Month: September 2021

By Greg Miller of American Shipper,

There’s panic-buying of gasoline in the U.K. Natural gas prices in Europe and Asia are skyrocketing. Protests are breaking out across Europe due to spiking electricity bills. India and China are short of coal for utilities. Power is being rationed to factories in multiple Chinese provinces — and winter is coming.

First came the COVID-induced global supply chain crisis for container shipping. Now comes a power crunch across Asia and Europe. Energy commodity stockpiles – just like U.S. retail inventories – did not build back up fast enough to contend with post-lockdown demand.

How could the power crunch affect ocean shipping? For U.S. importers of Asian containerized goods, it’s a negative: another crimp in the supply chain. For commodity shipping – dry bulk, liquefied natural gas (LNG) and possibly oil tankers – it’s a recipe for higher rates.

Container shipping

According to Bloomberg, power use is now being curbed by tight supply and emissions restrictions in the Chinese provinces of Jiangsu, Zhejiang and Guangdong. Bloomberg quoted Nomura analyst Ting Lu as stating, “The power curbs will ripple through and impact global markets. Very soon the global markets will feel the pinch of a shortage of supply from textiles and toys to machine parts.”

Nikkei reported that an affiliate of Foxconn, the world’s biggest iPhone assembler and a key supplier of Apple and Tesla, halted production at its facility in Kunshan in Jiangsu Province on Sunday due to lack of electricity supply. Another Apple supplier, Unimicron Technologies, also halted production in Kunshan on Sunday, said Nikkei, citing regulatory filings.

The New York Times reported on power outages in the heart of China’s southern manufacturing belt, in Guandong. Factories in the city of Dongguan have not had electricity since last Wednesday. The Times interviewed a general manager of a Dongguan factory that produces leather shoes for the U.S. market who has kept his operation running with a diesel generator and who said that power outages began this summer.

Stoppages of Chinese factories would further delay deliveries of U.S. imports, which have already been waylaid by extreme congestion at ports in Southern California and, more recently, ports in China.

Dry bulk shipping

“Whether it was coal or natural gas or oil, there was very low capital available for companies to continue to reinvest [in production] for several years heading into the pandemic,” explained Clarksons Platou Securities analyst Omar Nokta in an interview with American Shipper on Monday.

“We built up a big stockpile in the first few months of the pandemic and we went right through it as soon as lockdowns abated, but capital hasn’t been redeployed. There has really been a true lack of investment.”

In particular, thermal coal — coal used for power generation — faces steep restrictions in access to capital for environmental reasons. 

Thermal coal supplies in China and India have dwindled as post-lockdown electricity consumption has eaten into inventories; India’s stockpiles are at a four-year low. China’s supplies are further limited by environmental restrictions on domestic mines and a ban on Australian imports. The Newcastle benchmark thermal coal price was up to $205 per ton on Monday.

This is good news for dry bulk vessels in the Capesize and Panamax classes, said Nokta. (Capesizes have a capacity of around 180,000 deadweight tons, or DWT, and Panamaxes 65,000-90,000 DWT.)

Capesizes spot rose to $69,000 per day on Tuesday, with Panamax spot rates rising to $36,200 per day, according to Clarksons.

“People expected some bounce back in demand for thermal coal in 2021, but the surge in demand was not at all anticipated,” said Nokta.

“That resurgence is keeping Panamaxes and Capes very busy when they can’t count on the cargoes they normally would — grain for Panamaxes and iron ore for Capes. Grain has been consistent throughout the year and now the Panamaxes have this added thermal coal element. Capes have faced a somewhat inconsistent Chinese steel market [production plunged in August], but it hasn’t mattered because of all of these thermal coal cargoes they’ve been able to carry.”

Capesize rates have risen over the past week despite escalating concern over the fate of Chinese property developer Evergrande and the Chinese property market in general.

“The real-estate story is still a question, and the regulators are tempering steel production to limit pollution,” said Nokta. “But we could have a situation where iron ore demand dips and there’s a handoff to thermal coal, and when thermal coal demand diminishes after the winter season, the iron-ore market comes back to life. So, you may not even feel it.”

LNG shipping

The shortfall of natural gas in Europe and Asia is clearly evident in historically high natural gas spot prices.

The Asia benchmark, the Japan-Korea Marker (JKM), had risen to $27.50 per million British Thermal Units (MMBtu) on Friday, nearly double the August price. The two European benchmarks, TTF Netherlands and the National Balancing Point (NBP), have risen in lockstep with the JKM, to $26.51 and $26.23 per MMBtu, respectively. TTF and NBP are at all-time highs. The U.S. Henry Hub price has risen, but to far below these levels, at $5.51.

Last winter, amid a huge spread between natural gas prices, LNG shipping spot prices spiked to $200,000 or more per day (one spot voyage reached $350,000 per day). But currently, rates for tri-fuel diesel engine LNG carriers are $51,000 per day, just below the five-year average for this time of year, according to Clarksons.

Asked why LNG spot shipping rates are not surging given extremely high commodity prices in Asia and Europe and a large spread with U.S. pricing, Nokta cited two reasons.

First, he said that the big spikes in spot shipping rates happen when there is a big spread between the European and Asian commodity prices, and there are aggressive re-exports from Europe to Asia by traders. “Right now, the JKM is at parity with Europe, so there isn’t as much cross-hemispheric trade.”

Second, when spot rates spiked last winter, cargo interests took LNG ships on long-term charter to protect against future high spot rates. “Most of the charterers covered their requirements and spot activity has really dwindled in the past three months. So, when you look at spot rates, they may tell you things aren’t on fire, but there’s actually a lot of [cargo] movement.”

Even so, spot LNG shipping rates could see a jump this winter if the spread between European prices and the JKM widens and more companies with chartered ships “relet” them into the spot market to profit from higher rates.

Tanker shipping

Product and crude tanker rates remain below breakeven, but some analysts and brokers believe power shortage in Asia and Europe could help jumpstart these beleaguered shipping markets as well.

As with other commodities, oil stockpiles are low. Evercore ISI analyst Jon Chappell said Monday that “OECD refined product inventories are now lower than pre-COVID levels and are well below five-year averages, [however] at a certain point, inventories approach a level where there is no longer much slack in the system.”

Nokta noted that in past commodity cycles “crude oil led the charge and this time it seems all the other commodities rose and crude is bringing up the rear. But all the same fundamental factors and drivers are there [for crude as with other commodities].”

In light of extremely high natural gas prices, Goldman Sachs recently estimated that Asia and Europe could use up to 900,000 barrels per day more oil for power generation, as a substitute for natural gas.

According to Gibson Brokers, “This would depend on a ‘cold winter’ and would also likely be focused east of Suez where oil-based fuels have greater potential to form part of the power-generation market.”

Gibson said, “High-sulfur fuel oil [HSFO] is expected to be the primary beneficiary … and countries including Pakistan and Bangladesh, as well as some Middle Eastern players, have already been more active in the spot HSFO market as LNG prices began to rise.

“Higher HSFO prices could potentially increase refining run rates, supporting crude demand,” added Gibson.

Nokta pointed to this upside as well. “When we think about oil consumption, that’s been improving purely on mobility. Gasoline refining margins have strengthened as more people have gotten vaccinated,” he said. “But you could have this other element with fuel oil. Refiners could ratchet up production, which would mean you’re bringing higher amounts of crude into the refining system and producing more distillates and fuel oil.

“It’s a nice setup for tankers,” affirmed Notka. “You’ve got improving oil consumption, shrinking inventories, OPEC promising to boost output — and now throw in an energy crisis as we go into winter.”

U.S. index futures rebounded on Tuesday from Monday’s stagflation-fear driven rout as an increase in Treasury yields abated and the greenback dropped from a 10 month high while Brent crude dropped from a 3 year high of $80/barrel after API showed a surprise stockpile build across all products.

One day after one of Wall Street’s worst selloff of this year which saw the S&P’s biggest one-day drop since May, dip buyers made yet another another triumphal return to global markets, with Nasdaq 100 futures climbing 130 points or 0.9% after the tech-heavy index tumbled the most since March on Tuesday as U.S. Treasury yields rose on tapering and stagflationconcerns. S&P 500 futures rose 28 points or 0.6% after the underlying gauge also slumped amid mounting concern over the debt-ceiling impasse in Washington.

A key catalyst for today’s easing in financial conditions was the 10-year yield shedding four basis points and the five-year rate falling below 1%. In the past five sessions, the 10Y yield rose by a whopping 25 basis point, a fast enough move to trigger VaR shocks across risk parity investors.

“We think (10-year treasury yields) are likely to around 1.5% to 1.75%, so they obviously still have room to go,” said Daniel Lam, senior cross-asset strategist at Standard Chartered, who added that the rise in yields was driven by the fact that the United States was almost definitely going to start tapering its massive asset purchases by the end of this year, and that this would drive a shift from growth stocks into value names.

Shares of FAAMG gigatechs rose between 1% and 1.3% in premarket trading as the surge in yields eased. Oil firms and supermajors like Exxon and Chevron dipped as a rally in crude prices petered out. The S&P energy sector has gained 3.9% so far this week and is on track for its best monthly performance since February. Among stocks, Boeing rose 2.5% after it said 737 MAX test flight for China’s aviation regulator last month was successful and the planemaker hopes a two-year grounding will be lifted this year. Cybersecurity firm Fortinet Inc. led premarket gains among S&P 500 Index companies. Here are some of the other big movers this morning:

• Micron (MU US) shares down more than 3% in U.S. premarket trading after the chipmaker’s forecast came in well below analyst expectations. Co. was hurt by slowing demand from personal-computer makers
• Lucid (LCID US) shares rise 9.7% in U.S. premarket trading after the electric-vehicle company said it has started production on its debut consumer car
• EQT Corp. (EQT US) shares fell 4.8% in Tuesday postmarket trading after co. reports offering by certain shareholders who received shares as a part of its acquisition of Alta Resources Development’s upstream and midstream units
• PTK Acquisition (PTK US) rises in U.S. premarket trading after the blank-check company’s shareholders approved its combination with the Israel-based semiconductor company Valens
• Cal-Maine (CALM US) shares rose 4.4% postmarket Tuesday after it reported net sales for the first quarter that beat the average analyst estimate as well as a narrower-than-estimated loss
• Sherwin-Williams (SHW US) dropped 3.5% in Tuesday postmarket trading after its forecasted adjusted earnings per share for the third quarter missed the average analyst estimate
• Boeing (BA US) and Spirit Aerosystems (SPR US) climb as much as 3% after being upgraded to outperform by Bernstein on travel finally heading to inflection point

The S&P 500 is set to break its seven-month winning streak as fears about non-transitory inflation, China Evergrande’s default, potential higher corporate taxes and a sooner-than expected tapering of monetary support by the Federal Reserve clouded investor sentiment in what is usually a seasonally weak month. Meanwhile, Senate Democrats are seeking a vote Wednesday on a stopgap funding bill to avert a government shutdown, but without a provision to increase the federal debt limit. On Tuesday, Jamie Dimon said a U.S. default would be “potentially catastrophic” event, in other words yet another multibillion bailout for his bank.

“Many things are in flux: the pandemic is not over, the supply chain bottlenecks we are seeing are affecting all sorts of prices and we’ll need to see how it plays out because the results are not clear in terms of inflation,” Belita Ong, Dalton Investments chairman, said on Bloomberg Television.

Europe’s Stoxx 600 gauge rebounded from a two-month low, rising 0.9% and reversing half of yesterday’s losses. Semiconductor-equipment company ASM International posted the biggest increase on the index amid positive comments by analysts on its growth outlook. A sharp rebound during the European session marked a turnaround from the downbeat Asian session, when equities extended losses amid concerns over stagflation and China Evergrande Group’s debt crisis. Sentiment improved as a steady flow of buyers emerged in the Treasury market, ranging from foreign and domestic funds to leveraged accounts.  Here are some of the biggest European movers today:

• Academedia shares rise as much as 6.9% in Stockholm, the most since June 1, after the company said the number of participants for its higher vocational education has increased 25% y/y.
• ASM International jumps as much as 7.3%, rebounding from a three-day sell-off, boosted by supportive analyst comments and easing bond yields.
• GEA Group gains as much as 4.7% after the company published new financial targets through 2026, which Citigroup says are above analysts’ consensus and an encouraging signal.
• DSV bounces as much as 4.4% as JPMorgan upgrades to overweight, saying the recent pullback in the shares presents an opportunity.
• Genova Property Group falls as much as 10% in Stockholm trading after the real estate services company placed shares at a discount to the last close.
• ITM Power drops as much as 6.4% after JPMorgan downgrades to neutral from overweight on relative valuation, with a more mixed near-term outlook making risk/reward seem less compelling.
• Royal Mail slides as much as 6.2% after UBS cuts its rating to sell from buy, expecting U.K. labor shortages and wage inflation pressures to hurt the parcel service company’s profit margins.

Earlier in the session, Asian equities slumped in delayed response to the US rout. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.43% with Australia off 1.5%, and South Korea falling 2.06%. The Hong Kong benchmark shed 1.2% and Chinese blue chips were 1.1% lower. Japan’s Nikkei shed 2.35% hurt by the general mood as the country’s ruling party votes for a new leader who will almost certainly become the next prime minister ahead of a general election due in weeks.  Also on traders’ minds was cash-strapped China Evergrande whose shares rose as much as 12% after it said it plans to sell a 9.99 billion yuan ($1.5 billion) stake it owns in Shengjing Bank. Evergrande is due to make a $47.5 million bond interest payment on its 9.5% March 2024 dollar bond, having missed a similar payment last week, but it said in the stock exchange filing the proceeds of the sale should be used to settle its financial liabilities due to Shengjing Bank. Chinese real estate company Fantasia Holdings Group is struggling to avoid falling deeper into distress, just as the crisis at China Evergrande flags broader risks to other heavily indebted developers. In Japan, the country’s PGIF, or Government Pension Investment Fund, the world’s largest pension fund, said it won’t include yuan- denominated Chinese sovereign debt in its portfolio.

In rates, as noted above, Treasuries lead global bonds higher, paring large portion of Tuesday’s losses with gains led by intermediates out to long-end of the curve. Treasury yields richer by up to 4bp across long-end of the curve with 10s at around 1.50%, outperforming bunds and gilts both by 2bp; front-end of the curve just marginally richer, flattening 2s10s spread by 3.2bp with 5s30s tighter by 0.5bp. Futures volumes remain elevated amid evidence of dip buyers emerging Tuesday and continuing over Wednesday’s Asia hours. Session highlights include a number of Fed speakers, including Chair Powell.    

In FX, the Bloomberg Dollar Spot Index was little changed after earlier advancing, and the dollar slipped versus most of its Group-of-10 peers. The yen was the best G-10 performer as it whipsawed after earlier dropping to 111.68 per dollar, its weakest level since March 2020. The Australian dollar also advanced amid optimism over easing of Covid-related restrictions while the New Zealand dollar was the worst performer amid rising infections. The euro dropped to an 11-month low while the pound touched its weakest level since January against the greenback amid a bout of dollar strength as the London session kicked off. Confidence in the euro-area economy unexpectedly rose in September as consumers turned more optimistic about the outlook and construction companies saw employment prospects improve. The yen climbed from an 18-month low as a decline in stocks around the world helps boost demand for the currency as a haven. Japanese bonds also gained.

In commodities, oil prices dropped after touching a near three-year high the day before. Brent crude fell 0.83% to $78.25 per barrel after topping $80 yesterday; WTI dipped 1.09% to $74.47 a barrel. Gold edged higher with the spot price at $1,735.6 an ounce, up 0.1% from the seven-week low hit the day before as higher yields hurt demand for the non interest bearing asset. Base metals are under pressure with LME aluminum and copper lagging.

Looking at the day ahead, the biggest highlight will be a policy panel at the ECB forum on central banking featuring ECB President Lagarde, Fed Chair Powell, BoJ Governor Kuroda and BoE Governor Bailey. Other central bank speakers include ECB Vice President de Guindos, the ECB’s Centeno, Stournaras, Makhlouf, Elderson and Lane, as well as the Fed’s Harker, Daly and Bostic. Meanwhile, data releases include UK mortgage approvals for August, the final Euro Area consumer confidence reading for September, and US pending home sales for August.

Market Snapshot

• S&P 500 futures up 0.7% to 4,371.75
• STOXX Europe 600 up 0.8% to 455.97
• MXAP down 1.2% to 197.38
• MXAPJ down 0.7% to 635.17
• Nikkei down 2.1% to 29,544.29
• Topix down 2.1% to 2,038.29
• Hang Seng Index up 0.7% to 24,663.50
• Shanghai Composite down 1.8% to 3,536.29
• Sensex down 0.4% to 59,445.57
• Australia S&P/ASX 200 down 1.1% to 7,196.71
• Kospi down 1.2% to 3,060.27
• Brent Futures down 0.7% to $78.53/bbl
• Gold spot up 0.4% to $1,740.79
• U.S. Dollar Index little changed at 93.81
• German 10Y yield fell 1.1 bps to -0.210%
• Euro down 0.2% to $1.1664

Top Overnight News from Bloomberg

• China’s central bank governor said quantitative easing implemented by global peers can be damaging over the long term and vowed to keep policy normal for as long as possible
• China’s central bank injected liquidity into the financial system for a ninth day in the longest run since December as it sought to meet a surge in seasonal demand for cash
• China stepped in to buy a stake in a struggling regional bank from China Evergrande Group as it seeks to limit contagion in the financial sector from the embattled property developer
• The Chinese government is considering raising power prices for industrial consumers to help ease a growing supply crunch
• Japan’s Government Pension Investment Fund, the world’s largest pension fund, said it won’t include yuan-denominated Chinese sovereign debt in its portfolio. The decision comes as FTSE Russell is set to start adding Chinese debt to its benchmark global bond index, which the GPIF follows, from October
• Fumio Kishida is set to become Japan’s prime minister, after the ex-foreign minister overcame popular reformer Taro Kono to win leadership of the country’s ruling party, leaving stock traders feeling optimistic
• ECB Governing Council member Gabriel Makhlouf said policy makers must be ready to respond to persistently higher inflation that could result from lasting supply bottlenecks
• Inflation accelerated in Spain to the fastest pace in 13 years, evidence of how surging energy costs are feeding through to citizens around the euro-zone economy
• Sterling-debt sales by corporates exceeded 2020’s annual tally as borrowers rushed to secure ultra-cheap funding costs while they still can. Offerings will top 70 billion pounds ($95 billion) through Wednesday, beating last year’s total sales by at least 600 million pounds, according to data compiled by Bloomberg

A more detailed look at global markets courtesy of Newsquawk

Asian equity markets were pressured on spillover selling from global peers which saw the S&P 500 suffer its worst day since May after tech losses were magnified as yields climbed and with sentiment also dampened by weak data in the form of US Consumer Confidence and Richmond Fed indexes. ASX 200 (-1.1%) was heavily pressured by tech and with mining-related stocks dragged lower by weakness in underlying commodity prices, with the mood also clouded by reports that Queensland is on alert for a potential lockdown and that Australia will wind down emergency pandemic support payments within weeks. Nikkei 225 (-2.1%) underperformed amid the broad sell-off and as participants awaited the outcome of the LDP leadership vote which saw no candidate win a majority (as expected), triggering a runoff between vaccine minister Kono and former foreign minister Kishida to face off in a second round vote in which Kishida was named the new PM. KOSPI (-1.2%) was heavily pressured by the tech woes and after North Korea confirmed that yesterday’s launch was a new type of hypersonic missile. Hang Seng (+0.7%) and Shanghai Comp. (-1.8%) conformed to the broad risk aversion with tech stocks hit in Hong Kong, although the losses were milder compared to regional peers with Evergrande shares boosted after it sold CNY 10bln of shares in Shengjing Bank that will be used to pay the developer’s debt owed to Shengjing Bank, which is the Co.’s first asset sale amid the current collapse concerns although it still faces another USD 45.2mln in interest payments due today. In addition, the PBoC continued with its liquidity efforts and there was also the absence of Stock Connect flows to Hong Kong with Southbound trading already closed through to the National Holidays. Finally, 10yr JGBs were slightly higher as risk assets took a hit from the tech sell-off and with T-notes finding some reprieve overnight. Furthermore, the BoJ were also in the market for nearly JPY 1tln of JGBs mostly in 3yr-10yr maturities and there were notable comments from Japan’s GPIF that it is to avoid investments in Chinese government bonds due to concerns over China market.

Top Asian News

• L&T Is Said in Talks to Merge Power Unit With Sembcorp India
• Prosecutors Seek Two Years Jail for Ghosn’s Alleged Accomplice
• Japan to Start Process to Sell $8.5 Billion Postal Stake
• Gold Climbs From Seven Week Low as Yields Retreat, Dollar Pauses

Bourses in Europe are attempting to claw back some ground lost in the prior session’s global stocks rout (Euro Stoxx 50 +0.9%; Stoxx 600 +0.8%). The upside momentum seen at the cash open has somewhat stabilised amid a lack of news flow and with a busy agenda ahead from a central bank standpoint, with traders also cognizant of potential month-end influence. US equity futures have also been gradually drifting higher since the reopen of electronic trade. As things stand, the NQ (+1.0%) narrowly outperforms the ES (+0.7%), RTY (+0.8%) and YM (+0.6%) following the tech tumble in the prior session, and with yields easing off best levels. Back to European cash, major regional bourses see broad-based gains with no standout performers. Sectors are mostly in the green; Oil & Gas resides at the foot of the bunch as crude prices drift lower and following two consecutive sessions of outperformance. On the flip side, Tech resides among today’s winners in what is seemingly a reversal of yesterday’s sector configuration, although ASML (+1.3%) may be offering some tailwinds after upping its long-term outlook whilst suggesting ASML and its supply chain partners are actively adding and improving capacity to meet this future customer demand – potentially alleviating some concerns in the Auto sector which is outperforming at the time of writing. Retail also stands strong as Next (+3.0%) upped its guidance whilst suggesting the longer-term outlook for the Co. looks more positive than it had been for many years. In terms of individual movers, Unilever (+1.0%) is underpinned by source reports that the Co. has compiled a shortlist of at least four bidders for its PG Tips and Lipton Iced Tea brands for some GBP 4bln. HeidelbergCement (-1.4%) is pressured after acquiring a 45% stake in the software firm Command Alko. Elsewhere, Morrisons (+1.3%) is on the front foot as the takeover of the Co. is to be decided via an auction process as touted earlier in the month.

Top European News

• Makhlouf Says ECB Must Be Ready to Act If Inflation Entrenched
• ASML to Ride Decade-Long Sales Boom After Chip Supply Crunch
• Spanish Inflation at 13-Year High in Foretaste of Regional Spike
• U.K. Mortgage Approvals Fall to 74,453 in Aug. Vs. Est. 73,000

In FX, the yield and risk backdrop is not as constructive for the Dollar directly, but the index has posted another marginal new y-t-d best, at 93.891 compared to 93.805 yesterday with ongoing bullish momentum and the bulk of the US Treasury curve remaining above key or psychological levels, in contrast to other global bond benchmarks. Hence, the Buck is still elevated and on an upward trajectory approaching month end on Thursday, aside from the fact that hedge rebalancing flows are moderately positive and stronger vs the Yen. Indeed, the Euro is the latest domino to fall and slip to a fresh 2021 low around 1.1656, not far from big barriers at 1.1650 and further away from decent option expiry interest at the 1.1700 strike (1 bn), and it may only be a matter of time before Sterling succumbs to the same fate. Cable is currently hovering precariously above 1.3500 and shy of the January 18 base (1.3520) that formed the last pillar of support for the Pound before the trough set a week earlier (circa 1.3451), and ostensibly supportive UK data in the form of BoE mortgage lending and approvals has not provided much relief.

• AUD/JPY – A rather odd couple in many ways given their contrasting characteristics as a high beta or activity currency vs traditional safe haven, but both are benefiting from an element of corrective trade, consolidation and short covering relative to their US counterpart. Aud/Usd is clinging to 0.7250 in advance of Aussie building approvals on Thursday and Usd/Jpy is retracing from its new 111.68 y-t-d pinnacle amidst the less rampant yield environment and weighing up the implications of ex-Foreign Minister Kishida’s run-off win in the LDP leadership contest and the PM-in-waiting’s pledge to put together a Yen tens of trillion COVID-19 stimulus package before year end.
• CHF/CAD/NZD – All relatively confined vs their US rival, as the Franc continues to fend off assaults on the 0.9300 level with some impetus from a significant improvement in Swiss investor sentiment, while the Loonie is striving to keep its head above 1.2700 ahead of Canadian ppi data and absent the recent prop of galloping oil prices with WTI back under Usd 75/brl from Usd 76.67 at best on Tuesday. Elsewhere, the Kiwi is pivoting 0.6950 pre-NZ building consents and still being buffeted by strong Aud/Nzd headwinds.
• SCANDI/EM – Not much purchase for the Sek via upgrades to Swedish GDP and inflation forecast upgrades by NIER as sentiment indices slipped across the board, but some respite for the Try given cheaper crude and an uptick in Turkish economic confidence. Conversely, the Cnh and Cny have not received their customary fillip even though the PBoC added liquidity for the ninth day in a row overnight and China’s currency regulator has tightened control over interbank trade and asked market makers to narrow the bid/ask spread, according to sources.

In commodities, WTI and Brent front month futures have been trimming overnight losses in early European trade. Losses overnight were seemingly a function of profit-taking alongside the bearish Private Inventory Report – which showed a surprise build in weekly crude stocks of 4.1mln bbls vs exp. -1.7mln bbls, whilst the headline DoE looks for a draw of 1.652mln bbls. Further, there have been growing calls for OPEC+ to further open the taps beyond the monthly 400k BPD hike, with details also light on the White House’s deliberations with OPEC ahead of the decision-making meeting next week. Despite these calls, it’s worth bearing in mind that OPEC’s latest MOMR stated, “increased risk of COVID-19 cases primarily fuelled by the Delta variant is clouding oil demand prospects going into the final quarter of the year, resulting in downward adjustments to 4Q21 estimates. As a result, 2H21 oil demand has been adjusted slightly lower, partially delaying the oil demand recovery into 1H22.” Brent Dec dipped back under USD 78/bbl (vs low 763.77/bbl) after testing USD 80/bbl yesterday, whilst WTI Nov lost the USD 75/bbl handle (vs low USD 73.37/bbl). Over to metals, spot gold and silver have seen somewhat of divergence as real yields negate some effects of the new YTD peak printed by the Dollar index, whilst spot silver succumbs to the Buck. Over to base metals, LME copper trade is lacklustre as the firmer dollar weighs on the red metal. Shanghai stainless steel meanwhile extended on losses, notching the fourth session of overnight losses with desks citing dampened demand from the Chinese power crunch.

US Event Calendar

• 7am: Sept. MBA Mortgage Applications, prior 4.9%
• 10am: Aug. Pending Home Sales YoY, est. -13.8%, prior -9.5%
• 10am: Aug. Pending Home Sales (MoM), est. 1.3%, prior -1.8%

Central Bank speakers

• 9am: Fed’s Harker Discusses Economic Outlook
• 11:45am: Powell Takes Part in ECB Forum on Central Banking
• 11:45am: Bailey, Kuroda, Lagarde, Powell on ECB Forum Panel
• 1pm: Fed’s Daly Gives Speech to UCLA
• 2pm: Fed’s Bostic Gives Remarks at Chicago Fed Payments

DB’s Jim Reid concludes the overnight wrap

The main story of the last 24 hours has been a big enough rise in yields to cause a major risk-off move, with 10yr Treasury yields up another +5.0bps to 1.537% yesterday, and this morning only seeing a slight -0.3bps pullback to 1.534%. At the intraday peak yesterday, they did climb as high as 1.565% earlier in the session, but this accelerated the risk off and sent yields somewhat lower intraday as a result, which impacted the European bond closes as we’ll see below.

All told, US yields closed at their highest level in 3 months and up nearly +24bps since last Wednesday’s close, shortly after the FOMC meeting. That’s the largest 4-day jump in US yields since March 2020, at the outset of the pandemic and shortly after the Fed announced their latest round of QE. This all led to the worst day for the S&P 500 (-2.04%) since mid-May and the worst for the NASDAQ (-2.83%) since mid-March. The S&P 500 is down -4.06% from the highs now – trading just below the Evergrande (remember that?) lows from last week. So the index still has not seen a -5% sell-off on a closing basis for 228 days and counting. If we make it to Halloween it will be a full calendar year. Regardless, the S&P and STOXX 600 remain on track for their worst monthly performances so far this year.

Those moves have continued this morning in Asia, where the KOSPI (-2.05%), Nikkei (-1.64%), Hang Seng (-0.60%), and the Shanghai Comp (-1.79%) are all trading lower. The power crisis in China is further dampening sentiment there, and this morning Bloomberg have reported that the government are considering raising prices for industrial users to ease the shortage. Separately, we heard that Evergrande would be selling its stake in a regional bank at 10 billion yuan ($1.55bn) as a step to resolve its debt crisis, and Fitch Ratings also downgraded Evergrande overnight from CC to C. However, US equity futures are pointing to some stabilisation later, with those on the S&P 500 up +0.49%.

Running through yesterday’s moves in more depth, 23 of the 24 industry groups in the S&P 500 fell back yesterday with the lone exception being energy stocks (+0.46%), which gained despite the late pullback in oil prices. In fact only 53 S&P constituents gained on the day. The largest losses were in high-growth sectors like semiconductors (-3.82%), media (-3.08%) and software (-3.05%), whilst the FANG+ index was down -2.52% as 9 of the 10 index members lost ground – Alibaba’s +1.47% gain was the sole exception. Over in Europe it was much the same story, with the STOXX 600 (-2.18%) falling to its worst daily performance since July as bourses across the continent fell back, including the German DAX (-2.09%) and France’s CAC 40 (-2.17%).

Back to bonds and the rise in 10yr Treasury yields yesterday was primarily led by higher real rates (+2.1bps), which hit a 3-month high of their own, whilst rising inflation breakevens (+2.3bps) also offered support. In turn, higher yields supported the US dollar, which strengthened +0.41% to its highest level since November last year, though precious metals including gold (-0.92%) fell back as investors had less need for the zero-interest safe haven. Over in Europe the sell-off was more muted as bonds rallied into the close before selling off again after. Yields on 10yr bunds (+2.4bps), OATs (+3.0bps) and BTPs (+6.1bps) all moved higher but were well off the peaks for the day. 10yr Gilts closed up +4.2bps but that was -6.6bps off the high print. And staying with the UK, sterling (-1.18%) saw its worst day this year and fell to its lowest level since January 11 as sentiment has increasingly been knocked by the optics of the fuel crisis here. Given this and the hawkish BoE last week many are now talking up the stagflation risk. On the petrol crisis it’s hard to know how much is real and how much is like an old fashion bank run fuelled mostly by wild speculation. Regardless it doesn’t look good to investors for now.

All this came against the backdrop of yet further milestones on inflation expectations, as the German 10yr breakeven hit a fresh 8-year high of 1.690%, just as the Euro Area 5y5y forward inflation swap hit a 4-year high of its own at 1.789%. Meanwhile 10yr UK breakevens pulled back some, finishing -6bps lower on the day after initially spiking up nearly +5bps in the opening hours of trading. This highlights the uncertainty as to the implications of a more hawkish BoE last week.

As we’ve discussed over recent days, part of the renewed concerns about inflation have come from a fresh spike in energy prices, and yesterday saw Brent crude move above $80/bbl in regards intraday trading for the first time since 2018. Furthermore, natural gas prices continued to hit fresh highs yesterday, with European futures up +2.69% to a fresh high of €78.56 megawatt-hours. That said, oil prices did pare back their gains later in the session as the equity selloff got underway, with Brent crude (-0.55%) and WTI (-0.21%) both closing lower on the day, and this morning they’ve fallen a further -1.49% and -1.54% respectively.

Yesterday, Fed Chair Powell and his predecessor Treasury Secretary Yellen appeared jointly before the Senate Banking Committee. The most notable moment came from Senator Warren who criticized Chair Powell for his track record on regulation, saying he was a “dangerous man” and then saying on the record that the she would not support his re-nomination ahead of his term ending in February. Many senators, mostly Republicans, voiced concerns over inflationary pressures, but both Yellen and Powell maintained their stances that the current high level of inflation was temporary and due to the supply chain issues from Covid-19 that they expect to be resolved in time. Lastly, both Powell and Yellen warned the Senators that a potential US default would be “catastrophic” and Treasury Secretary Yellen said in a letter to Congress that the Treasury Department now estimated the US would hit the debt ceiling on October 18. So we’ve got an important few days and weeks coming up.

Last night, Senate Majority Leader Schumer tried to pass a vote that would drop the threshold from 60 to a simple majority to suspend the debt limit, but GOP Senator Cruz amongst others blocked this and went forward with forcing Democrats to use the budget reconciliation measure instead. Some Democrats have pushed back saying that the budget process would take too long and increases the risk of a default. While this is all going on we’re now less than 48 hours from a US government shutdown as it stands, though there seems to be an agreement on the funding measure if it were to be raised as clean bill without the debt ceiling provisions.

There is also other business in Washington due tomorrow, with the bipartisan infrastructure bill with $550bn of new spending up for a vote. While the funding bill is the higher short-term priority, there was news yesterday that progressive members of the House of Representatives may try and block the infrastructure bill if it comes up ahead of the budget reconciliation vote. That was according to Congressional Progressive Caucus Chair Jayapal who said “Progressives will vote for both bills, but a majority of our members will only vote for the infrastructure bill after the President’s visionary Build Back Better Act passes.” The infrastructure bill could be tabled once again as there is no real urgency to get it voted on until the more pressing debt ceiling and funding bill issues are resolved. Democratic leadership is trying to thread a needle and the key sticking point appears to be if the moderate and progressive wing can agree on the budget quickly enough to beat the clock on the US defaulting on its debt.

Shifting back to central bankers, ECB President Lagarde warned against withdrawing stimulus too rapidly as a response to inflationary pressures. She contested that there are “no signs that this increase in inflation is becoming broad-based across the economy,” and continued that the “key challenge is to ensure that we do not overreact to transitory supply shocks that have no bearing on the medium term.” Similar to her US counterpart, Lagarde cited higher energy prices and supply-chain breakdowns as the root cause for the current high inflation data and argued these would recede in due time. The ECB continues to strike a more dovish tone than the Fed and BoE.

Speaking of inflation, DB’s chief European economist, Mark Wall, has just put out a podcast where he discusses the ECB, inflation and the value of a flexible asset purchase programme. He and his team have a baseline assumption that the ECB will double the pace of their asset purchases to €40bn per month to smooth the exit from the Pandemic Emergency Purchase Programme, but the upward momentum in the inflation outlook and the latest uncertainty from recent supply shocks puts a premium on policy flexibility. You can listen to the podcast “Focus Europe: Podcast: ECB, inflation and the value of a flexible APP” here.

In Germany, there weren’t a great deal of developments regarding the election and coalition negotiations yesterday, but NTV reported that CSU leader Markus Söder had told a regional group meeting of the party that he expected the next government would be a traffic-light coalition of the SPD, the Greens and the FDP. Speaking to reporters later in the day, he went onto say that the SPD’s Olaf Scholz had the best chance of becoming chancellor, and that the SPD had the right to begin coalition negotiations.

Running through yesterday’s data, the Conference Board’s consumer confidence reading in the US for September fell to 109.3 (vs. 115.0 expected), which marks the third consecutive decline in the reading and the lowest it’s been since February. Meanwhile house prices continued to rise, with the FHFA’s house price index for July up +1.4% (vs. +1.5% expected), just as the S&P CoreLogic Case-Shiller index saw a record +19.7% increase in July as well.

To the day ahead now, and the biggest highlight will be a policy panel at the ECB forum on central banking featuring ECB President Lagarde, Fed Chair Powell, BoJ Governor Kuroda and BoE Governor Bailey. Other central bank speakers include ECB Vice President de Guindos, the ECB’s Centeno, Stournaras, Makhlouf, Elderson and Lane, as well as the Fed’s Harker, Daly and Bostic. Meanwhile, data releases include UK mortgage approvals for August, the final Euro Area consumer confidence reading for September, and US pending home sales for August.

In what the NYT described as “a triumph of elite power brokers over public sentiment”, Japan’s governing Liberal Democratic Party on Wednesday elected Fumio Kishida, a former foreign minister and heir of a prominent political family, as its choice to succeed Yoshihide Suga as prime minister of Japan. His victory has alternatively been described as an “upset”, while he has also been described as the “continuity candidate” given his close ties to the party leadership.

Kishida triumphed over his top rival, Taro Kono, a former defense and foreign minister, in a runoff vote for party leader that was dominated by conservative LDP insiders, who dominate in the lower house of Japan’s Diet, the country’s bicameral legislature. In a runoff vote, party legislators voted overwhelmingly for Kishida, who triumphed 257 to 170, installing him as party leader. He will be officially installed as prime minister via parliamentary vote on Monday, but thanks to his party’s control of the Diet, his victory is virtually assured.

For Kishida, the victory represents a major comeback from his crushing loss to PM Yoshihide Suga during last year’s LDP leadership battle. But the 64-year-old’s victory represents defeat for a “new generation” of Japanese politicians who had hoped to take control of the party. Unfortunately for them, Kishida’s victory was secured by the same factional politics that have dominated in Japan for decades. The race included two female candidates,

According to the NYT, neither the party’s rank and file nor the general Japanese public have shown much love for Kishida, Kono, who maintains a high-profile social media presence and is more well known for his flashy “maverick” persona, was clearly the more popular pick. But this aspect of his personality apparently soured his standing with party insiders, who apparently favored a return to a more staid personality in the country’s leader, in keeping with the LDP’s post-war tradition.

That could be problematic for Kishida, who now has the responsibility of leading his party through a general election that must be held before the end of November.

By choosing the “safe” candidate, party leaders telegraphed that they believe the LDP has more than enough support to win during the upcoming vote, despite the ructions of the past year, which saw former PM Suga – who ruled for barely a year after taking over for the long-serving Shinzo Abe, who left office due to health problems – spoil his reputation and his popularity due to the surge in COVID cases the coincided with the Tokyo Olympics, which were seen as an abysmal failure by the public.

Polls show the LDP, which has ruled Japan for most of the last 66 years, will triumph once again, in part because COVID has finally receded and the country’s state of emergency is coming to an end. PM Suga decided not to seek re-election to the LDP leadership after his popularity plummeted largely due to the COVID outbreak that swept Japan this year. He served only one year in office, which provoked anxieties about a return to the revolving-door days that preceded Shinzo Abe’s victory in 2012.

Wednesday’s leadership vote was the most hotly contested in years. Traditionally, party leadership coalesces around a candidate early. But this time, it wasn’t clear who would prevail until the final runoff votes were counted.

In terms of his politics, Kishida is seen as a “China hawk” who has called for strengthening of Japan’s missile defense system in the face of Beijing’s growing military might, about which he has expressed “deep alarm”.

During the campaign, Kishida said Japan needed to consider building up missile-strike capability against potential foes, including China and North Korea. While Japan is constitutionally forbidden from attacking first, it does have the right to strike enemy missile bases if they had been used in an initial strike, per WSJ.

“The other side’s technology is advancing every day,” he said in an interview with WSJ.

He has also recently become more of an economic populist, calling for left-leaning economic policies that would help take pressure off poorer Japanese after the pandemic helped expand wealth inequality. This would mark a shift away from the “neoliberal” approach that has formed the core of LDP ideology for nearly two decades, according to Nikkei.

“The international community is changing dramatically with authoritarian state systems gaining more power. I have a strong sense of crisis toward this,” Kishida told Nikkei. He has also emphasized the need for the capability to strike enemy missile bases to prevent to any imminent attack.

He has already proposed an economic stimulus package worth “tens of trillions of yen”, a new twist on the LDP’s generally pro-business stance.

“Inequality has expanded further because of the coronavirus,” Kishida told Nikkei in an interview earlier this month. “At companies, should shareholders take all the fruits of their growth? As proponents of stakeholder capitalism argue, they need to be distributed appropriately.” he said, adding “raising worker incomes and compensation” should be a top priority.

Of course, the incoming PM’s most important policy issue will be the battle against the COVID pandemic. Kishida has said he hopes to provide enough vaccines to fully inoculate those who want to be vaccinated by the end of November, while promoting the spread of oral coronavirus drugs – something Pfizer is also scrambling to do – by the end of the year.

Still, domestic analysts say that despite slight differences in ideology, Kishida is a member of the LDP’s base, just like his father and grandfather, who were also politicians, and as such, the “status quo” will likely remain firmly intact.

“The birth of a ‘status quo’ leader shows how the LDP lacks the urgency to change,” said Ritsumeikan’s Kamikubo. “The real focus here is how he forms a cabinet and who he appoints to which role.”

“Bringing diversity into his cabinet will be key to winning the upcoming general election,” Kamikubo added.

As far as markets are concerned, the next biggest focus for the JGB market (or what’s left of it, anyway) is who becomes finance minister. Right now, the risk of hawkish Sanae Takaichi getting the post could weigh on JGB prices, says Takenobu Nakashima, chief rates strategist at Nomura Securities in Tokyo. That wariness could linger through Oct. 4, when the new cabinet is expected to be formed.

Japanese stocks tumbled on Wednesday following news of Kishida’s victory even as few analysts expect Kishida to veer significantly from the Abenomics program.

Via SchiffGold.com,

The Federal Reserve held its September Federal Open Market Committee (FOMC) meeting last week. While there was a lot of talk about the central bank tapering its quantitative easing program, the Fed didn’t announce any concrete plans to slow asset purchases. The lack of concrete action was no surprise to Peter Schiff. After the Fed meeting, Peter appeared on NTD News to talk about it and the Fed’s apparent reluctance to take any concrete steps toward monetary tightening. He said the central bank is in the process of replacing America’s economic foundation with a money printing press.

The NTD News anchor opened the interview asking “what is the Fed afraid will happen if it does taper?” Peter said the Fed’s asset purchases are propping up the entire bubble economy.

If the Fed were to actually do what they’re talking about doing, they risk toppling the economy because they’re going to pull the foundation out from under it, which is why they only talk. They don’t actually act.”

Peter said despite their inaction, the central bankers have to talk about tightening or they would face an even bigger problem.

People would realize the severity of the position that they’re in. So basically, they continually bark about tapering but they don’t actually bite.”

Peter made another important point: tapering is still quantitative easing.

It’s not like they stop doing it. They’re just saying, ‘We’re going to do a little less of it,’ and they’re saying that they’re basically never going to raise interest rates because that’s supposedly what happens after they’re finished tapering. But that’s ain’t ever going to happen.”

The Fed claims QE helps meet the central bank’s employment goals. But how does buying US Treasuries and mortgage-backed securities help people find work?

I think it helps people find the wrong kind of work. Because what the Fed is doing is sustaining asset bubbles, and so, you have a misallocation of resources. What the Fed is helping to do is misdirect labor from places that it would ordinarily be absent the Fed’s easy-money policies to the places that it’s going pursuant to those policies. But these are economic mistakes — misallocations of resources, malinvestments that are ultimately going to have to be liquidated. And all of this is making the economy poorer, not richer.”

Peter said the Fed is the biggest roadblock we have keeping us from true economic prosperity.

The NTD anchor noted that low interest rate policies discourage savings. How does that work in an economy when savings continue to diminish year after year?

Short answer — it doesn’t work!

That’s the problem.”

And of course, the Fed monetary policy stokes inflation. Even the Fed has admitted that prices are rising faster than they projected. And Peter said the actual inflation rate is probably triple what the Fed admits to.

Savings are being destroyed. You have negative real rates because you’re getting zero nominal. But if inflation five, six percent, seven percent a year, that is a massive destruction of the purchasing power of money. Nobody is going to save under these circumstances. But the problem is for a real capitalist economy, savings are the lifeblood because it’s under-consumption and savings that finances capital investment, that allows for increased productivity — rising living standards. But if the Fed is punishing savers to the point that nobody wants to save, then you’ve destroyed the very foundation of the economy. The Fed is trying to replace it with a printing press.”

Yesterday we added to our ongoing case for uranium by posting about how crypto miners were starting to forge partnerships with nuclear power plants to combat the “bitcoin is not good for the environment” argument. Today, the case for nuclear has taken another positive step forward.

That’s because copper producer KGHM in Poland has now also turned to nuclear power, according to FT. 

Noting that finding cheaper and greener sources of energy was in Poland’s “national interest”, KGHM’s CEO Marcin Chludzinski said the company would be building four small modular reactors for alternative energy. Each reactor would have a capacity of 77MW. 

US group NuScale will be tasked with building the reactors, with the first due to come online in 2029, the report notes. It would make KGHM “self-sufficient in energy production and insulate[d] from volatile energy prices”.

The company is already Poland’s second largest consumer of electricity. 

Chludzinski said: “To be globally competitive, energy-intensive businesses like ours . . . need to have access to the cheapest electricity possible, and that is our goal. It is not only a challenge for us . . . it is a challenge for all businesses in Poland, because if energy continues to become more expensive at this rate, then our ability to invest will fall.”

Last year, Poland generated almost 70% of its energy from coal. However, CO2 emissions have risen in cost as the European Union has actively worked to phase out fossil fuels in favor of green energy. As we (and many others) have predicted, nuclear seems to be the “common sense” compromise at the middle of the equation. 

As a result a “number of companies” other than KGHM have looked into small modular reactors. 

Chludzinski has argued that Poland was being penalized too harshly for being reliant on coal energy, but he said technology like small modular reactors could help move the country off the fossil fuel. 

“Poles are very flexible. If it turns out that these are the conditions we have to compete in, and they cannot be changed, then we are able to adapt quite quickly. And I think that the energy transformation, which is meant to take place over time, could happen more quickly,” he said.

The SMRs will make KGHM a net energy producer, he concluded: “We’re not going to go from being a copper producer to being an energy company. We are focused above all on copper. But we have to be self-sufficient in energy terms, and if we have more energy than we need ourselves, then we will sell it.”