Category Archives: Silver

How the US Toppled the World’s Most Powerful Gold Trader

Posted on August 14, 2022 by admin

(Bloomberg) — In December 2018, a man in his early 30s was intercepted on arrival at Fort Lauderdale airport and taken to a room where two FBI agents sat waiting.Most Read from BloombergThe target was scared and already on high alert — one of his associates had recently admitted to crimes he knew he’d also committed. Christian Trunz wasn’t a terrorist or a drug trafficker, but a mid-level trader of precious metals returning from his honeymoon. Crucially: he was also a longstanding employee of JPMorgan Chase & Co., the biggest bullion bank.The FBI’s airport ambush described by Trunz was a crucial step in the pursuit by US prosecutors of JPMorgan’s precious metals desk, leading up to last week’s climax — the conviction on 13 counts of the man who was once the most powerful figure in the gold market, the desk’s former global head Michael Nowak.Watched with a mixture of fascination and horror by precious metals traders around the world, the case has shone a light on how JPMorgan’s traders — including Nowak and the bank’s long-time lead gold trader Gregg Smith — for years allegedly manipulated markets by placing bogus orders designed to wrongfoot other market participants, principally algorithmic traders whose high-speed activity became a major source of frustration.Nowak has become one of the most senior bankers to be convicted in the US since the financial crisis, and faces the prospect of decades in prison, although it could be far less.Read: JPMorgan Gold Traders Found Guilty After Long Spoofing TrialNowak’s lawyers contend Nowak wasn’t a “criminal mastermind” and said they will “continue to vindicate his rights in court.” A lawyer for Smith said during closing arguments last month that his client’s orders were legitimate, and there are other explanations to buy and sell futures contracts at the same time on behalf of customers.It took three weeks in court for the government to persuade a jury of Nowak and Smith’s guilt. (Jeffrey Ruffo, a salesman who was tried with them, was acquitted.)But whispers of spoofing had hung over JPMorgan’s trading desk for at least a decade — many years before the FBI first approached Trunz in 2018.Alex Gerko, the head of an algorithmic trading firm, complained about Smith’s activity in the gold market as early as 2012 to CME Group Inc., which owns the futures exchanges where the US alleged thousands of spoof trades took place. But Smith and Nowak continued working at the bank until 2019, when the US unsealed charges against them.“The wheels of justice are moving, slowly,” Gerko tweeted last month.At the Justice Department, the road to JPMorgan began with a decision to begin hunting down traders who made bogus offers to buy and sell commodities that they never intended to execute. The criminal fraud unit hired data consultants to go through billions of lines of trades to spot patterns of market manipulators.As the vast quantities of data was scrutinized, there were certain traders that stood out. And they worked at JPMorgan.With the data in hand, investigators went looking for cooperators, which they found in Trunz and his former colleague John Edmonds. Both relatively junior traders pleaded guilty to their own misconduct and agreed to testify against the desk’s boss.Nowak was arrested in September 2019, sending a shock wave through the metals world, but the Covid pandemic meant it would be another three years until the trial finally took place.In his testimony, Edmonds, who’d started in an operations role at JPMorgan, described spoofing on the desk as a daily phenomenon and felt obliged to take part because it was part of the normal strategy.Read: JPMorgan Gold Desk ‘Spoofing’ Cheated Market, Ex-Trader SaysThe Justice Department’s move against JPMorgan’s most senior bullion bankers was celebrated in some corners of the gold and silver markets, where investors and bloggers have long accused the bank of a large-scale scheme to manipulate prices lower. Those allegations prompted multiple investigations by the Commodity Futures Trading Commission, the most recent of which was closed in 2013 after finding no evidence of wrongdoing.The case against Nowak and Smith made no allegations of a systematic plot to suppress prices, instead arguing that they spoofed markets over very short periods of time, and in both directions, to benefit JPMorgan’s most important hedge fund clients.And while the convictions are a victory for the prosecutors, the jury rejected the government’s most sweeping charges — brought under the Racketeer Influenced and Corrupt Organizations Act, or RICO — that the men were part of a conspiracy and that JPMorgan’s precious metals desk was a criminal enterprise.At JPMorgan, Edmonds said the practice was referred to as “clicking” rather than spoofing, and the traders never discussed it as being illegal despite the firm’s own compliance policies making it plain. Trunz even spoke of a running joke involving Smith, who would click his mouse so fast to place and cancel orders that his colleagues would urge him to put ice on his fingers.In 2012, Gerko, who is the founder of quantitative trading firm XTX Markets Ltd., complained to the CME about Smith’s trading in gold futures by rapidly entering and canceling orders. The CME began an investigation, which dragged on for three years before concluding he’d likely been spoofing.“It took a long time after 2010 to get consistent enforcement,” Gerko said in a tweet, referring to the Dodd-Frank act in which spoofing was defined and made illegal.After another JPMorgan trader, Michel Simonian, was fired in 2014 for spoofing, Nowak called his traders into his office to ask if they’d been doing the same, according to Edmonds. No one said anything. The incident shocked Edmonds, he said, as Nowak knew it had been going on for years.During the trial, Nowak appeared largely impassive, his face hidden behind a Covid mask. Industry insiders described him in 2020 as introverted and brainy, and testimony during the trial painted him as a well-liked manager, who became friendly with Trunz while the two did a stint working out of JPMorgan’s London office.During trial, Trunz was asked whether he liked Nowak, the former trader responded: “I loved him.”However, the relationship became more complicated after Trunz was approached by authorities. When he contemplated making a deal with the government, Nowak told him not to, according to Trunz, who became audibly choked up as he gave the testimony.Defense lawyers painted Trunz and Edmonds as unreliable — proven liars who were testifying against their clients in order to avoid lengthy prison sentences.Read: JPMorgan Gold Trader Says Boss Coached Him on Spoofing LieNowak and Smith won’t be sentenced until next year. For comparison, two Deutsche Bank AG traders convicted of spoofing in 2020 were each sentenced to about a year in prison.Last week’s conviction represents the pinnacle of the US Justice Department’s crackdown on the illegal trading practice known as spoofing. So far, prosecutors have managed to convict ten traders at five different banks.JPMorgan has already paid $920 million to settle spoofing allegations against it.“Even though the jury rejected the conspiracy and RICO charges, they will consider this a win,” said Matthew Mazur, an attorney at Dechert LLP who defended one of the Deutsche Bank traders. “This is probably the end of the precious metals sweep that was done, but I do think there will continue to be cases.”Even after the crackdown, some market participants say spoofing still takes place. Back when commodity futures traded in the pits, brokers had to trade face-to-face. Hiding behind a screen makes it much easier to place and pull orders at will.“We still see spoofing on a regular basis,” said Eric Zuccarelli, an independent commodities trader who began working on the floor of the New York Mercantile Exchange in 1986. “But back then if a person spoofed everybody would come over and punch you in the face and the floor committee would come over and fine you for being an asshole.”Most Read from Bloomberg Businessweek©2022 Bloomberg L.P. Continue reading →

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Mr.”Big Short” Issues a Dire Warning About the Economy

Posted on August 13, 2022 by Luc Olinga

In the current recent euphoria of the markets, Michael Burry must appear as a killjoy.Moreover, he chose as “Cassandra B.C” as a handle in the microblogging website Twitter. This suggests that it does not bother him to be often against the current of the general trend if in the end he ends up being right. The main financial indices closed on Friday August 12 for a fourth consecutive week in the green. The S&P 500, the benchmark index, rose 134.96 points, or 3.3% for the week. The Dow Jones was up 957.58 points, or 2.9%, while the Nasdaq gained 389.63 points, or 3.1%.The reason for this euphoria is that investors are now convinced that the Federal Reserve will probably be less aggressive in its policy of raising rates to fight inflation at its highest in forty years.U.S. inflation slowed notably last month, data from the Bureau of Labor Statistics indicated on August 10, setting the possibility of a pause in Fed rate hikes.EuphoriaThe headline consumer price index for the month of July was estimated to have risen 8.5% from last year, down from the 9.1% pace recorded in June and firmly inside the Street consensus forecast of 8.7%. On a monthly basis, inflation was flat the BLS said, compared to the June increase of 1.3% and a May reading of 1.1% and again fell below the Street forecast of a 0.2% acceleration.Buoyed by these figures, investors prefer to ignore any negative signs such as comments made after the inflation figures by members of the Fed suggesting that their fight against rising prices was far from over.Minneapolis Federal Reserve Bank President Neel Kashkari told the Aspen Ideas Conference on August 10 hat the central bank is “”far, far away from declaring victory”, and still sees the need of a Fed Funds rate approaching 4% by the end of the year.Inflation has dominated discussions on the markets for several weeks. Many experts fear that an aggressive rate hike by the Fed is likely to cause a hard landing in the economy. Basically a recession would be inevitable if the central bank continues to raise rates so strongly.’Winter Coming’Burry warns against those who think the economy is probably out of danger. In a recent cryptic tweet, the financier explains that there is another fact which could augur future problems for the economy: households continue to spend as if nothing had happened. Scroll to ContinueTheStreet RecommendsThe investor, whose bet against the housing market is portrayed in the 2015 movie “The Big Short”, believes that consumers’ growing indebtedness poses a serious risk to the economy. “Net consumer credit balances are rising at record rates as consumers choose violence rather than cut back on spending in the face of inflation,” the legendary investor posted on Twitter on August 12, with a graph from Bloomberg showing that US consumer borrowing increased by $40.2 billion in June from the prior month. This was the second-biggest increase ever, according to data from the Federal Reserve.”Remember the savings glut problem? No more. COVID helicopter cash taught people to spend again, and it’s addictive. Winter coming,” Burry added. He has since deleted the tweet as he commonly does with all his posts.Burry seems to be referring here to the stimulus checks received by a large number of Americans from the federal government to avoid a collapse of the economy when the covid-19 pandemic had paralyzed economic activity. He seems to suggest that households continue to spend money without looking, which also affects their savings. In doing so, Americans are putting themselves in a precarious financial situation while inflation remains a drag on the economy.For some experts, stimulus checks contributed to the US inflation.”Winter coming” seems to be a reference to HBO series “Game of Thrones.” Characters used the phrase as a warning.As often with Burry, it’s hard to know what he clearly means. But in July, he suggested that he foresees a credit crunch for consumers.Credit- and debit-card spending, which account for more than 20% of total payments, gained 8% in July from a year earlier, while card spending per household climbed 5.3%, easing from a 5.7% ascent in June, according to a report on July consumer payments by Bank of America Institute, the bank’s internal think tank.Consumer sentiment jumped sharply in August to 55.1, well ahead of the Street consensus of 52.5 and nearly four points higher than the July reading.Burry also marked his difference with the majority of investors by warning that the current rebound of the Nasdaq index, which includes the majority of technology groups, does not mean that confidence has returned.”Nasdaq now up 23% off its low. Congratulations, we now have the average bear market rally. Across 26 bear market rallies from 1929-1932 and 2000-2002, the average is 23%. After 2000, there were two 40%+ bear market rallies and one 50%+ rally before the market bottomed.” Continue reading →

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A Worse Financial Crisis than 2008? Peter Schiff forecasts sustained and higher inflation, followed by an implosion of the U.S. dollar

Posted on August 11, 2022 by admin

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(Kitco News) – Despite a month-long streak of rallies for U.S. stocks, a financial crisis worse than 2008 is looming, said Peter Schiff, Chief Market Strategist at Euro Pacific Asset Management.
Schiff spoke with David Lin, Anchor and Producer at Kitco News.
Over the past month, the S&P 500 rose by 9 percent, and the NASDAQ rose by 13 percent.
Schiff warned that if the Federal Reserve keeps raising interest rates, then a worse financial crisis than 2008 will occur.
“2008 was about bad debt,” he explained. “It was about people borrowing money and they couldn’t pay it back. The collateral for those loans was no good because it was real estate, and prices went down. Well, we have much more debt now than we had in 2008… and so this is going to be a much bigger crisis when the defaults start.”
Schiff added that this time, banks would not be able to be bailed out.
“When they fail, it’s going to be a lot worse, except with inflation too high and the Fed fighting inflation,” he said. “There’s no TARP 2.0. All these banks are going to have to be allowed to fail.”
Inflation to get worse
The latest Consumer Price Index (CPI) figures were released on Wednesday morning.
Year-on-headline CPI, which includes food and energy rose by 8.5 percent in July, a reduction in the official inflation figure compared to the previous month, when year-on-year prices rose by 9.1 percent. The 9.1 percent figure was a 41-year high.
On the same day as the CPI release, President Joe Biden claimed that there had been a “zero percent” change in month-on-month consumer prices.
“Today, we received news that our economy had zero percent inflation in the month of July,” said Biden. “When you couple that with last week’s booming jobs report of 528,000 jobs created last month and 3.5 percent unemployment, it underscores the kind of economy we’ve been building.”
President Biden was referencing the month-over-month change in headline CPI, which was unchanged from the previous month of June.
Core CPI, which excludes food and energy, grew by 5.9% year-on-year, and increased 0.3% month-over-month.
“If you believe the official CPI, then prices, that are already very high, did not get any higher during the month of July,” Schiff explained. “I don’t think that’s something to celebrate… It’s not like consumers actually got the relief of prices coming down.”
Despite the slight fall in reported CPI, Schiff said that inflation will get a lot worse.
“There’s no doubt in my mind that we will get a higher number than 9.1 percent [inflation],” he said. “We are nowhere near done with this inflation problem. It is going to be here for years and years, and probably the remainder of this decade and then some.”

A dollar implosion?
As the Fed pivots to prevent a “massive financial crisis,” Schiff said that this would result in a “sovereign debt crisis” and a “U.S. dollar crisis.”
The U.S. dollar index is up by 9.5 percent year-to-date. However, Schiff claimed that future events are not properly priced into this.
“The dollar has risen so far, in the early stages of this big inflation, because investors are delusional about the Fed’s ability to contain inflation and bring it back down to 2 percent,” he said. “When they wake up to reality, that inflation is going to be way above 2 percent indefinitely, then the dollar is going to fall through the floor, and then gold and silver will go through the roof.”
To find out Schiff’s thought on the next financial crisis, as well as his views on the Inflation Reduction Act, watch the above video.
Follow David Lin on Twitter: @davidlin_TV
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JPMorgan Gold Traders Found Guilty After Long Spoofing Trial

Posted on August 10, 2022 by Joe Deaux

(Bloomberg) — The former head of the JPMorgan Chase & Co. precious-metals business and his top gold trader were convicted in Chicago on charges they manipulated markets for years, handing the US government a win in its long crackdown on bogus “spoofing” orders.Most Read from BloombergMichael Nowak and Gregg Smith were found guilty Wednesday by a federal jury after a three-week trial and more than eight days of deliberations. Prosecutors presented evidence that included detailed trading records, chat logs and testimony by former co-workers who “pulled back the curtain” on how Nowak and Smith moved precious-metals prices up and down for profit from 2008 to 2016.A third defendant, Jeffrey Ruffo, who was a salesman on the bank’s precious-metals desk, was acquitted of charges he participated in the conspiracy.The case was the biggest yet in a crackdown by the US Justice Department. Nowak, the managing director in charge of the desk, and Smith, its top trader, were convicted of fraud, spoofing, market manipulation. The government alleged the precious-metals business at JPMorgan was run as a criminal enterprise, though the jury acquitted all three men of a separate racketeering charge.“They had the power to move the market, the power to manipulate the worldwide price of gold,” prosecutor Avi Perry said during closing arguments.US District Court Judge Edmond Chang said Nowak and Smith will be sentenced next year. Each faces decades in prison, though it may be far less. Two Deutsche Bank AG traders convicted of spoofing in 2020 were each sentenced to a year in prison.Read More: JPMorgan Trader Spoofed So Fast Colleagues Urged Ice on Fingers“While we are gratified that the jury acquitted Mr. Nowak of racketeering and conspiracy, we are extremely disappointed by the jury’s verdict on the whole, and will continue to seek to vindicate his rights in court,” his lawyer, David Meister, said in an email.An attorney for Smith didn’t respond to messages seeking comment.Ruffo’s lawyer, Guy Petrillo, said in an email, “Mr. Ruffo, his family and we always believed in Jeff’s innocence and are grateful that these unfortunate charges are now behind him.”JPMorgan, the largest US bank, agreed in 2020 to pay $920 million to settle Justice Department spoofing allegations against it, by far the biggest fine by any financial institution accused of market manipulation since the financial crisis.With Wednesday’s verdict, the Justice Department has secured convictions of 10 former traders at Wall Street financial institutions, including JPMorgan, Merrill Lynch & Co., Deutsche Bank AG, The Bank of Nova Scotia, and Morgan Stanley, Assistant Attorney General Kenneth A. Polite Jr. said in a statement.“Today’s conviction demonstrates that no matter how complex or long-running a scheme is, the FBI is committed to bringing those involved in crimes like this to justice,” Assistant Director Luis Quesada of the FBI’s Criminal Investigative Division said in a statement.The criminal case against some of the biggest players in the precious-metals markets was closely watched. Spoofing became illegal with the passage of the Dodd-Frank Act in 2010.“It’s something that’s been on the minds of many people that were involved in the precious-metals markets in that point in time, and I would say this verdict closes a chapter,” said Phil Streible, the chief market strategist at Blue Line Futures. “This kind of thing had been going on for at least 15 years or more with people waiting for justice, and I never thought it would ever get closed.”Read More: From Profits to Pay, JPMorgan’s Gold Secrets Spill Out in CourtDennis Kelleher, co-founder and Chief executive officer at Better Markets, an organization advocating stricter financial regulation, said the verdict “should signal to Wall Street’s biggest financial firms and executives that they are not above the law.”The star witnesses at the criminal trial were former co-workers who said they participated in the spoofing activity over years. Traders John Edmonds and Christian Trunz testified about market manipulation by all three defendants at JPMorgan, while trader Corey Flaum described similar behavior when he worked with Smith and Ruffo at Bear Stearns, before it was acquired by JPMorgan in 2008.The JPMorgan case wasn’t a complete victory for prosecutors.All three defendants were acquitted of violating the Racketeer Influenced and Corrupt Organizations Act, a law more commonly used against gangs or mafias. Jurors didn’t agree with claims by prosecutors that the JPMorgan precious-metals desk was run as a criminal enterprise. No witnesses or chat logs presented during the trial showed the defendants openly discussing their intent to spoof.Racketeering charges also are part of the federal government’s case against Bill Hwang, whose Archegos Capital Management collapsed last year and cost banks billions.Read More: JPMorgan Gold Trader Says Boss Coached Him on Spoofing LieThe case is US v. Smith et al, 19-cr-00669, US District Court, Northern District of Illinois (Chicago)(Updates with comment from DOJ)Most Read from Bloomberg Businessweek©2022 Bloomberg L.P. Continue reading →

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Weekly Comic: The Incredible Shrinking Euro

Posted on July 19, 2022 by Investing.com

Investing.com — The alarm bells will be ringing in Frankfurt this week as the European Central Bank’s governing council meets with the euro back where it was 20 years ago – worth only a dollar.The last time it was this weak, one could make an argument that it was still largely an unknown quantity, struggling to fill the shoes of the mighty Deutsche Mark in global foreign exchange markets. This time, it’s because its weaknesses are only too familiar.The ECB will raise its interest rates for the first time in a decade on Thursday, having sat out the whole of the last eight years with its key rate below zero, paying banks to lend from it in a fundamental perversion of capitalism. Even after Thursday, real – that is, inflation-adjusted – interest rates will still be running at nearly -10%. A well-timed leak on Tuesday, suggesting that the bank will discuss a hike of 50 basis points rather than just the 25 guided for, appears to have averted the embarrassment of having the euro trade below a dollar: the single currency shot as high as $1.0269 in response on a burst of what analysts said was largely short-covering.And there was further good news for the euro later in the day, when Reuters cited unnamed sources as saying that Russia will probably restart flows of gas through the Nord Stream pipeline when a scheduled maintenance period ends this week. If confirmed, that would banish fears of an immediate and complete stop of deliveries to Europe’s largest economy, which has been one of the biggest drags on the euro in recent weeks.However, for the euro to hold or even extend those gains, a number of things need to happen, almost all of them outside the control of the ECB.First, there needs to be an improvement in inflation trends in the U.S. that allows the Federal Reserve to stop raising U.S. interest rates so aggressively. This is the key point in the brutally simple tale of the euro’s decline against the dollar this year: the U.S. economy is growing fast enough to withstand higher interest rates, and the Eurozone’s isn’t. While Fed officials talk of raising rates to 3.5% or more, market interest rates suggest the ECB won’t be able to go beyond 1.5%.Second, the energy crisis currently engulfing Europe needs to abate. While Russian gas supplies remain the key pressure point here, the crisis actually goes much deeper.  An acute lack of snowfall on the Alps over the winter means that rivers on all sides cannot generate the required hydropower, let alone cool France’s ageing and increasingly unreliable nuclear reactors. French electricity prices for the day-ahead hit a staggering 589 euros ($603.73) a megawatt-hour on Tuesday, a level unsustainable for any energy-intensive economy.Energy and food accounted for around half of the 8.6% annual inflation reported by Eurostat in June. While government tax cuts in Spain, Italy and elsewhere may ease that in the course of the year, they will only do so by widening budget deficits.Which brings us to point three of what’s needed to turn the euro around: The government crisis in Italy needs to be resolved.This is not impossible: Italian government crises tend to happen every 12-18 months as a rule, and they all get resolved somehow. However, this one has more riding on it than most.Financial markets want to see Mario Draghi, the ECB’s former president and a guarantor of orthodox economic policy, remain as Prime Minister. Draghi – aware that he doesn’t have a popular mandate of his own – has said he can’t continue to govern unless the populist 5 Stars Movement (M5S), which refused to give him its vote of confidence last week, returns to the coalition.M5S defected in protest at a lack of support for lower-income groups in dealing with high inflation. Draghi has so far refused to accommodate any demands for more subsidies because he needs to present a budget that will persuade the EU to approve 200 billion euros of post-pandemic recovery funds.There is no chance of that issue being resolved in time for Thursday’s ECB meeting, which will again stop President Christine Lagarde from giving too much away about the bank’s new ‘anti-fragmentation’ tool, supposed to keep bond yields from rising too much as the ECB finally begins to raise its interest rates. That’s because the tool will reportedly be conditional – depending specifically on the observance of Eurozone rules on spending and borrowing.The reality is that no one is going to win the next Italian election on promises like that, whether they take place this year or next.As such, even though the euro’s positioning looks stretched at parity, it can easily overshoot in the near term if any of the many risks around it materialize. JPMorgan (NYSE:JPM) analysts revised their target for the currency to 95c at the weekend. But for the time being, the Eurozone’s drama looks more likely to play out – yet again – in the bond markets rather than the currency ones. Continue reading →

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Commodities: Inflation, Interest Rates And The U.S. Dollar

Posted on July 19, 2022 by SP Dow Jones Indices

oatawaBy Jim Wiederhold After last week’s highest inflation print in over four decades, the U.S. dollar (USD) rose to its strongest level in 20 years, as measured against a broad basket of currencies. The euro also hit parity with the USD for the first time since 2002 as a consequence of Europe’s front-line exposure to the Russia-Ukraine conflict and the perception that the European Central Bank has been slow to raise interest rates. Most major commodities included in the headline commodity benchmark, the S&P GSCI, are still showing positive gains YTD, even with the global recession fears permeating market sentiment. Some traditional inflation hedging assets are not performing as expected, with negative YTD performance for real estate, gold, and U.S. Treasury Inflation Protected Securities (TIPS) (see Exhibit 1), but commodities have recently been offering inflation protection amicably. Commodities’ outperformance can be explained by the energy sector commodities. The worst-performing energy constituent within the S&P GSCI, S&P GSCI Crude Oil, was up 41.36% YTD. While gasoline prices have been getting the headlines in the U.S., gasoil, heating oil and natural gas were all up nearly 100% in 2022. A cooling off of these energy commodities could be a leading indication for cooling of inflation in the near term. USD strength has traditionally been a headwind for commodities. Most major commodities around the world are priced in USD, so when the currency strengthens, buying commodities becomes more expensive in non-USD currencies. As one strengthens, the other weakens. But this has not been the case recently, and there are previous periods in history where this relationship has faltered (see Exhibit 2). In this case, commodities moved first, and the USD strength has been more recent in response to an abrupt switch in global monetary policy aimed at cooling inflation. Something will have to give soon if this unusual situation based on history continues in the short run. If inflation finally starts to ease, it’s possible the U.S. Federal Reserve might ease up on its rate hiking regime, thereby cooling off the red-hot USD. Where does this leave us in the current environment compared to similar situations historically? During two similar periods where skyrocketing inflation was met with interest rate tightening (in the 1980s and 2000s), commodities still tended to outperform, although eventually the high cost of goods caused the U.S. consumer to suffer and recessions to ensue. Commodities have posted double-digit percentage gains during high inflationary regimes, as can be seen in Exhibit 3. Allocating aggressively to commodities and away from equities during these times has tended to produce favorable risk-adjusted returns, as can be seen by our S&P Multi-Asset Dynamic Inflation Strategy Index, with a 6.4% gain YTD. For more information on this index, please read our prior blog. Commodities have been known as an inflation hedging asset mostly because they are raw materials that go into the production of the goods that tend to rise in lockstep with inflation. Much of the recent strength in commodities prices can be attributed to supply shocks, including the Russia-Ukraine conflict and post-COVID-19 supply chain disruptions. Longer term, there are additional supply constraints imposed by the energy transition. Interest rates are a blunt monetary instrument and can do little to directly address these supply constraints, but they can slow demand. Similarly, USD strength may eventually hamper commodity demand from non-U.S. consumers. Disclosure: Copyright © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. This material is reproduced with the prior written consent of S&P DJI. For more information on S&P DJI please visit www.spdji.com. For full terms of use and disclosures please visit www.spdji.com/terms-of-use. Original Post Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors. Continue reading →

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The U.S. Economy Is Facing An Unusual Disconnect

Posted on July 19, 2022 by CME Group

Darren415/iStock via Getty Images By Blu Putnam At A Glance The labor market continues to grow despite two quarters of negative real GDP Slow labor force growth plus low labor force participation rates are both working to keep the job market tight There is a disconnect between U.S. real GDP and the labor market. The U.S. job market remains quite healthy, with the unemployment rate under 4%, and job growth, while slowing, remains above the likely long-run trend. By contrast, U.S. real GDP was negative for Q1 2022, and according to the Atlanta Fed’s GDPNow estimate may be negative in Q2 as well. There are four key factors to watch in this disconnect. Some may choose to call two back-to-back quarters of real GDP declines a recession. But the National Bureau of Economic Research’s recession dating committee will probably disagree since they focus more on real personal income and nonfarm payroll employment, the latter of which remains very strong. Author 2. The Fed’s jobs mandate is specifically to encourage full employment. So, the jobs data takes priority over GDP data in the calculus of how fast interest rates might be raised to combat elevated inflation. Author 3. Real GDP recovered its pre-pandemic peak back in Q2 2021, so it was naturally going to decelerate after such a rapid rebound. For jobs, the pre-pandemic peak is only now being fully recovered, with job vacancies abound and wages rising. 4. Labor force growth is likely to be very slow, and labor force participation rates are low, both working to keep the job market tight. Author The bottom line is that a robust labor market is not necessarily going away just because of a little GDP weakness after a very rapid rebound. Original Post Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors. Continue reading →

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What Recession?

Posted on July 18, 2022 by Lawrence Fuller

Dzmitry Dzemidovich/iStock via Getty ImagesLast week I discussed the balancing act between slowing the rate of economic growth with tighter financial conditions to bring down the rate of inflation and maintaining just enough growth to avert a recession. It is a fine line we must walk to stay on track for a soft landing, but that remains my base case. Investors panicked midweek when the headline inflation number for June hit a new high of 9.1%, increasing the probability of a full-percentage-point rate increase by the Fed at the end of the month to an almost certainty. That sent risk asset prices reeling. Yet the markets staged a huge rebound on Friday, due to a better-then-expected retail sales report for June, as well as forward-looking indicators on the inflation front that tempered expectations of tighter monetary policy. Edward Jones A more pessimistic view of the retail sales report would conclude that the entire gain of 1% in June was a function of higher prices, but the important thing is that consumers were still spending, despite the higher prices. They may be saying they are miserable, but they are drowning their sorrows in bars and restaurants with both discretionary spending categories the largest contributors to June’s gain. This is in no way indicative of a recession, which increases the likelihood that we are still on the path for a soft landing. Bloomberg The underlying strength of the retail sales report was coupled with a decline in longer-term inflation expectations in the University of Michigan’s consumer sentiment survey. Consumers now see prices increasing at a 2.8% annual rate over the next five to 10 years, which is down from June’s 3.1% and at a one-year low. They see prices increasing at a 5.2% rate over the next year, which is down from 5.3% last month. As I have said many times before, markets respond to rates of change, and these rates are moving in favorable directions. More good news came from the assessment of current conditions, which rose to 57.1, due largely to the decline in gasoline prices. Overall, the consumer sentiment index nudged modestly higher in July to 51.1, which is just above the June low. I have discussed many of the commodities falling in price in recent weeks, which should feed into lower prices of goods and services during the second half of this year. The most important of these is oil, which is now resulting in lower prices at the pump. In another development, the supply-chain bottlenecks that led to shortages of just about everything over the past year have now eased in each of the last three months, which should help to further reduce inflationary pressures. Bloomberg Another way to monitor the health of the global supply chain is to track the number of times the word “shortage” is mentioned in the monthly Beige Book survey conducted by the Fed. Here too we are seeing a gradual healing in the form of fewer references to shortages of materials, workers, and other inputs. Bloomberg The most ardent of bears on Wall Street are now turning to second quarter earnings reports for new reasons to sell stocks with expectations for deteriorating margins, due to rising costs and weakening demand. Yet rising costs and expectations for weakening demand are the reasons why stocks had their worst six-month performance to start a year since 1970! The market discounted this news already, and the stock market indexes will start to rebound well in advance of any improvements in costs or demand. I think that is already happening with June marking the low for this cycle. If stocks don’t look back, the inevitably conversion of Wall Street bears to bulls will provide additional demand for risk assets down the road. Bloomberg The performance of bank stocks on Friday is a perfect example. After mixed reviews for some of the sectors largest banks, namely JPMorgan and Morgan Stanley, the sector soared at the end of the week to lead the market higher. Valuations are already reflecting a deceleration in business activity, but the stock prices should start to look forward to a second half and 2023 recovery. Finviz After purging the markets of speculative investment activity over the past year, investment dollars should continue to rotate between asset classes and sectors of the market in search of growth at a reasonable price. I still think the market climbs a wall of worry during the second half of the year, as the consensus shifts its concerns from higher prices to fears of slowing growth. Economic Data Housing market data for the month of June is the focus this week, and it show a softening under limited supply and rising borrowing costs. I will be very interested in the mid-month surveys of manufacturing and service sector managers for signs of economic strength and weakness in July. MarketWatch Technical Picture We look poised to challenge the 50-day moving averages for all the major market indexes this week, especially with a strong start to trading in the futures markets this morning. That would be the first positive development on the technical front in a long time. Stockcharts Continue reading →

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U.S. wants to end dependence on China rare earths -Yellen

Posted on July 18, 2022 by Reuters

SEOUL (Reuters) -The United States wants to end its “undue dependence” on rare earths, solar panels and other key goods from China to prevent Beijing from cutting off supplies as it has done to other countries, U.S. Treasury Secretary Janet Yellen said.Yellen, who arrived in Seoul late on Monday, told Reuters she was pushing for increased trade ties with South Korea and other trusted allies to improve the resilience of supply chains and avert possible manipulation by geopolitical rivals.”Resilient supply chains mean a diversity of sources of supply and eliminating to the extent we can the possibility that geopolitical rivals will be able to manipulate us and threaten our security,” she said in an interview en route to Seoul. Yellen will map out her concerns in a major policy address in Seoul on Tuesday after touring the facilities of South Korean tech heavyweight LG Corp during the final leg of an 11-day visit to the Indo-Pacific region.According to excerpts of her remarks, Yellen will make a strong pitch for “friend-shoring” or diversifying U.S. supply chains to rely more on trusted trading partners, a move she said would also combat inflation and help counter China’s “unfair trade practices.”Yellen said South Korea had “tremendous strengths in terms of resources, technology, abilities” and its companies, including LG, were already investing in the United States.”They have substantial capacity to produce advanced semiconductors,” was particularly important given the United States’ “huge dependence” on Taiwan Semiconductor, she said.It was critical to reduce U.S. dependence on certain Chinese exports since Beijing had cut off supplies to countries such as Japan in the past, while applying pressure in other ways to Australia and Lithuania, a senior Treasury official said.”They have used coercion to pressure a number of countries whose behavior they have disapproved of,” Yellen said. “We know that’s a reason we don’t want to be dependent on China.”Despite her strong words, Yellen said the relationship with China was not “totally negative or escalating into tremendously hostile territory.”She said China was listening to U.S. concerns in other areas and that it had now made some constructive moves on restructuring the debt of low-income countries. “We have real concerns with respect to China and we’re pressing them, but I don’t want to convey a picture of purely escalating hostilities with China,” she said. Continue reading →

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Energy & Precious Metals – Weekly Review and Outlook

Posted on July 17, 2022 by Investing.com

Investing.com – Will the now-viral fist bump result in more oil for the world? Possibly in the coming weeks, says the White House. But Saudi Crown Prince Mohammed bin Salman (a.k.a. MbS), who received the fist bump from President Joe Biden, says the kingdom’s output will climb by just a million to reach 13 million barrels per day, and that only by 2027.The truth is probably somewhere in between.Biden’s awkward encounter with a man and kingdom that he had hoped to isolate for the 2018 butchering of Saudi-journalist-turned-US-resident Jamal Khashoggi  underscored the challenges for a president desperate to bring home relief from high gasoline prices. Months of painstaking behind-the-scenes work by U.S. State Department and Saudi palace officials made it happen, and each side played up the positives from Friday’s photo-op between the two men. Politically, the gambit seemed a disaster for Biden, with criticism from some of his own party faithful, led by California Democratic Senator Adam Schiff, who tweeted that “one fist bump is worth a thousand words” and this one showed “the continuing grip oil-rich autocrats have on U.S. foreign policy in the Middle East.” Khashoggi’s widow also tweeted, telling the president that “the blood of MbS’ next victim is on your hands”.But strategically, even if the Saudis raise production slightly in the coming weeks — after the additional 650,000 bpd a month that OPEC+ has already committed for July and August — it’s a win of sorts for the White House. With the Biden visit, it’s looking increasingly likely that Saudi oil policy towards the administration will not be as toxic as before. This is in spite of the president reminding MbS on Friday that he held him responsible for Khashoggi’s death, to which the monarch responded by releasing pictures of the two of them smiling and chatting. To MbS, most important was to show the world that Biden acknowledged him as the next Saudi king and that the president recognized Riyadh as holding the levers to the world’s oil. In Biden’s case, he wanted to tell MbS who he really thought he was to his face, and that he was there as a president of the American people. In that sense, both got what they wanted.The week in oil itself scored 1 for the bulls and 0 for the bears. ​​Crude prices fell as much as 7% on the week as earlier losses induced by a strong dollar offset the likelihood that Biden’s Saudi visit will not immediately lead to additional production of oil. The dollar surged to two-decade highs between Wednesday and Thursday after panic across markets that the Federal Reserve might opt for a record 100-basis point rate hike next to quell new four-decade highs in consumer prices — a threat later downplayed by the central bank’s officials.Crude’s increasing sensitivity to the dollar, Fed rate hikes and recession threats showed it was turning into a greater financial play than a commodity driven just by supply-demand.Global crude benchmark Brent Oil has fallen for five straight weeks now, losing a cumulative 17%. U.S. crude’s West Texas Intermediate, or WTI, gauge has dropped in four of those five weeks, sliding by a net 19%. The narrative in oil now is no longer about barrel deficiency alone. Over the past week, previously unasked questions about whether oil had become too pricey for consumers and needs to come down meaningfully to lower inflation have started getting investors’ attention. All these questions coincide with pump prices of US Gasoline that have also started their descent from last month’s record highs of above $5 a gallon to a national average of $4.55 last week.The average price of U.S. gasoline, all grades combined, has now dipped for the fourth week in a row, to $4.65 as of Monday, according to data from the Energy Information Administration, or EIA.In the week through July 8, gasoline consumption plunged by 9.7% to 8.73 million barrels per day, on a four-week moving average, according to EIA data. The EIA measures gasoline consumption in terms of barrels supplied to the market by refiners, blenders, etc., and not by retail sales at gas stations. This was the steepest decline yet so far this year.Some say that U.S. drivers are resorting to all kinds of tricks to put a lid on their gasoline expenditures: Drive a little less, take it easier with the gas pedal, cut out unnecessary trips, plan shorter road trips, prioritize the most fuel-efficient vehicle in the garage, use mass transit, etc. A debate now is whether a recession — which the Fed says it’s trying hard to avoid despite Deutsche Bank, JPMorgan Chase & Co. and Morgan Stanley suggesting one may be inevitable — will do more to bring oil consumption and prices down. But talk of a recession — and how badly that could impact oil — may also be overblown as the physical market for crude remains strong. While June and July have brought sweeping changes to what decides the direction in oil, new restrictions on Russian exports or a shipment blockade in Libya or Nigeria can still turn the market on its head, sending crude prices soaring.And despite the selloff in Brent and WTI, oil for near-term delivery continues to trade at a big premium to contracts for later delivery. The downward curve slope, known as backwardation, is a hallmark of a very tight physical oil market. At about $4 a barrel, the front-to-second front month backwardation is near its strongest ever. Back in July 2008, the oil time-spreads were in the opposite condition: a contango, with spot barrels at a discount to forward contracts, a sign of an oversupplied market.Liquidity in oil market futures is, meanwhile, poor, leaving them vulnerable to anyone unwinding a large position or selling forward contracts. Over the summer, several big producer-hedging deals are likely, including the annual deal used by the Mexican government to lock in prices for the following year. Wall Street banks also have large put options for 2023 — likely a sign that a big client was in the market hedging oil prices. New York-traded West Texas Intermediate, or WTI, crude posted a final trade of $97.57 per barrel on Friday, after settling the official session up $1.81, or 1.9%, at $97.59 per barrel. For the week, however, WTI was down 6.9% after plumbing a near five-month low of $90.58 on Thursday. The U.S. crude benchmark has also lost 8.1% since the start of July.London-traded Brent crude posted a final trade of $101.13 per barrel on Friday, after settling the official session up $2.19, or 2.2%, at $101.16 a barrel. The global crude benchmark fell to $95.42 in the previous session, marking a low since late February. For the week, Brent was down 5.5%, while for July it has lost 7.4%.Amid heightened volatility ahead, WTI’s sustained move away from the just-ended week’s lows of $90.58 to hold at above $92 can push it towards the Daily Middle Bollinger Band of $104.30, said Sunil Kumar Dixit, chief technical strategist at skcharting.com.“If WTI manages to break and sustain above week high of 105, the recovery can extend to the 50-Day Exponential Moving Average of $106.80 and the 100-Day Simple Moving Average of $107.40, as well as the weekly middle Bollinger Band of $108.50,” said Dixit.But he also cautioned that failure to breach $105 could resume WTI’s downward correction to $94-$92-$90.“If WTI breaks below $90, it will eases the drop to the vertical support of $88-$85-$83,” Dixit added.Gold for August delivery on New York’s Comex posted a final trade of $1,706.50 per barrel on Friday, after settling the official session down $2.20 at $1,703.60.For the week, however, August gold was down 2.2% after plumbing a 27-month low of $1,695 on Thursday.The U.S. gold benchmark has fallen for five straight weeks now, losing a cumulative 9%. Year-to-date, it is down 7%.Since the Consumer Price Index for the year to June came in on Wednesday at a new four-decade high of 9.1%, bets on rates have been volatile — with the pendulum swinging between an unprecedented increase of 100 basis points for July versus the broader consensus for a 75-basis point hike. “Risky assets have been beaten up enough and could be ready for a bounce here,” said Ed Moya, analyst at online trading platform OANDA. “The precious metal is still vulnerable to further technical selling.”Dixit of skcharting said the five-week drop in gold has taken out all key markers including the Middle Bollinger Band of $1,877 and the major moving averages 50 week EMA 1837 and 100 Week SMA 1836. “The stochastic readings for daily gold at 6/12 and weekly gold are 3/6 are extremely oversold,” Dixit said. “Thus, a short-term rebound towards at least $1,745 is a high probability.”He also said if gold manages to breakout above $1745, it could extend towards $1770-$1,800 and $1,815“As an erstwhile safe haven, gold is not out of the woods yet and its doors remain open for another break below $1,700, aiming this time for $1683-$1,666-$1,652,” Dixit added.Disclaimer: Barani Krishnan does not hold positions in the commodities and securities he writes about. 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75 or 100 basis points? Lost in market debate over Fed’s next rate hike is ‘how long inflation stays at these levels’

Posted on July 16, 2022 by Vivien Lou Chen

Debate has been simmering over whether Federal Reserve policy makers will raise the fed-funds rate by three-quarters of a percentage point later this month, as they did in June, or step up their inflation-fighting campaign with a full point hike —- something that hasn’t been seen in the past 40 years.Friday’s economic data, which included somewhat improving or steady inflation expectations from the University of Michigan’s consumer survey, prompted traders to lower their expectations for a 100 basis point hike in less than two weeks. The size of the Fed’s next rate hike might be splitting hairs at this point, however, given the bigger, overwhelming issue confronting officials and financial markets: A 9.1% inflation rate for June that has yet to peak.Generally speaking, investors have been envisioning a scenario in which inflation peaks and the central bank is eventually able to back off aggressive rate hikes and avoid sinking the U.S. economy into a deep recession. Financial markets are, by nature, optimistic and have struggled to price in a more pessimistic scenario in which inflation doesn’t ease and policy makers are forced to lift rates despite the ramifications for the world’s largest economy. It’s a big reason why financial markets turned fragile a month ago, ahead of a 75 basis point rate hike by the Fed that was the biggest increase since 1994 — with Treasurys, stocks, credit and currencies all exhibiting friction or tension ahead of the June 15 decision. Fast forward to present day: Inflation data has only come in hotter, with a greater-than-expected 9.1% annual headline CPI reading for June. As of Friday, traders were pricing in a 31% chance of a 100 basis points move on July 27 — down significantly from Wednesday — and a 69% likelihood of a 75 basis point hike, according to the CME FedWatch Tool.“The problem now does not have to do with 100 basis points or 75 basis points: It’s how long inflation stays at these levels before it turns lower,” said Jim Vogel, an interest-rate strategist at FHN Financial in Memphis. “The longer this goes on, the more difficult it is to realize any upside in risk assets. There’s simply less upside, which means any round of selling becomes harder to bounce back from.”An absence of buyers and abundance of sellers is leading to gaps in bid and ask prices, and “it will be difficult for liquidity to improve given some faulty ideas in the market, such as the notion that inflation can peak or follow economic cycles when there’s a land war going on in Europe,” Vogel said via phone, referring to Russia’s invasion of Ukraine. Financial markets are fast-moving, forward-looking, and ordinarily efficient at evaluating information. Interestingly, though, they’ve had a tough time letting go of the sanguine view that inflation should subside. June’s CPI data demonstrated that inflation was broad-based, with virtually every component coming in stronger than inflation traders expected. And while many investors are counting on falling gas prices since mid-June to bring down July’s inflation print, gasoline is just one part of the equation: Gains in other categories could be enough to offset that and produce another high print. Inflation-derivatives traders have been expecting to see three more 8%-plus CPI readings for July, August and September — even after accounting for declines in gas prices and Fed rate hikes.Ahead of the Fed’s decision, “there will be dislocations across assets, there’s no other way to put it,” said John Silvia, the former chief economist at Wells Fargo Securities. The equity market is the first place those dislocations have appeared because it has been more overpriced than other asset classes, and “there aren’t enough buyers at existing prices relative to sellers.” Credit markets are also seeing some pain, while Treasurys — the most liquid market on Earth — are likely to be the last place to get hit, he said via phone. “You have a lack of liquidity in the market and gaps in bid and ask prices, and it’s not surprising to see why,” said Silvia, now founder and chief executive of Dynamic Economic Strategy in Captiva Island, Florida. “We’re getting inflation that’s so different from what the market expected, that the positions of market players are significantly out of place. The market can’t adjust to this information this quickly.”If the Fed decides to hike by 100 basis points on July 27 — taking the fed-funds rate target to between 2.5% and 2.75% from a current level between 1.5% and 1.75% — “there will be a lot of losing positions and people on the wrong side of that trade,” he said. On the other hand, a 75 basis point hike “would disappoint” on the fear that the Fed is not serious about inflation.All three major U.S. stock indexes are nursing year-to-date, double-digit losses as inflation moves higher. On Friday, Dow industrials
DJIA,
+2.15%,
S&P 500
SPX,
+1.92%
and Nasdaq Composite
COMP,
+1.79%
posted weekly losses of 0.2%, 0.9% and 1.6%, respectively, though they each finished sharply higher for the day.For the past month, bond investors have swung back and forth between selling Treasurys in anticipation of higher rates and buying them on recession fears. Ten- and 30-year Treasury yields have each dropped three of the past four weeks amid renewed interest in the safety of government debt. Long-dated Treasurys are one part of the financial market where there’s been “arguably less financial dislocation,” said economist Chris Low, Vogel’s New-York based colleague at FHN Financial, even though a deeply inverted Treasury curve supports the notion of a worsening economic outlook and markets may be stuck in a turbulent environment that lasts as long as the 2007-2009 financial crisis and recession.Investors concerned about the direction of equity markets, while looking to avoid or trim back on cash and/or bond allocations, “can still participate in the upside potential of equity market returns and cut out a predefined amount of downside risk through options strategies,” said Johan Grahn, vice president and head of ETF strategy at Allianz Investment Management in Minneapolis, which oversees $19.5 billion. “They can do this on their own, or invest in ETFs that do it for them.”Meanwhile, one of the defensive plays that bond investors can make is what David Petrosinelli, a senior trader at InspereX in New York, describes as “barbelling,” or owning securitized and government debt in the shorter and longer parts of the Treasury curve — a “tried-and-true strategy in a rising rate environment,” he told MarketWatch. Next week’s economic calendar is relatively light as Fed policy makers head into a blackout period ahead of their next meeting.Monday brings the NAHB home builders’ index for July, followed by June data on building permits and housing starts on Tuesday.The next day, a report on June existing home sales is set to be released. Thursday’s data is made up of weekly jobless claims, the Philadelphia Fed’s July manufacturing index, and leading economic indicators for June. And on Friday, S&P Global’s U.S. manufacturing and services purchasing managers’ indexes are released. Continue reading →

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The big default? The dozen countries in the danger zone

Posted on July 15, 2022 by Reuters

LONDON (Reuters) – Traditional debt crisis signs of crashing currencies, 1,000 basis point bond spreads and burned FX reserves point to a record number of developing nations now in trouble.Lebanon, Sri Lanka, Russia, Suriname and Zambia are already in default, Belarus is on the brink and at least another dozen are in the danger zone as rising borrowing costs, inflation and debt all stoke fears of economic collapse.Totting up the cost is eyewatering. Using 1,000 basis point bond spreads as a pain threshold, analysts calculate $400 billion of debt is in play. Argentina has by far the most at over $150 billion, while the next in line are Ecuador and Egypt with $40 billion-$45 billion.Crisis veterans hope many can still dodge default, especially if global markets calm and the IMF rows in with support, but these are the countries at risk.ARGENTINAThe sovereign default world record holder looks likely to add to its tally. The peso now trades at a near 50% discount in the black market, reserves are critically low and bonds trade at just 20 cents in the dollar – less than half of what they were after the country’s 2020 debt restructuring.The government doesn’t have any substantial debt to service until 2024, but it ramps up after that and concerns have crept in that powerful vice president Cristina Fernandez de Kirchner may push to renege on the International Monetary Fund. GRAPHIC: The pain has spread- https://graphics.reuters.com/MARKETS-EMERGING/mopanaqkmva/chart.png UKRAINE Russia’s invasion means Ukraine will almost certainly have to restructure its $20 billion plus of debt, heavyweight investors such as Morgan Stanley (NYSE:MS) and Amundi warn.The crunch comes in September when $1.2 billion of bond payments are due. Aid money and reserves mean Kyiv could potentially pay. But with state-run Naftogaz this week asking for a two-year debt freeze, investors suspect the government will follow suit. GRAPHIC: Ukraine bonds brace for default https://fingfx.thomsonreuters.com/gfx/mkt/dwpkrbaxrvm/Pasted%20image%201657725996621.png TUNISIAAfrica has a cluster of countries going to the IMF but Tunisia looks one of the most at risk.A near 10% budget deficit, one of the highest public sector wage bills in the world and there are concerns that securing, or a least sticking to, an IMF programme may be tough due to President Kais Saied’s push to strengthen his grip on power and the country’s powerful, incalcitrant labour union. Tunisian bond spreads – the premium investors demand to buy the debt rather than U.S. bonds – have risen to over 2,800 basis points and along with Ukraine and El Salvador, Tunisia is on Morgan Stanley’s top three list of likely defaulters. “A deal with the International Monetary Fund becomes imperative,” Tunisia’s central bank chief Marouan Abassi has said. GRAPHIC: African bonds suffering- https://fingfx.thomsonreuters.com/gfx/mkt/zdvxobognpx/Pasted%20image%201657541934055.png GHANA Furious borrowing has seen Ghana’s debt-to-GDP ratio soar to almost 85%. Its currency, the cedi, has lost nearly a quarter of its value this year and it was already spending over half of tax revenues on debt interest payments. Inflation is also getting close to 30%. GRAPHIC: How not to spend it- https://graphics.reuters.com/MARKETS-EMERGING/znpneakgkvl/chart.png EGYPT Egypt has a near 95% debt-to-GDP ratio and has seen one of the biggest exoduses of international cash this year – some $11 billion according to JPMorgan (NYSE:JPM). Fund firm FIM Partners estimates Egypt has $100 billion of hard currency debt to pay over the next five years, including a meaty $3.3 billion bond in 2024.Cairo devalued the pound 15% and asked the IMF for help in March but bond spreads are now over 1,200 basis points and credit default swaps (CDS) – an investor tool to hedge risk – price in a 55% chance it fails on a payment. Francesc Balcells, CIO of EM debt at FIM Partners, estimates though that roughly half the $100 billion Egypt needs to pay by 2027 is to the IMF or bilateral, mainly in the Gulf. “Under normal conditions, Egypt should be able to pay,” Balcells said. GRAPHIC: Egypt’s falling foreign exchange reserves- https://fingfx.thomsonreuters.com/gfx/mkt/zgpomxkqnpd/Pasted%20image%201657817324629.png KENYAKenya spends roughly 30% of revenues on interest payments. Its bonds have lost almost half their value and it currently has no access to capital markets – a problem with a $2 billion dollar bond coming due in 2024.On Kenya, Egypt, Tunisia and Ghana, Moody’s (NYSE:MCO) David Rogovic said: “These countries are the most vulnerable just because of the amount of debt coming due relative to reserves, and the fiscal challenges in terms of stabilising debt burdens.” GRAPHIC: Kenya’s concerns- https://fingfx.thomsonreuters.com/gfx/mkt/lbpgnelzjvq/Pasted%20image%201657872126738.png ETHIOPIA Addis Ababa plans to be one of the first countries to get debt relief under the G20 Common Framework programme. Progress has been held up by the country’s ongoing civil war though in the meantime it continues to service its sole $1 billion international bond. GRAPHIC: Africa’s debt problems- https://fingfx.thomsonreuters.com/gfx/mkt/lbvgneokapq/Pasted%20image%201657727788029.png EL SALVADOR Making bitcoin legal tender all but closed the door to IMF hopes. Trust has fallen to the point where an $800 million bond maturing in six months trades at a 30% discount and longer-term ones at a 70% discount. PAKISTANPakistan struck a crucial IMF deal this week. The breakthrough could not be more timely, with high energy import prices pushing the country to the brink of a balance of payments crisis.Foreign currency reserves have fallen to as low as $9.8 billion, hardly enough for five weeks of imports. The Pakistani rupee has weakened to record lows. The new government needs to cut spending rapidly now as it spends 40% of its revenues on interest payments. GRAPHIC: Countries in debt distress at record high- https://fingfx.thomsonreuters.com/gfx/mkt/klpykyzxepg/Pasted%20image%201657728812497.png BELARUSWestern sanctions wrestled Russia into default last month and Belarus now facing the same tough treatment having stood with Moscow in the Ukraine campaign. GRAPHIC: Belarus bonds: https://fingfx.thomsonreuters.com/gfx/mkt/dwpkrbzdmvm/Pasted%20image%201657848388314.png ECUADORThe Latin American country only defaulted two years ago but it has been rocked back into crisis by violent protests and an attempt to oust President Guillermo Lasso.It has lots of debt and with the government subsidising fuel and food JPMorgan has ratcheted up its public sector fiscal deficit forecast to 2.4% of GDP this year and 2.1% next year. Bond spreads have topped 1,500 bps. NIGERIABond spreads are just over 1,000 bps but Nigeria’s next $500 million bond payment in a year’s time should easily be covered by reserves which have been steadily improving since June. It does though spend almost 30% of government revenues paying interest on its debt. “I think the market is overpricing a lot of these risks,” investment firm abrdn’s head of emerging market debt, Brett Diment, said. GRAPHIC: Currency markets in 2022- https://fingfx.thomsonreuters.com/gfx/mkt/zgpomxnjrpd/Pasted%20image%201657869185784.png Continue reading →

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