks from derivatives trading, and being vigilant against Ponzi schemes. (what a list!)
Why it Matters:
Guo also warned about the consequences of loose monetary policy worldwide, defending China’s policies. It is important to remember that China effectively imports monetary policy from the U.S. while maintaining its currency peg and capital controls. Increasing inflation levels have officials in Beijing worried, likely about potential increases to social unrest, which leads us to believe there will be a continued managed appreciation of the yuan and further regulatory pressure on asset speculation.
LONGER-TERM THEMES:
National Security Assets in a Multipolar World:
Study Buddies No More: Wuhan lab row threatens US-China co-operation in science - FT
The U.S. and China have been working together on various scientific research endeavors for a long time. Some see the U.S.-China scientific relationship as the world’s most academically fertile. Between 2005 and 2017, the number of papers authored by US and Chinese researchers in high-quality journals jumped sixfold. Some of the jointly produced work has changed the world.
Why it Matters:
Scientists are now worried that collaborations of this kind are under threat, imperiled by mutual suspicions between the two governments. There may be a good reason for that, as U.S. law enforcement agencies have found the Chinese to use collaborative projects to steal sensitive American technology. As we continue to move to a more multipolar world, the collaboration between the two nations will likely be reduced as scientific findings are tied more to national defense needs.
Electrification Policy:
Crypto Tracking: How the FBI Got Colonial Pipeline’s Ransom Money Back – WSJ
The Justice Department recovered some of the cryptocurrency, equal to about $2.3 million of Colonial’s initial ransom of $4.4 million. While Monday’s announcement was noteworthy for the size of the recovery and the broad impact of the initial attack on the pipeline company, law-enforcement officials in recent years have established a track record of tracing cryptocurrency and at times seizing it.
Why it Matters:
Despite cryptocurrency’s reputation as a hard-to-trace medium of exchange, crypto experts say it is at times easier to track than hard currencies such as U.S. dollars. “We’ve effectively developed a map of hundreds of millions of bitcoin addresses associated with illicit actors all around the world,” said David Carlisle, director of policy and regulatory affairs at blockchain analytics firm Elliptic. FBI officials say the techniques they used to recover some of Colonial’s funds can be used in future cases, including when hackers attempt to transfer cryptocurrency through unfriendly overseas jurisdictions.
Crypto Crackdown: More Chinese provinces issue bans on cryptomining - Reuters
Authorities in China’s northwestern province of Qinghai and a district in neighboring Xinjiang ordered cryptocurrency mining projects to close this week, as local governments put into practice Beijing’s call to crack down on the industry. Xinjiang is China’s biggest bitcoin mining center, accounting for about a third of total computing power. Qinghai is in ninth place, according to data compiled by the University of Cambridge.
Why it Matters:
China accounts for over half of global bitcoin production, but some miners have been considering moving elsewhere. “Scouting for new destinations is truly happening on a global scale, with North America and Europe among the most sought-after places, followed by countries in Central Asia and the Middle East,” said Tong of Babel Finance. Given the importance, Chinese miners play in supporting crypto and energy usage, any move by China to further crackdown on the space, promoting a change in mining locations, needs to be watched closely.
Commodity Super Cycle Green.0:
Ethanol: India’s $7 Billion Bet to Turn a Fifth of Its Gasoline Green - BBG
About 10 billion liters of ethanol will be required each year to meet the 20% ethanol-blended fuel standard by 2025, triple the amount of ethanol that’ll go into the mix compared to the year ending November 2021, when ethanol constitutes 9% of blended gasoline. India will also expand the use of renewable energy in the world’s third-biggest oil importer and help turn the nation’s surplus rice and damaged food grains into ethanol.
Why it Matters:
Most of India’s ethanol output is currently made from sugarcane molasses, with non-sugar sources making up less than 10%. India’s goal is to eventually reach a 50-50 blend between sugar-based and grained-based. This development is worth highlighting as it will change the country's future oil and grain demand and shows its commitment to moving away from fossil fuels.
Steel: Steelmakers Keep Old Plants Idle Despite Surging Prices – WSJ
Two of the nation’s largest steelmakers are keeping older mills closed because of the high cost of restarting and the threats to their survival from rivals’ new plants. Steel companies are also facing pressure from regulators and customers to reduce carbon emissions from older plants. “The industry is in transition,” said Mark Millett, chief executive of Steel Dynamics, which is building a new mill in Texas. “If you’ve got ancient assets to compete against new, state-of-the-art facilities, you’ve got to question whether you bring those back.”
Why it Matters:
Steel prices have reached record highs, with low levels of imports and supply-chain problems reducing inventories. According to steel users, wait times for some deliveries from U.S. producers have stretched up to six months. Some customers said they are receiving partial shipments. Domestic capacity is not expected to come back any time soon, nor are imports likely to cheapen. As a result, any infrastructure builds, or general construction will have higher input costs from steel for some time.
ESG Monetary and Fiscal Policy Expansion:
G-7 Green Belt (No Road): G-7 Set to Back Green Rival to China’s Belt and Road Program – BBG
The “Clean Green Initiative” would provide a framework to support sustainable development and the green transition in developing countries. It was initially proposed by the U.S. and is featured in the technical discussions occurring at this year’s meeting.
Why it Matters:
Currently, the initiative has no new money backing it and instead more of a strategic framework discussion. It is important to highlight, though, as several G-7 countries and the EU have launched their own infrastructure initiatives with mixed results. If the group can agree upon a larger initiative, it may counter China's soft power gains through its own BRI projects. It’s also another area where fiscal policy will be channeling taxpayer money towards green projects.
PBOC Green: PBOC Adds Green Bonds to System for Grading Financial Institutions - Caixin
China’s central bank’s evaluation system, which was launched three years ago, will include performance metrics for both green bonds and green loans starting July 1. Financial institution’s risk levels will be graded based on various metrics, including the share of total assets made up by green assets and the year-on-year change in the total value of these assets.
Why it Matters:
Chinese financial regulators have been working on various ways for finance to play a significant role in the country’s green transition, including developing carbon markets and green financing. It is important to watch any moves by global regulators to promote green financing and subsequently punish non-green financing. China’s financial industry, being more centrally controlled, will have an advantage in moving funds the way they want here over western nations.