Sive Morten
Special Consultant to the FPA
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Fundamentals
Yesterday we've started the discussion of recent statistics, mostly focusing on NFP and JOLT's data and paid a lot of attention to banking sector, explaining why rising of default spreads it is not just problem of solvency for particular bank. This is complex event that reflects situation in global finance and banking sector in particular. Today we keep going with this statistics, I will show you more interesting pictures. Also we take a look at some political issues, such as recent OPEC decision and ignoring US request to increase extraction. What it could mean and why this happens.
Market overview
Gold edged higher in after capping its best week since mid-August as a retreat in the dollar provided some relief to the precious metal. Bullion posted its first weekly gain in three on Friday, with an easing in Treasury yields also helping to boost the allure of the non-interest bearing asset.
China’s financial regulators told the biggest state-owned banks to extend more financing to the country’s embattled property sector in the final four months of this year, according to a report on Friday. Meanwhile, Credit Suisse Group AG’s new chief executive officer asked investors for time to deliver a turnaround strategy following sharp declines in the bank’s share price.
There’s a global migration underway in the gold market, as western investors dump bullion while Asian buyers take advantage of a tumbling price to snap up cheap jewelry and bars. Rising rates that make gold less attractive as an investment mean that large volumes of metal are being drawn out of vaults in financial centers like New York and heading east to meet demand in Shanghai’s gold market or Istanbul’s Grand Bazaar.
In fact, it can’t move fast enough. Logistical issues combined with quirks of the market are making it difficult for traders to get enough bullion where it’s wanted. As a result, gold and silver are selling at unusually large premiums over the global benchmark price in some Asian markets.
The rotation of metal around the world is part of a gold-market cycle that has repeated for decades: when investors retreat and prices drop, Asian buying picks up and precious metals flow east — helping to put a floor on the gold price during times of weakness. Then, when gold eventually rallies again, much of it returns to sit in bank vaults beneath the streets of New York, London and Zurich.
More than 527 tons of gold has poured out of New York and London vaults that back the two biggest Western markets since the end of April, according to data from the CME Group Inc. and London Bullion Market Association. At the same time, shipments are rising into big Asian gold consumers like China, whose imports hit a four-year high in August.
While plenty of gold is heading east, it’s still not enough to meet demand. Gold in Dubai and Istanbul or on the Shanghai Gold Exchange has traded at multi-year premiums to the London benchmark in recent weeks, according to MKS PAMP — a sign that buying is outstripping imports.
Analysts say that much of the precious metals feeding Asia’s appetite is coming out of vaults run by CME Group, which back the Comex futures market in New York.
Market dislocations early in the pandemic drove a massive surge in prices there, forcing banks to build large stockpiles to cover their futures positions. In recent months gold has traded at a discount on the Comex compared to London, and those inventories are now being drawn down to meet Asian demand.
My suggestion, guys, that this year the classical cycle hardly repeats again. When west will wake up and start to buy gold, hardly east will start to sell it... 775 tonnes (~ 25 Mln Oz), is not too big volume, compares to derivatives positions and will be swept off in a blink of an eye. Interesting fact: the last time silver rose in price as much as today, in November 2008. This was the bottom, and over the next two and a half years, silver increased by 400%
US economy is deteriorating more
Fed finally starts tightening and reduce the balance moderately for the first time in this year. As a result, the Fed assets return the levels of the January. This has led to the boom on Repo market when banks start to make short-term loans, backed by US Treasuries bonds to get liquidity. Fed Reverse Repo rates have reached $2.4 Trln this week. The Fed's balance sheet this week reached its lowest level in a year, down by $206 billion from its peak in April and by $74 billion over the past 3 weeks. This is the biggest three-week decline since July 2020. The Fed is finally starting to ramp up the pace of QT.
Fed's B. Evans told that he expects Fed to rise rate for another 1.25% within nearest two meeting, and rate should reach 4.5-4.75% level in Spring. So our suggestion that active stage of the crisis should last 6-8 months more is getting another confirmation. Market participants also expect further dollar strength within the same term.
An overwhelming majority of 85% of analysts, 47 of 55, in the Sept. 30-Oct. 5 Reuters poll who answered an additional question said the dollar's broad strength against a basket of currencies hasn't yet reached an inflection point. When asked when it would be reached, 25 of 46 who responded said within six months and 17 said within three months. Among the remaining four analysts three said within a year and one said over a year.
Our chart of short-term yields shows market consensus that mostly agrees with B. Evans forecast. Another interesting moment is 1-year rate equals to the Fed Fund rate, suggesting that market doesn't expect policy easing next year by far:
Meantime, despite higher interest rates situation remains difficult. Inflation become structural, although it is decreasing in energy sector because of drop in industry production and demand, it is spreading over other sectors. All most important life goods and services, such as healthcare, education, Food have jumped significantly, and only TV, cell phones, computer games dropped in price.
Fever in real estate sector continues. Now 30-year housing loans are offered at 6.75%, they show growth for the 7th week in a row. At the same time, an interesting situation is developing in the market. Interest rates are at record levels for 16 years, and demand has reached its minimum. The number of applications decreased by 14% last week. The shocking collapse of mortgage applications last week. Purchase demand is at its lowest level in a DECADE. Comparable to the lows of 2010 during the last housing crash.
The situation is developing in such a way that with rising Fed rates, it is no longer profitable for banks to offer cheap mortgages, which forces them to raise interest rates. In conditions of inflation and rising rates, the demand for such products is lost.
Stock and real estate market now is priced around $80 Trln while GDP stands around 25 Trln. It is still long way to go to normalize situation. If even we suggest assets price return to average of 2 times of GDP, i.e. $50 Trln, drop of stocks and housing market still should happen for 30-40% from current levels. Although, for the truth sake, 70% of the US GDP is a services which doesn't produce any real value and represents just re-distribution of production income among other population. If your wage from some industrial plant is $5K per month and I wash your dishes and clean your house and you pay me $1'000 per month, you just re-distributed the part of your income at your needs but not create the new value for $1000. While GDP calculation suggests that now it is $6 000 in total production value. This is big bubble. The same reason is why GDP inflation is so low, because CPI takes 70% of value while PPI just 30%. In reality, GDP inflation has to be above 10% already.
While Fed has started to drain liquidity more aggressively - all markets turn to sharp nosedive. Bonds we've discussed yesterday, and here is stock market. Since this is not the end yet and Fed will go at least with more 1.25% rate hike, drop should accelerate. Besides of economical factors, there are more others, including geopolitics that could accelerate this process:
I can't add more than 10 charts in single post guys, so -
To be continued ...
Yesterday we've started the discussion of recent statistics, mostly focusing on NFP and JOLT's data and paid a lot of attention to banking sector, explaining why rising of default spreads it is not just problem of solvency for particular bank. This is complex event that reflects situation in global finance and banking sector in particular. Today we keep going with this statistics, I will show you more interesting pictures. Also we take a look at some political issues, such as recent OPEC decision and ignoring US request to increase extraction. What it could mean and why this happens.
Market overview
Gold edged higher in after capping its best week since mid-August as a retreat in the dollar provided some relief to the precious metal. Bullion posted its first weekly gain in three on Friday, with an easing in Treasury yields also helping to boost the allure of the non-interest bearing asset.
China’s financial regulators told the biggest state-owned banks to extend more financing to the country’s embattled property sector in the final four months of this year, according to a report on Friday. Meanwhile, Credit Suisse Group AG’s new chief executive officer asked investors for time to deliver a turnaround strategy following sharp declines in the bank’s share price.
There’s a global migration underway in the gold market, as western investors dump bullion while Asian buyers take advantage of a tumbling price to snap up cheap jewelry and bars. Rising rates that make gold less attractive as an investment mean that large volumes of metal are being drawn out of vaults in financial centers like New York and heading east to meet demand in Shanghai’s gold market or Istanbul’s Grand Bazaar.
In fact, it can’t move fast enough. Logistical issues combined with quirks of the market are making it difficult for traders to get enough bullion where it’s wanted. As a result, gold and silver are selling at unusually large premiums over the global benchmark price in some Asian markets.
The rotation of metal around the world is part of a gold-market cycle that has repeated for decades: when investors retreat and prices drop, Asian buying picks up and precious metals flow east — helping to put a floor on the gold price during times of weakness. Then, when gold eventually rallies again, much of it returns to sit in bank vaults beneath the streets of New York, London and Zurich.
More than 527 tons of gold has poured out of New York and London vaults that back the two biggest Western markets since the end of April, according to data from the CME Group Inc. and London Bullion Market Association. At the same time, shipments are rising into big Asian gold consumers like China, whose imports hit a four-year high in August.
While plenty of gold is heading east, it’s still not enough to meet demand. Gold in Dubai and Istanbul or on the Shanghai Gold Exchange has traded at multi-year premiums to the London benchmark in recent weeks, according to MKS PAMP — a sign that buying is outstripping imports.
Analysts say that much of the precious metals feeding Asia’s appetite is coming out of vaults run by CME Group, which back the Comex futures market in New York.
Market dislocations early in the pandemic drove a massive surge in prices there, forcing banks to build large stockpiles to cover their futures positions. In recent months gold has traded at a discount on the Comex compared to London, and those inventories are now being drawn down to meet Asian demand.
My suggestion, guys, that this year the classical cycle hardly repeats again. When west will wake up and start to buy gold, hardly east will start to sell it... 775 tonnes (~ 25 Mln Oz), is not too big volume, compares to derivatives positions and will be swept off in a blink of an eye. Interesting fact: the last time silver rose in price as much as today, in November 2008. This was the bottom, and over the next two and a half years, silver increased by 400%
US economy is deteriorating more
Fed finally starts tightening and reduce the balance moderately for the first time in this year. As a result, the Fed assets return the levels of the January. This has led to the boom on Repo market when banks start to make short-term loans, backed by US Treasuries bonds to get liquidity. Fed Reverse Repo rates have reached $2.4 Trln this week. The Fed's balance sheet this week reached its lowest level in a year, down by $206 billion from its peak in April and by $74 billion over the past 3 weeks. This is the biggest three-week decline since July 2020. The Fed is finally starting to ramp up the pace of QT.
Fed's B. Evans told that he expects Fed to rise rate for another 1.25% within nearest two meeting, and rate should reach 4.5-4.75% level in Spring. So our suggestion that active stage of the crisis should last 6-8 months more is getting another confirmation. Market participants also expect further dollar strength within the same term.
An overwhelming majority of 85% of analysts, 47 of 55, in the Sept. 30-Oct. 5 Reuters poll who answered an additional question said the dollar's broad strength against a basket of currencies hasn't yet reached an inflection point. When asked when it would be reached, 25 of 46 who responded said within six months and 17 said within three months. Among the remaining four analysts three said within a year and one said over a year.
Our chart of short-term yields shows market consensus that mostly agrees with B. Evans forecast. Another interesting moment is 1-year rate equals to the Fed Fund rate, suggesting that market doesn't expect policy easing next year by far:
Meantime, despite higher interest rates situation remains difficult. Inflation become structural, although it is decreasing in energy sector because of drop in industry production and demand, it is spreading over other sectors. All most important life goods and services, such as healthcare, education, Food have jumped significantly, and only TV, cell phones, computer games dropped in price.
Fever in real estate sector continues. Now 30-year housing loans are offered at 6.75%, they show growth for the 7th week in a row. At the same time, an interesting situation is developing in the market. Interest rates are at record levels for 16 years, and demand has reached its minimum. The number of applications decreased by 14% last week. The shocking collapse of mortgage applications last week. Purchase demand is at its lowest level in a DECADE. Comparable to the lows of 2010 during the last housing crash.
The situation is developing in such a way that with rising Fed rates, it is no longer profitable for banks to offer cheap mortgages, which forces them to raise interest rates. In conditions of inflation and rising rates, the demand for such products is lost.
Stock and real estate market now is priced around $80 Trln while GDP stands around 25 Trln. It is still long way to go to normalize situation. If even we suggest assets price return to average of 2 times of GDP, i.e. $50 Trln, drop of stocks and housing market still should happen for 30-40% from current levels. Although, for the truth sake, 70% of the US GDP is a services which doesn't produce any real value and represents just re-distribution of production income among other population. If your wage from some industrial plant is $5K per month and I wash your dishes and clean your house and you pay me $1'000 per month, you just re-distributed the part of your income at your needs but not create the new value for $1000. While GDP calculation suggests that now it is $6 000 in total production value. This is big bubble. The same reason is why GDP inflation is so low, because CPI takes 70% of value while PPI just 30%. In reality, GDP inflation has to be above 10% already.
While Fed has started to drain liquidity more aggressively - all markets turn to sharp nosedive. Bonds we've discussed yesterday, and here is stock market. Since this is not the end yet and Fed will go at least with more 1.25% rate hike, drop should accelerate. Besides of economical factors, there are more others, including geopolitics that could accelerate this process:
I can't add more than 10 charts in single post guys, so -
To be continued ...
