Spot Markets Live Transcript, 13/10/23 (Bonds, Uranium, Wine, Polish elections)

10:28 Hello and welcome back to SPOT MARKETS LIVE.

Yes, we’re back.

Mainly because the markets are looking a little iffy again. But also because we finally found ourselves a solid partner for a daily gig.

10:31 Just waiting for the rabble to arrive. Sorry, typos already, so deleted the last comment.

Hello everyone!

I’m delighted to announce that in our last and final stab at making this a thing, we’ve partnered up with Julian Rimmer.

Who he? I hear you ask.

( He asks himself the same question)

Well, if you haven’t already caught his contributions on FT Alphaville the last year or so you may have been on the receiving end of his broker notes circulated through the market.

He was also the anonymous author of  the Naked Broker and the Pain Trader in euroweek/Global capital magazine from 2010-2020. [Anonymous until now that is].

But the official bio (as provided by Julian himself) goes something like this:

Julian was diverted from his true calling – a journalist carping from the sidelines – by thirty-two years in the City. Starting off as a junk bond salesman at Salomon Brothers on Wall St during the heady days of Liar’s Poker in 1989, he left no crisis unexplored and no dying asset class unresuscitated during his long odyssey to the wilder shores of financial markets. He began trading Japanese equities just as the longest bear market on record began then sat in Nick Leeson’s lucky seat on the Barings trading floor in Singapore during a long stint at ING. An enduring fascination with Soviet histo-misery porn attracted him to Moscow for a wild, extended rodeo ride with easily the most cowboy of Russian broking outfits which ended with a lawsuit for unfair dismissal.He sued for £1.7million. He settled for £5000. After the GFC, he spent five difficult years Subsistence Broking in Austerity Britain at an Eat-What-You-Kill shop. The years were difficult because he didnt kill much. Returning to the post-MIFID mainstream at Jefferies and Investec for the latter stages of this so-called career, he tired of the City’s new, lunchless puritanism and the commission famine it accompanied, of DMA and electronic trading and left investment banking for good. He comes home to write about markets now, like Ulysses wading ashore at Ithaca. When not writing about markets, Julian drinks wine, reads books and listens to podcasts while walking Pablo along the riverside in Richmond’

So hello and welcome Julian.

And we should note our new time of 1030 is designed to put off all possible competition.

Actually before we crack on we should reference that the great and the good are in Marrakech where Andrew Bailey (BoE top dog) has been speaking all morning and flagged that Potential growth has slowed in the UK.

Hunt meanwhile is also out warning that the UK financial position is worse now than it was in Spring.  Pound is still holding steady vs USD for now:

But Jules, over to you.

if Rembrandt were painting now, instead of the Amsterdam guild, he’d be depicting a group of traders in ‘Fedwatch’

I’m sure AI could conjure up that image.

this is the most interesting thing driving markets right now

I think an interesting point would be to discuss why it is that long bond yields have suddenly backed up so hard and fast recently – when nothing actually seems to have changed. US natl debt has been ballooning for some time but like Hemingway said about going bankrupt (or was it getting drunk?) it happens very slowly at first and then all at once?

10:40Listening to my Goodfellas podcast with the dog by the river yesterday I heard Niall Ferguson (I’m a proper fanboy of his) revealing that US debt servicing is now greater than defence spending (pace Niall Ferguson’s piece for Bloomberg last week)

https://www.bloomberg.com/opinion/articles/2023-10-09/worst-bond-collapse-in-150-years-caused-by-unintended-consequences?srnd=undefined

and this seems to have suddenly catalysed a reassessment of the Fed’s borrowing capabilities. If UST 10YR hits 5% then cumulative losses for bondholders over the last 3 yrs would be 50%.

10:44suggested causes… expected splurge in US defence spending given forever war in Ukraine and M/E. Chinese divestment of US FI. De-dollarisation (although this is a general process rather than an event) as BRICs look to diversify trading currencies. Increased likelihood of Republican defeat in US elections. Death of the 60/40 traditional portfolio construction

 And UBS agree with Yellen. It has less to do with deficit fears and more to do with growth projections..

But while we acknowledge that we are in a period of heightened concern

about the US fiscal situation, we think the outlook for Treasury yields will

depend more on the growth trajectory of the US economy than on fears

around the federal deficit.

In our latest monthly letter, we look at what has driven long-term yields

higher, and where they may go from here. We think about Treasury yields

as a function of several factors: Supply and demand dynamics, market

expectations about inflation, and overall expectations about growth and the

Federal Reserve’s reaction function. Looking at each of these in turn:

We expect demand for Treasuries to meet rising supply. A higher-thanexpected

supply of Treasury securities to fund the US fiscal deficit does appear

to have contributed to higher bond yields in recent months. But although

higher Treasury supply could put some near-term upward pressure on yields,

we ultimately think the demand for Treasuries is likely to remain sufficiently

strong to meet the additional supply. We believe concerns that Japanese

and Chinese investors may sell their holdings are overdone. A significant

portion of Treasury demand is also insensitive to price—driven by regulatory

requirements or collateral needs. And importantly, the Fed has the ability and

willingness, to step in as a buyer if needed to ensure the stability of the

Market.

Robust US growth has been a key driver of the recent rise in yields.

With structural demand for Treasuries likely to keep pace with supply, and

inflation not being a major contributor to the recent moves in yields, by

process of elimination we are left with economic growth as the primary yield

driver. As the US economy has shown resilience, investors have priced in

“higher for longer” interest rates from the Fed and priced out the likelihood

of a recession. But we still expect growth to slow. US consumers are likely

to tighten their purse strings as the effect of higher interest rates continues

to feed through to the economy and the labor market cools. Business

investment is also unlikely to be sustained at the current pace given higher

borrowing costs.

I thought this was a telling chart btw, based on Truss’ comments a few weeks ago that govt spending as a percentage of GDP is out of control.

but the point really is that it’s not really changed that much since the 90s

But what I keep hearing from the market is that it’s really all about “real rates”. And I’d be interested in what the rabble has to say about that.

@robert – do you agree with the Krugman view that the only thing that undermines the Blanchard/Krugman argument that you can spend your way out of an economic doldrum are rising real rates?

Despite all the scary budget deficit talk, EU governments in particular are actually still benefiting from having used the period of super low rates to borrow long.

And the thing about inflation is that it can have a positive effect on nominal GDP in the long run as tax receipts go up.

His is leading to a lot of revisions. Governments in essence have the opposite problem of the cbanks. In the immediate period their income goes up even as their debt servicing stays low/the same.

That means their debt servicing costs as a percentage of GDP aren’t too bad (FOR NOW):

This chart surprised for example

As Dimitris notes:

Moreover, Euro area debt to GDP stands at

91.5% and continues to decline thanks to

high nominal growth.

▪ This is in part thanks to lagged effects—

inflation has run well ahead of interest rates, and member states used the period of very low rates during the pandemic to lower their

borrowing costs.

▪ As a result, government interest expenditure as a percent of GDP is at 1.7%– well below

its historical average of 2.49%.

▪ Of course, the Euro area is not a (perfect) fiscal union, and weaker members can be

particularly vulnerable to sell-offs in rates.

▪ But the benefits of years of low interest rates, combined with the widespread fiscal

restraint (or outright outperformance in the case of Greece) will not erode quickly.

▪ Moreover, the European Central Bank’s Transmission Protection Instrument (TPI) is

precisely designed to protect against market-led selloffs in government bonds.

▪ Finally, the commitment won by Southern member states to keep reinvesting bonds
under the Pandemic Emergency Purchase Programme (PEPP) through
the end of 2024 will also serve to prevent drastic selloffs.

▪ We thus see little chance of a repeat of the Eurozone debt crisis, a prediction that is

currently ubiquitous in the financial press.

@robert – interesting. Makes sense

10:54@steve dalton – i think the mkt is seeing through the current spike in oil and still thinks inflation has topped out

I thought this was interesting yesterday

The rouble was on a tear, rallying from 101 to ~97/USD ever since Putin announced the return of capital controls on Thursday.

(at least last i checked the numbers, I’ll get a chart in a sec)

Here’s the blurb we did about it for Morning Central Banker at Politico (my other gig)

BACK IN CONTROL: The ruble leaped after the Russian central bank reintroduced capital controls for at least some exporters. The Kremlin issued a supporting decree on mandatory FX sales but said it won’t publish the companies it applies to. The affected exporters — likely to be largely in the oil and gas and other natural resources sectors — will have to sell their export earnings on the domestic market, increasing the local supply of foreign currency and propping up the ruble.

Revenue recovering but spending surging: The CBR had imposed similar measures immediately after Russia’s invasion of Ukraine, but had removed them when the initial pressure on the ruble subsided. Today, the CBR’s action comes against a backdrop in which Russia’s export revenues are rising again, thanks to higher oil prices and the gradual circumventions of the West-led price cap on its oil exports. The IEA had said earlier that Russia enjoyed its highest oil export revenues in 15 months in September. The ruble however had weakened past 100 to the dollar again earlier this week, under the pressure of a widening budget deficit.

Have to admit, I’m slightly fascinated by this. I’ve been arguing for a while the only possible pathway from here, and not just for Russia, but the West in general is the slow and subtle reintroduction of capital controls.

Yellen, it should be noted flagged at the IMF meetings on Wednesday that she was very much on board allowing the European Commission to tax the proceeds of the gains being generated by all that lovely Russian money still sitting in margin accounts at Euroclear.

11:00[Actually, was remembering yesterday that my grandad once gave a beautifully presented album of Russia space postage stamps that he had collected. I was an annoying dismissive teenager, and I think i accidentally threw them away in some sort of tantrum. What an idiot]

Although, on sanctions .. it was kind of obvious in my opinion that they weren’t gonna work. History is definitely a guide to that. But even more absurd was the price cap policy. Which btw has had a hilarious uturn of late

The solution to the problem says “architect” of the programme … to err, raise the cap.

????

@steve dalton – apparently regarding China, Jules has some strong thoughts.

(which is what we like here)

11:07I wrote a piece for FT Alphaville last year on China which was filleted of the main thrust of its argument (sell China, don’t look back)

So i take it you’re u-turning on that view?

I think you’re right that it’s the ultimate contrarian trade right now.

That piece in the FT condemned the malign combination of state dirigisme, the terrifying precedent of Russia, the suffocation of entrepreneurialism and the CCP emphasis on political control rather than growth led to  MSCI China ETF dropping – 5% last year and hugely underperforming MSCI EM in 2023

Neutral weightings the MSCI EM index for China would be ~30%. Almost every institutional fund manager is UW China (20%, an UW of 50%, would be a fairly common position to hold but many fund managers own even less than that. The pain trade danger for EM PMs now would be a sudden reversal in China fortunes. The govt wants the mkt to rally, is considering a stabilisation fund, buying property inventory directly from developers and now punishes CEOs who sell their own shares. China mkt is cheap on ~10x, 2STD below average, YE rally would be the pain trade for UW EM funds.

However artificial/  manufactured a rally would be, it would cause huge underperformance for EM PMs, especially because it could happen at a time when India,  poster-child for EM, suddenly finds its lustre dulled by its diplomatic spat with Canada and its morally questionable foreign policy. India is priced for perfection and China for a multi-year bear-market with a terminal value of zero.

Also Xi and Biden could both do with some positive interaction when they meet at the Apec summit in California next month. Biden would prefer a less antagonistic backdrop to his re-election campaign (or Gavin Newsome’s, more on that some other time). More tranquil Sino-American relations may also further China’s cause in the Taiwanese elections approaching in Jan 24. Making it easier for the KMT party to win in Jan, would foster better relations across the Strait of Formosa. I expect the mood music from San Fran to be more melodious

Though I am going to watch it this weekend.

I want to know if the overall moral message is diametrically opposite to the message of top gun, i.e. the responsible collective will save the day rather than the rogue individualistic maverick hero.

but stay!

how about a piece of yellowcake?

i dont mean lemon drizzle sponge

(though I wasn’t blown away by Oppenheimer this summer)

(boom boom)

STOP WITH THE LAME JOKES KAMINSKA

I wouldn’t describe the uranium trade as a big secret (if it were I wouldn’t know about it), however

As the price chart below indicates, this is not a resource that no one is talking about. The market is small and participants are well aware that the mkt is in a structural deficit for the foreseeable. It’s already started to move but what people perhaps don’t grasp yet is how much uranium can move.

Bull market just starting. Structural deficit for the rest of the decade. No further nuclear disarmament owing to war and no decommissioning of nuclear plants/ recycling warheads. Number of latter to rise from ~ 450 to 500 next few years.

Financial buyers now a big factor in a small mkt, taking 10-20% of global production. In 2024 production will be give or take 200mill lbs with demand 210 lbs and upwards with these trens to exacerbate in next few years.

85% of global production is focused in 6 countries Canada/ Aus/ Namibia/ Russia/ Kazakh and Niger of which the projections of the last 3 are suspect to say the least. Mkt is not transparent and unreliable state actors could paralyse production. Nuclear is 10% of global power generation but as world electrifies/ decarbonises its importance rises, and the inflationary impact of uranium price multiplying would be significant. Demand is very elastic because utilities just chase the price and regulatory regimes allow them to pass it on

(for a man who types with two fingers and his tongue hanging out this is killing me)

11:21Russia has started buying uranium on the open mkt for the first time in years and this is likely to lead to a big dispute with the Chinese over what happens to Kakakhstani supplies and influence over Kazakh generally. Anyway, I think uranium could treble from here (he says with all the freedom that not managing money for anyone confers)

But also worth noting, the Germans are now under pressure to drop Qatari LNG for political reasons.

This could leave them in a real pickle.

Quickly before time runs out.. we need to get to the really important topic

****WINE TIME FRIDAY****

Julian has something he would like to share with the group.

Oh right. Yes. Well, I’m not sure which skeleton in my cupboard is clanking most nervously here. I have done my level best to keep all personality disorders in abeyance for the duration of this session at least.

I have a small wine habit. well, size is relative

Too many people had too much time and too much excess cash during lockdown and anyone with a wine habit/ problem/ addiction bought a lot of it. There is a huge amount of wine sitting in bonded warehouses waiting for prices to rise so that investors can sell it and the squeeze on disposable incomes is reducing demand for something that’s an everyday staple for most people on this website but is clearly discretionary among other constituencies.

like this one

Wine until 12 years ago was largely the preserve of amateur enthusiasts but consistent returns, a trend towards alternative investments and the ultra-low interest rates meant wine became catnip for financial investors, at the same time as the fine wine market in Asia really opened up.

Wine is a longlasting but ultimately perishable commodity and there is too much sitting round needing to be sold off sooner or later.

2022 Bordeaux is a vintage to be bought and kept however, and 2022 Burgundy looks like it too might have found a way to manage the intense heat and produce wines designed for longevity.

Areas of weakness remain the big winners of the last few years, Burgundy -0.14% and champagne -0.21% with Bordeaux also consolidating slightly. The asset class could, I suppose, be viewed as a deflation trade. When interest rates paid you zero, why wouldn’t you invest in overpriced wine? Italy and Rhone, where there is a lower concentration of big, financial investors, continue to buck the trend. Overall, fine wines are down 5% this year. It’s beaten fixed income this year … but not much else. My advice is to buy wine opportunistically from good vintages in the secondary market.

You forgot your chart Julian

Quickly ref that we consciously failed to mention Metro Bank and Activision. We might revisit next week.

But i wanted to finish quickly on the big political story for the weekend.

Polish elections coming up on October 15 (Sunday). And I think they could be quite explosive for European politics.

(people died for the vote etc etc)

Not sure if you’ve been following the drama with National Bank of Poland? That was quite a drama.

In Poland both ends of the media spectrum accuse the other side of being fake news propagandists. And depending on which filter you’re looking through, inflation has either genuinely eased or has been manipulated downwards by state-dominated corporates on order by the government.

It’s actually a bit of an absurd situation. I can go on …but don’t want to overdominate the session with Polish talk.

The key point to remember is that the results of the vote are likely to trigger chaos either way. If PiS wins, the integrity of the vote is likely to be challenged by the opposition, and the capital is likely to experience outsized protests (most opposition voters are Warsaw based).

The government’s response to those protests will be key in determining how things unravel or not.

If PO (the opposition) wins, there’s likely to be similar disputes the other way.

But chances are PO will need a coalition to rule properly, and the only possible contenders are right of PiS, such as the Konfederacja Party. Truly mad.

Oh, and absolutely every Party standing has an anti immigration policy.

Anne Applebaum is hardly a neutral player here tho. She is married to Radek Sikorski, a powerful force in the opposition and a former member of Donald Tusk’s cabinet. I tried to listen to one of her podcasts once and I just found her to be full of inconsistencies and overly ideological.

But, hey. Nobody’s perfect.

I did get to take part in a private gathering last year where Radek made an appearance, and all I will say is that I didn’t find him very amiable.

But then I probably wasn’t important enough to be registered by him properly.

Here’s the polling

(Via barclays)

I think this is truly the case of both sides being as bad as eachother, and anyone who thinks a coalition with Konfederacja is more moderate than PiS is probably not aware of this guy:

A timely reminder that Hitler came to power via a coalition arrangement, and being the kingmaker minority.

The problem with the opposition is that they are knee-jerk predisposed towards taking the opposite position on anything PiS says on principle. Even when it’s something entirely logical. Which sometimes can be the case. This leads to absurd situations like the campaign right now to rubbish them for “manipulating” inflation lower. It’s totally ridiculous. As if every central bank in the world isn’t in the business of manipulating inflation. And it makes them lose credibility. IMHO.

Anyway, here’s Barlcays on the economic implications of the possible outcomes:

Economic implications

In terms of fiscal policy, we do not expect a major difference in the short term between the two

major scenarios: a continuation government or an opposition win. There are structural issues,

such as election-related policies (eg, raising one child support by PLN300 to PLN800 per month

as from January 2024) and military spending planned to be raised gradually to 4% of GDP, from

below 2% before the invasion of Ukraine. Slowdown in nominal GDP growth would affect tax

revenues negatively; additionally, a 1pp change in nominal growth would affect the budget

deficit to GDP by around 0.3pp. Poland’s gross borrowing requirement of the country for 2024 is

also high at PLN420bn, o/w PLN319bn domestic and PLN101bn external. The external

borrowing target corresponds to EUR22bn, o/w EUR7bn is assumed to be generated from the

EU recovery funds (RRF) and the rest, EUR15bn, from eurobond issuance. EUR15bn issuance on

the external market looks very high when compared to EUR7bn issued YTD. Moreover, we also

have some doubts about the RRF funds being given rule of law concerns.

In terms of EU funding, starting in 2024, the EU will move to the next seven-year budget period

(2021-2027) where Poland is allocated €75bn for the whole period (including agriculture

funds of €12.5bn), meaning a €12.5bn allocation of cohesion funds annually on average.

However, the first years of a new budget tend to move more slowly, so countries will likely need

additional funding sources to fill the gap in 2024. For other CEE countries, excluding Hungary,

the Recovery Fund (RRF) is likely to fill that gap. However, Poland’s RRF funding, which could

reach €16bn in total as grants, is locked until the country addresses the EC’s rule of law

concerns. The government has taken the necessary steps and passed reforms but these need to

be approved by President Duda, who is waiting for the view of the Constitutional Tribunal

on the constitutionality of the new law. Irrespective of election scenarios, the release of RRF

funds depends highly on the approval of the new law.

On the monetary policy side, we expect one last 25bp cut to 5.5% before the NBP takes a

pause in its easing cycle until Q2 24. Our terminal policy rate forecast is 4.5% with the

assumption of a continuation government. In a scenario of an opposition win, the NBP is likely

to pause its easing cycle at 5.75% and wait until H2 23 before initiating cuts once again. We

would expect policy rate to be higher at 5.0% by YE 2024 in the event of an opposition win.

And now we’re done!

So thanks everyone

Nice to back

Hope Julian hasn’t been scared off by the intensity of the rabble?

We will be back on Monday at 1030 am

(Transcript will be on the-blindspot.com)