Turkish President Erdogan fires three more Central Bank governors overnight.
He fired the Central Bank Governor in March 2021.
Erdogan wants interest rates. These three guys express a bias for higher interest rates.
So here is the trade;
Sell USD / Buy Turkish Lira (its the cheapest it has been forever).
then, choice # 1 – buy a bank term deposit for 13%-15%
choice # 2 – buy Turkish 10 year government bond which are yielding 18% p.a.
or choice # 3 – buy shares in one (or a few) of the top 5 banks in Turkey.
IS Bank for instance, is the oldest and 2nd largest in terms of assets. Its equity has a market capitalisation of equiv. US$2.5 billion, trailing P/E ratio is 3 times, forward P/E estimates is 2.3 times and its Price to Book ratio is 0.35.
The latter is probably safer than an Australian mining exploration stock.
Here is an ongoing series of posts about Fortescue Metals (FMG.AX) and how it has traded at percentage extremes above it 200 week moving average. This helps tell you when chasing a stock higher becomes perilous in the face of a mean reversion, often when the tide and sentiment turns at its worst.
I don’t hate the stock nor the company. I’m just calling it as I see it.
For more than a year, FMG.AX has defied gravity.
If we see a break below $13.71, sees the stock visit $11.70 – $12.00, failing that it may test the $7.00 level.
Below is an extract from this week’s IMF economic forecast report showing World GDP is set to rise 21% over the next 5 years.
This is an average of 4.2%, which is a good 35% higher than the post GFC GDP growth average from 2013-17.
So, how can the world’s economy grow by one-fifth in short period of time, without any material inflationary pressures when companies are telling us they see rising costs, constraint in capacity and the need to increase selling prices?
We will see a huge amount demand for production output constrained by production supply.
3 into 1, just won’t fit.
I think central banks in the ‘developed world’ are behind the curve.
Russia, Mexico, Brazil are commodity producing and commodity sensitive economies. Their central banks have been raising rates citing reasons to curb the rising cost of living.
Inflation is a tax that the ‘poor’ can’t afford to pay.
Their citizens are amongst the least indebted in terms of personal debt to GDP, so rising interest rates doesn’t threaten the value of their real estate and financial asset values unlike the sky-high indebted citizens of Australia, Canada, the U.S. and the U.K.
(see the other image below)
Interestingly, South Korea, Norway and New Zealand are the first of the developed world economies to raise interest rates. Their central bank reasons were to curb their respective country’s soaring household debt and home prices. Not the cost of living……
The main message of this report is China ‘channelling’ a macro, trade, political and digital decoupling with Europe.
This theme takes some thinking. Many thought China would find friends or solace amongst Europeans amidst a heated spat with the U.S.
Silk Road rhetoric aside, China is taking a binary road instead. Either they are embracing globalisation or nationalistic protectionism. The latter seems to be the current path.
“It is this blend of China’s conditional coupling, a vast state-aid apparatus and protectionism extended to national
champions, and Beijing’s new-found self-confidence in its non-convergence with Organisation for Economic Cooperation
and Development (OECD) norms and principles that is driving the current ‘crisis of interdependence’ with China.”
I’m advising clients to tune in where the noise is and where the herd is gathering.
Albeit, this is subjective and certainly more art than science, it’s important to identify the “crowded trade” and asking yourself if you are about to be the marginal buyer.
For example,
“everyone” is going Long Crude Oil, Natural/LNG Gas and Coal.
and “nobody” wants to buy Chinese equities nor Gold.
There is merit considering a contrarian result.
With Brent Crude Oil currently $83, I ask myself if it rises $20 or falls $20 from here?
In the coming months, I say it sees $63 rather $103.
The charts below overlay the stock price of Australia’s largest independent coal miner, Whitehaven Coal (WHC.AX) and the Australian premium coking coal price.
The opportunity of leveraged cashflow and profits that an operational company offers is the reason many investors own shares in such companies when trying to benefit from a move in an underlying theme or commodity.
The (under)performance of Whitehaven over the 2 timeframes shown below, especially in light of the recent surge in coal prices tells me that the market isn’t a believer.
Coinciding with other overbought and extended extremes, selling WHC.AX last week around $3.60 was prudent.
Today’s $3.35 is still OK to do so.
Let’s see how it looks when it pulls back to $2.40 or so.
Here is a weekly chart of the S&P 500 over a period of 28 years.
My notations show the extreme percentages that the SPX was trading above its 200 week moving average. It was 43% a couple weeks ago and is at a relatively high 36% today.
I’m trying to show where we are in the ebbs and flow of price movements and not chasing something at the highest point of the pendulum’s arc.
The following assets (on a weekly timeframe) registered an Overbought reading or traded more than 2.5 standard deviations above its rolling mean.
Extremes “above” the Mean (at least 2.5 standard deviations)
USD/JPY (telling us of a strong USD and a weaker Yen)
It’s the weakest since early 2019.
So sell USD and Buy JPY and use it to buy cheap Japanese equities.
Overbought (RSI > 70)
Hot Rolled Coil Steel (for the 54th consecutive week)
Aluminium
Australian coal
and India’s Sensex & NIFTY 50 equity indices
The Overbought Quinella – Both Overbought and Traded at > 2.5 standard deviations above the weekly mean)
U.K. 10 year government bond yields (Gilts)
U.S. 2 year and 5 year govn’t bond yields
Korean 10’s
The Bloomberg Commodity Index
The CRB Index
The Baltic Dry Index
WTI and Brent Crude
Gasoil
Heating Oil
Natural Gas
the JKM “Japan/Korea (LNG) Marker”
Coal, Rotterdam delivery (it was up 22% early in the week)
Russia’s MOEX equity index
Assets (securities) which touched the other side of the extreme, being Oversold (where the RSI is < 30) or were at least 2.5 standard deviations below its mean are;
Extremes “below” the Mean (at least 2.5 standard deviations)
South Korea’s KOSPI equity index
EUR/GBP – telling us the Euro is weaker and we have a strong British Pound, so sell your GBP and Buy EUR (there are some bargains amongst European equities)
Oversold (RSI < 30)
None
The Oversold Quinella – Both Overbought and Traded at > 2.5 standard deviations above the weekly mean.
None
Notes & Ideas:
Most of the price action continues in the bond market (with some markets seeing yields hitting some extremes) while many commodities continue to post weekly moves of greater than 2% over this past week.
In the past weeks bond yields have been rising.
Over the past 8 weeks, Australian 10’s have risen from 1.07% to 1.67%. This week alone, they’ve risen from 1.49%.
U.S. 10’s moved from 1.13% to 1.62%. In the past week, they stretched from 1.47%.
French 10 years from -0.15% to + 0.12%.
U.K. 10’s have doubled from 0.52% to 1.15%. We’ve seen them extend from last weeks 1.06%.
While over the past week alone, Korean 10’s moved from 2.26% to 2.38%. Canada’s equivalent went from 1.47% to 1.63% and German Bunds rose from a negative 0.23% to (0.15%).
My call for a peak and an interim ‘head-fake’ in rising yields stands. Interest Rates will rise but for now the surge needs a break. Furthermore, the U.S. 10 year minus 2 year yield ‘spread’ has hit a resisting trendline.
The larger advancers over the past week comprised of Baltic Dry Index (shipping) 6.2% (adding to last week’s 12% rise), WTI & Brent Crude 4.3%, Gasoil 6.4%, Copper 2%, Heating Oil 3.8%, JKM 3% (peaked at +12%), Cattle 4.3%, Lumber 15% (I’ll remind readers of my bottom call), Platinum 5.6%, Gasoline 5.1%, CRB Index 2.2%, Australian Coal 3.2%, KBW Banking Index 2.3%, MOEX 4.3%, Nifty 50 & Sensex 2.2%, Singapore’s Strait Times 2%, Dow Jones Transports 2.7%, Nasdaq Transports 1.8% & Australia’s ASX 200 1.9%.
The group of decliners included Lean Hogs (2.2%), Hot Rolled Coil Steel (2%), Orange Juice (3.9%), Corn (2%), Wheat (2.8%), Dutch (Euro) Gas (6.4%) peaked at +45% during the week, KOSPI (2.1%) and Nickel fell 2.5%.
In last week’s edition I wrote……..and I remind readers;
A rise in the U.S. Dollar has generally resulted in weaker commodity prices. Gold in AUD continues to hold a A$2,312 support level.
But I continue to watch and think that recent rise in interest rates will be a head-fake and lead to a reversal lower. The next resistance in U.S. 10’s is 1.62%.
Higher U.S. interest rates means a rising AUD. If 10’s hit resistance and reverse lower, the lower AUD and weaker commodities trade is back on.
In other notes, the FTSE 100 (7,096) is closer to a breakout and is Italy’s MIB Index (26,051), with my bet being for lower prices.
The Nord Stream 2 gas pipeline is not commissioned,
The pipeline runs from Russia 🇷🇺 into Germany 🇩🇪 via the Baltic Sea,
It has been completed but it hasn’t been turned on yet,
Germany has until January 8th to certify Nord Stream 2,
Merkel is no longer chancellor of Germany,
The new chancellor hasn’t been confirmed,
In the meantime, Russia has started filling the pipeline for inventory and pressure,
The pipeline is owned by Gazprom,
although Gazprom is listed, the Russian Federation owns 51% of Gazprom,
Equities in Russia (Gazprom) oil and gas companies have tripled.
Russia accounts for one-third of world’s natural gas reserves,
Russia provides more than one-third of Europe’s gas supply,
Ukraine and USA have opposed Nord Stream,
as it will increase Europe’s reliance on Russian energy.
The West has been imposing sanctions on Russia,
Putin says he is willing to help Europe with supply,
America (Blinken) says Russia shouldn’t use energy supply as a ‘weapon’,
Russia smirks as renewables aren’t exactly doing it for Europe yet.
Doesn’t Norway have gas?
Norway’s Equinor is Europe’s 2nd largest gas supplier after Gazprom,
they will increase more supply.
So Putin offers immediate gas transported through Ukraine,
Ukraine and Biden (USA) are friends,
Biden could be friendly to Russia by ‘allowing’ gas to run through Ukraine,
Russia then asks for sanctions to ease as a trade off,
Ukraine gets to earn money in transit fees,
Europe receives gas quickly,
Gas prices fall, easing rising consumer costs,
The U.S. will be nicer to Russia,
because while he was at Columbia Law School,
Secretary of State, Antony Blinken wrote a book in 1987,
Which suggest being friendly and engaging Russia rather than defeating them,
And this gives us a clue to his potential diplomacy plan,
The book “Ally versus Ally: America, Europe, and the Siberian Pipeline Crisis (1987)” argued, U.S. policy toward the Soviet Union was less important than U.S. policy toward its European allies.
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