Month: January 2021

At the start of every year, the Wall Street consensus is infatuated with a set of ideas, narratives and trades, which shape markets for the next few months, quite often repricing violently especially since so many of them end up being dead wrong. 2021 is no exception, and as Reuters summarizes among the top trades which investment banks and asset managers believe will dominate financial markets in 2021, are: i) Dump the dollar!; ii) Buy emerging markets! iii) Stay sustainable… oh and pray that central banks bail you out when everything blows up.

1. King Dollar (Keeps) Falling

Covid ended a decade of dollar strength (after first creating a supernova surge in the value of the greenback as a $12 trillion dollar short squeeze shockwave which was short circuited by the Fed printing trillions), and expectations are for 2021 to bring more greenback pitfalls. BofA’s December investor survey showed ‘shorting’ the dollar was the second most crowded trade. Another gauge – U.S. Commodity Futures Trading Commission data – shows $30 billion in net dollar shorts, swinging from last December’s $17 billion net long.

The reasoning, says Peter Fitzgerald, chief investment officer for multi-asset and macro at Aviva Investors, is that no central bank can “out-dove the Fed”. In other words, when the Federal Reserve cut interest rates near 0%, it kicked away the dollar’s yield advantage over peers. And it still has room to ease policy.  Any future reduction in trade and political tensions, likely under a Biden administration, would also be dollar-negative

How much and for how long will the dollar fall? Analysts polled by Reuters predict weakness to endure until mid-2021, capped by COVID-19 uncertainty. But PIMCO notes dollar declines are fastest after deep recessions, with five instances of 8%-10% annual depreciations recorded between 2003 and 2018. Vaccines and rebounding economies will “hasten the dollar’s fall from grace”, PIMCO predicted.

2. Re-emerging markets

With developing economies seen benefiting from recovering global trade, tourism and commodities, a weaker dollar and a more predictable White House, Morgan Stanley’s message is: “Gotta Buy EM All!” The bank is recommending currencies from China, Mexico, Brazil, South Africa and Russia, alongside bonds from Ukraine and Mexican oil firm Pemex. Goldman Sachs and JPMorgan are also backing EM for 2021, with the BofA survey showing the sector the main overweight. Pictet says EM currencies have 25% of undervaluation to recoup.

Additionally, debt in emerging market currencies will net investors 6.2% next year, more than the S&P500, BofA expects. The sentiment swing towards a sector that’s languished for a decade is driven of course by hopes of a China-led growth recovery but also the lure of higher emerging market interest rates, given 0% or negative yields across richer countries.

Understandably, according to the Institute of International Finance (IIF) investors are shovelling money into EM assets at the fastest rate in nearly a decade. But some remain wary. Higher Treasury yields could spark a 2013-style “taper tantrum”, Citi suggested. Investment-grade credit ratings are at risk in some countries such as Romania or Mexico, while more debt defaults are likely in weaker nations.

3. (Central) Banking on It

Perhaps we should have started with this one because underpinning virtually all 2021 bets is the view that the Federal Reserve, European Central Bank, Bank of Japan, Bank of England and People’s Bank of China will keep the cheap money flowing. As we reported previously, central banks worldwide spent $1.3 billion an hour since March on asset purchases, according to BofA. There were also 190 rate cuts in 2020 year – roughly four every five trading days. But with global GDP seen expanding 5.4% next year – the most since 1973 – it might be hard to justify pushing the pedal further to the metal, especially if inflation creeps higher.

And not much policy room is left anyway. JPMorgan estimates that over 80% of sovereign bonds from richer nations pay negative yields after factoring in inflation. Many investors including BlackRock are now underweight the sector. Still, the Big Five’s asset purchases should total $3 trillion, Pictet predicts, down from this year’s $8 trillion but enough to keep bond yields extremely low.

A note of caution from JPMorgan – consensus forecasts in the past 10-15 years have correctly called the direction of Treasury yields only 40% of the time. Which means that the most likely outcome is for sharply lower yields by year end.

4. ESG – Here For “Good”

The assets of funds investing in environmental, social and governance (ESG) principles doubled this past year to over $1.3 trillion, and the IIF predicts the pace will accelerate in 2021, especially if U.S. President-elect Joe Biden pursues a greener agenda (the irony, as we explained in September, is that most “ESG” investments are really just a handful of mega-cap tech stocks). Virtue signaled “concerns” about pollution, climate change and workers’ rights (by corporations whose bottom line is to literally minimize workers’ rights) are the main drivers. But the IIF also points out 80% of “sustainable” equity indices outperformed non-ESG peers during the pandemic-linked selloff, while renewable energy has been the runaway outperformer since then.

BlackRock describes ESG as “the tectonic shift transforming investing” (perhaps referring to the impact its own top-line is expected to see), forecasting “persistent flows into sustainable assets in the long transition to a less carbon-intensive world.” In any case, for now it’s working: two-thirds of ESG fund assets are in equities, but sustainable debt has grown 20% in 2020 to more than $620 billion. Governments are stepping up green debt issuance while central banks are eyeing more sustainable bond-buying and reserve strategies

5. Biden Time on Tech

According to Reuters, many of the above investment strategies are premised on a very different approach to trade and geopolitics under Biden. He has vowed the United States will be “ready to lead” again on the global stage, but BofA cautions that China, North Korea or Iran may look to test him early on with “provocative actions”. In some areas – big data, 5G, artificial intelligence, electric vehicles, robotics, and cybersecurity – Biden’s policies might be just as combative as Trump’s.

That may speed up the move towards what’s dubbed ‘splinternet’, with dual or multiple tech systems. Tech and e-commerce companies account for a quarter of U.S. corporate profits, while tech comprises 40% of MSCI’s emerging equity index. So watch this space.

The leader of the Proud Boys, the group that has vocally supported President Trump’s efforts to overturn the election results, was arrested on Monday on charges of destruction of property after he arrived in Washington to protest the congressional certification of the election later this week, the NYT and WaPo reported.

The chairman of the Proud Boys – a Latin man by the name of Enrique Tarrio – was arrested by Metropolitan Police on suspicion of burning a Black Lives Matter banner torn from a historic Black church in Washington during protests last month that led to several violent clashes, including stabbings, around the city.

Police stopped a car Tarrio had been in shortly after it entered the District, said Dustin Sternbeck, a D.C. police spokesman. He said it is believed that Tarrio, who lives in Miami, was coming into the District from the airport. Sternbeck said Tarrio is charged with one misdemeanor count of destruction of property in connection with the Dec. 12 burning of a banner stolen from Asbury United Methodist Church.

A spokesman for the Metropolitan Police Department confirmed that Tarrio, 36, had been arrested on charges of destruction of property, stemming from a mid-December incident in downtown Washington. Police said Tarrio, who was in custody Monday evening, also was charged with two felony counts of possession of high-capacity ammunition feeding devices, which is a legal term for a firearms magazine that allows guns to hold additional bullets. The devices were found during the arrest, police said.

Members of the Proud Boys are planning a rally in the District on Wednesday in support of President Trump and his efforts to overturn the election outcome. Trump has urged his supporters to descend on Washington to express their dismay with the certification of the election for President-elect Joseph R. Biden Jr. On New Year’s Day, he promoted what he described as “the BIG Protest Rally” in Washington.

Tarrio had told The Washington Post last month that he was among those who burned the banner. The church banner was ripped down after a similar rally last month.

According to WaPo, Tarrio could appear Tuesday in D.C. Superior Court. Prosecutors with the U.S. attorney’s office in the District could modify the charges brought by police. Authorities had described the burning of the banner as a potential hate crime. Sternbeck said it would be up to prosecutors to determine whether to file hate crime charges, which could increase the penalty.

Tarrio last month told The Post that he would plead guilty to destruction of property, pay the church the cost of the banner and surrender to authorities if a criminal charge was filed. “Let me make this simple,” he said. “I did it.”

However, Tarrio said he would not admit to committing a hate crime. He said he was not motivated by race, religion or political ideology, but because he believes the Black Lives Matter movement “has terrorized the citizens of this country.”

The Proud Boys, along with members of antifa were caught in protests and marches in mid-December that gave way to violent clashes between Trump’s supporters, antifas and law enforcement, as well as vandalism and destruction of property at churches in the city, including historic Black churches. The local police said at the time that it would investigate the church attacks as potential hate crimes.

The banner that Tarrio said he participated in burning was taken from Asbury United Methodist, one of the oldest Black churches in the city. DC police have classified the burning as a destruction of property, a misdemeanor when damage is under $1,000. It is punishable by up to 180 days in jail and a $1,000 fine.

Tarrio previously said he does not know who tore down the banner, and that neither he nor his members knew the church is predominantly African American. “We didn’t Google the church and go, ‘Oh, it’s a Black church, let’s target it,’ ” Tarrio said. “The sign was taken down because of what it represents.”

Washington is bracing for another round of protests on Wednesday, when the Senate convenes to certify the results of the Electoral College. Pro-Trump groups including the Proud Boys are expected to protest, and law enforcement officials are preparing for more violence.

Tarrio had said on Parler that the Proud Boys would “turn out in record numbers on Jan 6th,” but that they would fan out across the city “incognito.”

2018 was a very bad year for one-time commodity trading wunderkind, Pierre Andurand, who back in April of 2018 bet oil could soon hit $100 a barrel (and even said $300 oil is “not impossible“), but watched as his billion Andurand Commodities Fund suffered its largest monthly loss ever just a few months later as oil closed the year at just half of his target price. And while his performance in 2019 was better, the energy trader who runs one of the last big oil-focused hedge funds again failed to generate a positive return in a year when oil staged only a modest rebound.

Well what a difference a year makes: after being short in early 2020 when WTI did the unthinkable and on April 20 traded as low as a negative $40/bbl, Andurand redeemed himself following losses in the previous two years, and according to Bloomberg, his hedge fund stormed back in 2020 to post its biggest-ever gain.

The flagship Andurand Commodities Fund, which mostly bets on rises and falls in oil prices, was up 68.6% for the year, according to a Bloomberg source, while the Discretionary Enhanced Fund, which was launched in 2019 without pre-set risk limits, surged 154%. That made it not only the best performing commodity fund, but also one of the year’s best-performing hedge funds across all products and sectors.

As we reported at the time, most of the funds’ gains came in March (up 63.5%) and April when energy prices collapsed amid the covid lockdowns, and when Andurand was uncharacteristically – if 100% spot on correct – bearish on oil (we warned just weeks before the infamous price implosion that negative prices could be coming, and one month later that’s precisely what happened) .

According to Bloomberg, Andurand’s returns were the best since his main fund made 38% in 2014. The solid 2020 performance is reminiscent of his strong gains during the last financial crisis at his previous firm BlueGold, which he co-founded with Dennis Crema in 2007 and launched the following year. He made more than 210% in 2008.

The solid performance could not come any sooner for the fund which has emerged as one of the very few commodity hedge funds still trading. Many of the biggest names have exited the market, including Astenbeck Capital Management, Blenheim Capital Management and Clive Capital, each of which managed billions of dollars at its peak, but which were forced to shutdown following major losses in recent years as oil cratered on several occasions in the past 6 years.