Month: November 2021

It nearly sunk the Brexit deal, and now the ongoing dispute between France and the UK over access to fisheries in the North Atlantic is threatening to overshadow the biggest global climate summit since the Paris Accords in 2015.

But in the latest win for UK PM Boris Johnson, French President Emmanuel Macron has backed off from his threat to retaliate against the British for blocking French fishing boats from accessing British fisheries (which they were granted access to as part of the agreement between the Brits and the EU27 that averted a “hard” Brexit), saying that the Brits would “come back to us tomorrow with further proposals.  We’ll see where we are at the end of the day,” Macron told reporters in Glasgow.

“We won’t be bringing in sanctions while we’re negotiating,” Macron added.

Macron’s decision followed a day of tense discussions, with the UK-France fishing spat at risk of overshadowing the broader COP26 climate talks. France had previously threatened to introduce additional customs controls on goods entering from the UK and also threatened to block UK fishing boats from landing their catches in France, if progress wasn’t made on issuing extra licenses by midnight on Monday.

Prime Minister Boris Johnson’s office welcomed Macron’s decision in a statement, saying  “we are ready to continue intensive discussions on fisheries.”

Downing Street said Brexit Minister David Frost will travel to Paris on Thursday for in-person talks with French junior minister for European affairs, Clement Beaune.

“We’ve always said we want to de-escalate this,” UK Environment Minister George Eustice said on Sky News on Tuesday.

“We welcome the fact France has stepped back from the threats it was making.”

The fishing rights at stake represent only a tiny fraction of each countries’ economy, but they have become a major flash point following the UK’s departure from the EU. The issue cast a stink over the G-20 meeting in Rome this weekend, and has continued to make diplomats nervous at the COP in Glasgow.

You will find more infographics at Statista

Part of the kerfuffle stems from French authorities’ decision to detain a British trawler which they alleged was fishing in off-limits waters. The skipper’s owner said the boat was still being held in France, just hours after UK Environment Minister Eustice claimed it had been freed, but not before France’s ambassador to London was summoned to the Foreign Office for a rebuke usually reserved for hostile states.

But on Tuesday morning, Eustice welcomed France’s decision to back down on the post-Brexit fishing row, and said the French government had agreed to release the detained British trawler and temporarily removed its threat of punitive action against the UK. The Environment Secretary said that the impounded Scottish skipper, the Cornelis Gert Jan, has now been released pending discussion of what Eustice described as an “administrative error.”

To try and maximize its leverage over the UK, the French government has also warned it could raise energy prices for the British Channel Islands, which are heavily reliant on electricity from France via an undersea cable.

There was no outward sign of tension as Johnson welcomed Macron to the COP26 climate summit, with the two leaders smiling and chatting for several minutes. But behind the scenes, diplomats are scrambling, and one thing is clear: the dispute is far from resolved.

Via SchiffGold.com,

Gold has been rangebound of late, bouncing between $1,750 and $1,800 an ounce for several months. Given the inflationary environment, one would expect gold to be soaring. So, what’s going on with the yellow metal? And when will the price of gold go up? Peter Schiff tackled this question during a recent Q&A session on YouTube.

First, Peter pointed out that you have to step back and look at the big picture. If you go back to 2000, the price of gold was at the bottom of a 20-year bear market that began in 1980. That year, gold was at $850 an ounce — up from $35 an ounce when President Nixon slammed shut the cold window and eliminated the last vestige of the gold standard.

In the early 80s, Federal Reserve Chair Paul Volker went to war against the inflation of the 1970s, pushing interest rates to 20%. That saved the dollar and brought the price of gold down.

Of course, it never went anywhere near the $35 an ounce that it started from. But it did get back below $300. It was below 300, as a matter of fact, in 2000.”

Over the next two decades, the price of gold ran up from under $300 an ounce t0 $2,000 an ounce in 2020. That was over a 566% increase.

Since then, the price has pulled back below $1,800. It’s been stuck in that range as investors have anticipated the Federal Reserve will step in and tighten monetary policy to deal with the rising inflationary pressure.

But if you look at what’s been happening to the price of gold so far this century, this millennium even, it’s been pretty strong.”

The meteoric rise (and dips) in bitcoin have perhaps skewed expectations.

Gold is not going to act like bitcoin. It’s a real asset, and it’s a real market. And it’s not going to have that kind of parabolic move. Unless, of course, you have a complete implosion of the dollar, which is certainly not off the table as far as what may happen in the future. But, if that’s the case, it’s really not the price of gold going up. It’s just the value of the dollar going down.”

Looking ahead, Peter said he expects the price of gold to resume its upward trend and move much higher than $2,000 an ounce as people begin the digest the enormity of the economic problems that exist.

As they come to terms with the fact that inflation is not only not transitory, it’s here to stay. It’s going to get much worse. And the Fed can’t do anything about it, at least not that they’re willing to do without creating another financial crisis, which they won’t do. And even if they inadvertently created a financial crisis, we already know what their response would be — it would be more inflation. They would print more money. They would bail everybody out. And so ultimately, that’s going to be positive for gold as well.”

Peter said people just have to be patient when it comes to the price of gold.

But the direction is already clear. And that’s up. And it’s been going up for some time.”

Today is the last day for Virginians to vote in what has become an unexpectedly close race for governor between former Democratic Gov. Terry McAuliffe and newcomer Republican candidate, Glenn Youngkin – who has gained considerable ground in recent days.

Political watchers across the country are keeping tabs on this year’s race as a proxy for the political mood, as the outcome may offer insight into what might be ahead for both parties in the 2022 midterm elections.

From the beginning, Democrats expected McAuliffe to coast into the Governor’s mansion in a state which saw Biden beat Trump by 10 points in the last election – yet Youngkin has gained massive ground after focusing on parents’ anger over schools – which includes pandemic mandates and critical race theory. McAuliffe, meanwhile, said during a debate with Youngkin “I don’t think parents should be telling schools what they should teach,” a decidedly poor move.

McAuliffe’s campaign has faltered amid anecdotal accounts of an apathetic Democratic voter base. Biden’s standing in the commonwealth is mediocre, with his approval rating in the low 40s in several polls.

The upshot is that Youngkin appears to have the momentum going into Election Day on Tuesday. The level of enthusiasm at recent campaign events has been tangibly greater for Youngkin, even in the Democratic-leaning Northern Virginia suburbs. -The Hill

Meanwhile, the University of Virginia’s Center for Politics has shifted its opinion of the race from “leans Democratic” to “leans Republican.”

The shift comes after McAuliffe spent considerable time pressing his Democratic colleagues on Capitol Hill to pass two major bills in order to show that Democrats are able to capitalize on their slim majority in Congress – yet fighting within the party has resulted in a political quagmire.

And as the New York Post notes, what’s going on in Virginia may be part of a 30-year political epicycle in which a Democrat wins the White House and then ‘lurches left’ – causing a backlash that reverberates to off-year elections in Virginia and New Jersey.

In 1993 it was Bill Clinton, who ran for office as a “new kind of Democrat,” promising to “end welfare as we know it” and pledging not to raise taxes on the middle class. Instead Clinton moved left, dumping his welfare reform promise in favor of an unpopular nationalized health care scheme that a Democratic Congress never even put to a vote, raising taxes on the middle class, and promoting the boutique liberal cause of gays in the military (though ultimately settling for the muddle of “don’t ask, don’t tell”).

Republicans swept the governors’ races in Virginia and New Jersey in 1993 and made large gains in both state legislatures, previewing the GOP landslides in the House and Senate in 1994, when Republicans gained 54 seats in the House for their first House majority in 40 years, and eight seats in the Senate that also gave the GOP a majority. Clinton immediately tacked to the center and remained there for the rest of his presidency.

The pattern repeated itself in 2009 following Barack Obama’s sharp left turn from the vague platform of “hope and change,” leading to Republicans to once again capture the governorships of Virginia and New Jersey that year.

A win for Youngkin would be a massive boost to Republicans nationwide – and would add to President Biden’s woes which include failing approval ratings, supply chain issues, inflation, and absolute chaos trying to get his legislative agenda passed.

As The Hill‘s Niall Stanage notes, “Even a narrow win for Democrats in Virginia would likely not be enough to calm the party’s nerves as it looks towards next year’s midterm elections — and beyond, to the 2024 presidential election where they fear the specter of Trump will be resurrected.”

 

By Simon Watkins of OilPrice.com,

According to senior economic and political sources close to the Iranian government exclusively spoken to by OilPrice.com last week, Tehran is now messaging senior figures in the European Commission in Brussels that it wants to talk about the quick resumption of negotiations in order to reactivate the Joint Comprehensive Plan of Action (JCPOA) – more widely known as ‘the nuclear deal’. “The Supreme Leader [Ali Khamenei] himself is behind this new initiative, which is being driven primarily by the increasingly poor state of the country’s economy,” said one of the senior sources. “The aim is to get a new version of the JCPOA agreed and the U.S.-enforced sanctions dropped by the end of the current [Iranian calendar] year [ending on 20 March 2022],” he added. 

Although Iran’s economy has been boosted in parts by the ongoing 25-year agreement with China, Beijing has been reluctant to be too overt in its direct financial support for Tehran, given the unexpected tough line take by the new U.S. Presidential Administration of Joe Biden. A major U.S. shot across China’s bow came in March from new Secretary of State, Antony Blinken, as he said that the U.S. wanted to discuss its ‘deep concerns with actions by China, including Xinjiang, Hong Kong, Taiwan, cyber-attacks on the United States, [and] economic coercion towards our allies.” These views were echoed at the June G7 summit in the U.K. with Biden himself engineering an alliance to rival that of China’s ‘One Belt, One Road’ project. As exclusively highlighted by OilPrice.com, this tough line is also due to be taken by the U.S. with China on the matter of tackling the trade imbalance between the two countries.

This reluctance on China’s part to directly challenge Washington over its Iran policy has meant a gradual worsening of the Islamic Republic’s economy since the U.S. reimposed all sanctions against it following its unilateral withdrawal from the JCPOA in May 2018. Just two years later – at around this time last year – using a comparison benchmark of November 2019 (itself around one year after the last of the previous sanctions were reintroduced), Iran’s GDP growth was running at minus 22 percent, unemployment at around 37 percent, inflation at 65 percent, and there had been – to date over that period – around a 65 percent depreciation in the value of the rial against a basket of core global currencies. As it stood, Iran was running a budget deficit of 80 percent, and a trade balance of negative US$6.5 billion. 

In the year since then, the situation has worsened, with the most serious ramification for the Supreme Leader, and his core supporters of the Islamic Revolutionary Guards Corps (IRGC), being that Iran’s ability to spread its brand of Islam across the world has been significantly diminished. “The key economic problem facing Iran is that its foreign currency reserves now stand at significantly less than US$10 billion [compared to about US$114 billion just before the U.S. withdrew from the JCPOA in May 2018], and its gold reserves are also now very low,” said a senior Iran source last week. “This means that the IRGC is facing a crunch point when it comes to funding its international network of proxies used to project Iranian influence, including in the key operational theatres right now of Yemen, Lebanon, and Syria as these people want payment in either [U.S.] dollars or gold,” he added. “Although China is still buying Iranian oil, it is still at the heavily discounted rate offered in the 25-year agreement,” he underlined.

Iran is appealing to the European Union (EU) for its help in resuscitating a workable version of the JCPOA for the U.S. as two of the three key European powers at the time of Washington’s withdrawal from it – Germany and France – opposed the U.S.’s action. The other key EU member at that time – the U.K. – was also against the withdrawal but its negativity was tempered by its desire to secure a beneficial trade deal with the U.S. after its own withdrawal from the EU, which had been voted for in 2016. The EU view was broadly that keeping Iran within the confines of the JCPOA was preferable to effectively leaving Tehran to do as it pleased. 

Consequently, shortly after the U.S. announcement of its withdrawal from the JCPOA deal, the EU moved to impose its ‘Blocking Statute’ that made it illegal for EU companies to follow US sanctions. At the same time, the EU’s foreign policy chief, Federica Mogherini, said that the JCPOA agreement: ‘Is not a bilateral agreement …  so it is clearly not in the hands of any president of any country in the world to terminate [it].’ German Foreign Minister at the time, Sigmar Gabriel, warned: ‘We also have to tell the Americans that their behaviour on the Iran issue will drive us Europeans into a common position with Russia and China against the USA.’ At the same time, the EU sought to construct a payments system – Instex – that would bypass all U.S. payments sanctions, although this had little tangible success.

This said, the E3 – Germany, France and the U.K. – have been highly unimpressed by the quality of the representations made to them in the past week or so by senior Iranian foreign office staff, according to the Iran sources, and Tehran’s position to play a tough negotiating game with the U.S. suffered a huge blow in recent private talks with Russia. At these talks, which were based around extending the 20-year deal between Tehran and Moscow that is set to run out this year, it was made clear to Tehran that Russia would not compromise its relationship in the Middle East with Israel by directly or indirectly aiding Iranian military or paramilitary activities across the region. “This was a huge blow for the IRGC, to add to China’s wariness of the U.S. and the EU’s negative view on what it had seen from the new Iranian government, so this – in conjunction with the country’s terrible economic position – means that Iran is ready to consider all of the U.S.’s hardline clauses that were dropped from the original JCPOA drafts,” one of the Iran sources told OilPrice.com.

The full list of the original 12 tough clauses that former U.S. President Barack Obama and his Secretary of State, John Kerry, wanted in the original draft of the JCPOA but which were removed after U.N. Permanent Members France, China, and Russia – plus Germany – supported Iranian objections to them can be found here, as delineated exclusively at the time by OilPrice.com. These were precisely the key clauses that Trump – and his former National Security Advisor, John Bolton – wanted to be put back in any new version of the JCPOA that would occur after Iran was suitably crippled (as the plan was) after sanctions were re-imposed after the unilateral U.S. withdrawal from the deal in May 2018. Iran’s initial likely negotiating position can be found here, as also delineated exclusively at the time by OilPrice.com.

Given this, according to the Iran sources, Iran will ultimately agree to whatever it has to agree to in order to get what it wants – sanctions lifted and free access where it needs it – for as long as it can do so without having to comply with anything it does not want to comply with, so the lists are now irrelevant in practical terms. All the more so, as Iran’s accession to full membership of the SCO will mean that the key problem Iran faced when the full details of the 25-year deal with China emerged in September 2019 – and prompted official denials from senior government figures in Tehran – that is, that Iran was being bought by China and becoming a client state in the process, can be disguised as investment flows coming from its membership of the SCO. Already, this process has begun, with last week seeing statements from Iran’s new Petroleum Minister, Javad Owji that plans are underway to attract US$145 billion from Iranian and foreign investors in the petroleum industry within the next 4 to 8 years. 

As LongTail Alpha’s founder, Vineer Bhansali, notes, pension fund managers have started asking him for guidance on how to best protect their portfolios against interest-rate volatility.

“That tells you they are getting worried,” he says. At some point, he adds, “markets are just going to break in some parts. It will be a fun time to trade.”

Nowhere is that fear more evident currently than in Treasury bond options markets.

The MOVE Index, akin to the VIX index on Treasuries, is spiking, signaling investors are increasingly worried about immediate risk surrounding tomorrow’s Fed announcement, most specifically Powell’s potential plans to taper bond purchases.

(The MOVE Index is a yield-curve weighted index of the normalized implied volatility on 1-month Treasury options. It incorporates the weighted average of vols on the current 2Y, 5Y, 10Y, & 30Y bond.)

The spike in the index to the highest levels since April 2020 suggests some front-running in Treasuries is taking place, brokers told Bloomberg’s Alyce Andres (but it could also be linked to major dislocations and low liquidity in the back end of the curve).

Meanwhile, the VIX Index, pricing expected volatility of the S&P 500, trades around 16. In April 2020, when the MOVE Index was near current levels, the VIX was trading at almost 50.

Interestingly, MOVE has normalized back to pre-COVID levels relative to VIX here…

Bloomberg also notes that last week’s massive cheapening in the 20Y bond (and inversion to the 30Y) continues to see aftershocks (reportedly forcing relative-value and hedge funds to liquidate paper, brokers confirm).

The 5s30s curve has collapsed…

And 20s30s is inverted for the first time ever…

Bear Traps recently summarized this dynamic perfectly:

For much of the last two years, price discovery across global government bond yield curves has been suppressed. As we stressed in recent months, “Adam Smith’s hands are being tied behind his back.”

Free markets have not existed in a covid world.  Now central banks are pulling away and the moves across the front and long-end of yield curves are colossal. It’s ALL ABOUT the rate of change. In macro rates, the body bags are piling up this week. The losses are enormous across this section of the hedge fund community. As one large whale gets stopped out, he takes the smaller players with him / her. There is a lot more risk out there than meets the eye.

In US rates, the 20 and 30-year bonds both yield 1.77%, we touched inversion today. We are NOT seeing real economic growth, bonds are telling us real demand destruction is here. Inflation has already hiked rates 200bps for the Fed.

So what happens next? We recently put it all together:

1. The liquidity in what is supposed to be the deepest, most liquid market in the world, is collapsing.

2. In a time when the Fed is still injecting $120BN in liquidity every month, we just observed an event that has only happened on prior previous occasions – Oct 2nd 2017, Aug 19th 2020 and Feb 25th 2021. One can only imagine what happens to liquidity when the Fed begins to taper.

3. As liquidity evaporates, rate vol is accelerating and dislocations across the yield curve accelerate, with bond vol surging while equity vol is completely ignoring the turmoil in the bond market. Eventually equity vol catches up to rates.

4. Some extremely levered multistrat hedge funds are reprising LTCM and piling into treasury/futures basis trades – the same trades that blew up spectacularly in Sept 2019 and March 2020.

5. As hedge funds pile into new flattener basis trades, others are liquidating basis steepeners, in some cases at huge margin call inducing losses, which force them to liquidate other performing assets.

6. A positive feedback loop emerges as liquidity shrinks further while volatility rises as the basis trade funnel gets wider, and more enter while those hoping to exit hold off until the last moment.

7. We hit a tipping point where all basis trades are no longer viable as there is simply not enough liquidity to put new trades on. That’s the moment everyone starts rushing for the exits, and as Sept 2019 and March 2020 showed us, that’s precisely the catalyst for a cross-asset crash, as basis trading funds scramble to boost liquidity while repo markets lock up. The result is a surge in volatility in underlying assets (TSYs), but also a freeze in the funding pathways (i.e. repo) that are used by the funds to fund said trades.

8. Eventually, Fed steps in to bail out some of the world’s richest hedge fund managers, usually under the guise of some social calamity, like – for example – a viral pandemic.

We are currently toward the end of step 6 of this checklist.

President Biden was evacuated from the COP26 summit in Glasgow earlier today, ahead of his big gas pledge.

Chaos at #COP26. @POTUS seems to have been evacuated after entering Methane Pledge. DiCaprio and what appears to be with Bezos are inside room. Bull horn out telling crowds to disperse after crowds pushed through. Chaos.

— John Glover (@John__Glover) November 2, 2021

The President had reportedly been in a meeting room with Leonardo DiCaprio and Jeff Bezos before his secret service detail rapidly escorted him out after an alarm was sounded…

Some scenes after @POTUS was forced to leave the meeting room to enter via another means for the announcement of the #Methanepledge at #COP26 @JohnKerry entered via the upstairs as well. No delegates or media were allowed in as a result. pic.twitter.com/BLzbBVTD03

— John Glover (@John__Glover) November 2, 2021

On the bright side, perhaps the sudden move will help the President stay awake today.

Our first reaction when seeing the exponential move higher in shares of rental car operator Avid Budget Group (whose ticker is CAR yet the company is hardly a “car company”) was whether they, too, had ordered a few hundred thousand Teslas in the latest cross-marketing gimmick.

*AVIS BUDGET TRADING PAUSED AFTER SHARES SPIKE 36%

How many teslas are they ordering?

— zerohedge (@zerohedge) November 2, 2021

Turns out this time the reason was somewhat more fundamental, coupled with a solid dose of technicals: Avis shares soared over 100% to a record high on Tuesday, triggering at least two trading halts, after the car-rental company’s third-quarter results topped expectations, helped by strong demand.

The fact that CAR had the most shorts (as a % of float) in over a year certainly did not slow the exponential surge higher.

Still, analysts were split over their future performance with Morgan Stanley saying high margins cannot be maintained longer term while JPMorgan noted that the strong conditions in the rental car industry can be expected to last for some time.  

Morgan Stanley analyst Billy Kovanis (underweight, PT $140 from $110) said Avis delivered against very high expectations in 3Q, hitting a record high Ebitda margin; that said, the analyst continues to believe that 2021/2022 will mark the cyclical peak and doesn’t see Avis maintaining the current margin profile in the long term.

On the other hand, JPMorgan analyst Ryan Brinkman (overweight) said the record results came as revenue rose, driven by both surging Revenue per Day (RPD), which reached record highs in both the Americas and International segments, as well as steadily recovering transaction days. He noted that Avis shares fell sharply after reporting a similar size beat to 2Q expectations, prompting an investor concern of peaking performance.

According to Brinkman, while the 3Q beat may feel similar, JPMorgan estimates it is different, as a great deal of evidence has piled up in the time since 2Q results to suggest that above average normal conditions in the rental car industry are likely to persist for some time

FInally, Deutsche Bank analyst Chris Woronka (hold) said that if any weakness ultimately unfolds in the shares, would view it as likely profit taking from investors with a “this is as good as it gets” point of view.

Despite their opinions, none of the analysts could explain today’s move which likely was precipitated by a solid burst in short covering, as CAR was the stock that many traders used as a pair trade to HTZ, and which is now being unwound.

By bithedge

Perhaps not satisfied with jawboning just the S&P500 well above its peers (5Y performance: spx +120%, msci world ex-us +43%), it’s become apparent that US investors have been nothing short of the pillar of crypto’s recent rise from relative obscurity to a $2.7T asset class.

Nowhere is this more obvious than in Ethereum, the ‘Amazon of information’, where performance during the U.S session since the start of 2020 stacks up at 2700%, vs. the European session at 492% and finally the Asian session with a return of 28%, barely more than one hundredth of the performance had during U.S hours.

Despite ongoing regulations being a worldwide development, a constant barrage of what appeared to be China full-out ‘banning’ crypto quite literally dozens of times and finally appearing to commit with conviction (don’t rule out more headlines) is the immediate suspect behind the glaring underperformance from the Asian session.

Less stunning but just as compelling is the breakdown for the top dog Bitcoin, where once again America drives, Europe rides, and Asia disappoints:

Due to crypto trading 24/7 and the varying open and close times of major stock exchanges, 8:00am to 6:00pm was used to classify session hours in NYC, Brussels, and Beijing, as this is the smallest window possible that captures all market hours in each region. This same window is used on weekends as it is also conceivably the lowest common denominator for the period of local time during which most financial activities take place on any day.

And while Asia’s shortfall can be reasonably attributed to China’s never-ending crackdown, the bifurcation between the U.S and Europe is less easily explained, although one could speculate has been helped by differing fiscal programs, cultural attitudes, and institutional responses between the two regions as a few among many factors.

The one thing this massive divergence makes clear is that despite what some U.S incumbents may think, the market appears to have voted with a resounding yes to crypto more so there than anywhere, and doesn’t appear to be having any second thoughts…