Category: zerohedge

It was inevitable that some reversion to the mean would have to happen between names like Tesla and, well, the rest of the auto industry. While Tesla shares are lower on Wednesday in early trade, VW might be the leading frontrunner to meet the mean from the other direction. Shares of VW common and preferred have continued to scorch higher, adding to yesterday’s gains. 

This extends yesterday’s monster gains which saw VW shares climb over 30% at one point. And, as you can see below, VW is starting to look a bit like Tesla’s chart over the last 18 months. The key exception is, of course, that VW is a consistently cash generating legacy automaker with decades of history behind it. 

The reversion to the mean could be very bad news for Tesla, as VW could be just the first of many valuation “reality checks” that Musk’s company could be in for. Eventually, people are destined to realize that legacy automakers can make quality EVs that are inevitably going to compete – seriously – with Tesla. Recall, names like Apple, BMW, Jaguar and Audi – just to name a few – are also throwing their hats into the respective ring. 

“This may be driven in part by U.S. retail investors jumping on the electric vehicle train,” Louis Capital Markets cross asset sales trader Frederic Benizri told Bloomberg on Wednesday. MPPM EK head of trading Guillermo Hernandez Sampere says that he suspects an orchestrated short squeeze in the name: “GameStop was the blueprint for deals of that sort — it was only a matter of time before someone would copy it”. 

Recall, yesterday VW upgraded its profit guidance laid out plans for expanding the company’s EV offering out through 2030 which also includes dethroning Tesla as the reigning EV world champ. VW hosted its “Power Day” yesterday and revealed plans to build six “gigafactories” with a total capacity of 240 gigawatt hours per year. 

“The company is aiming to achieve an operating margin between 7% and 8% after 2021. VOW also confirmed it is looking to finish the year at the upper and of a 5% – 6.5% range in 2021. Higher profitability will be achieved through lower costs with as much as 2 billion euros savings identified for 2023 compared to 2020,” the company said yesterday, according to StreetInsider. 

Chief Executive Herbert Diess said on CNBC: “This period is probably the most crucial for the whole industry. Within the next 15 years we will see a total turnover of the industry. Electric cars are taking the lead and then software really becomes the core driver of the industry.”

“Electric cars already today are very, very competitive and they’re becoming more competitive over time. that gives us the certainty that this is the right way going forward. Electric cars actually will bring down the cost of individual mobility further,” he continued.

VW also disclosed yesterday that it was working on a “new unified battery cell” to be launched in 2023. Diess said: “The one size fits almost all cell design will radically reduce battery costs … by up to 50% compared to today. Lower prices for batteries means more affordable cars, which makes electric vehicles more attractive for customers.”

Also probably contributing to its ascent is the fact that VW is a “less liquid” share listing, as Bloomberg notes that it is “owned by major shareholders Porsche SE, the German state of Lower Saxony and Qatar”. 

The move is also part of a general hysteria surrounding EV stocks. Recall, we wrote days ago that Rob Arnott of Research Affiliates referred to it as a “big delusion”. Arnott’s predictions could eventually rope in valuations across the board in EVs, not just for any one player. 

Current valuations in EVs are due to “pricing delusion”, Arnott said in a new paper calling EVs the “Big Market Delusion” last week. “The electric vehicle industry, with its astronomical growth in market-cap over the 12 months ending January 31, 2021, is a prime example of a big market delusion,” he wrote.

In his paper, he defines a big market delusion as “when all the firms in an evolving industry rise together, despite that fact that they are competing against each other.” He used airlines as an example of the BMD in the past. Technology “does not translate into great fortunes for investors unless it is associated with barriers to entry that allow a company to earn returns significantly in excess of the cost of capital for an extended period,” he argued.

As Europe’s vaccine rollout lags, COVID cases are exploding in Europe right now, prompting several member-state leaders to warn of an imminent “third wave” of the virus. As Nate Silver pointed out on twitter earlier, the EU and UK had similar rates of COVID cases per capita a month ago, while the US rate was about 30% higher. Now, the EU (slow vaccine rollout) has about 2x as many cases per capita as the US and 3-4x more cases than the UK.

On Tuesday, the EU added more newly confirmed COVID cases than the US and the UK combined, with 303.6 cases per million people in the EU, vs 165.4 and 84.9 in the US and UK. The number of new cases is growing as worries about mutated COVID strains amplify concerns about the EU’s slothful pace of vaccinations.

 

COVID deaths in the EU have topped 550K this week while fewer than 1/10th of the blocs adults have been vaccinated.

Now that some two dozen countries have halted the AstraZeneca-Oxford COVID jab, experts are worried that the pace of vaccinations will slow further as more Europeans decline to receive the shot. As Bill Blain wrote earlier, the EU’s vaccine rollout is “in tatters”, and the AstraZeneca controversy is only making the situation worse. The EMA, Brussels’ equivalent to the FDA, has launched a hasty safety review of the vaccine while reiterating that any risks posed by the vaccine are far outweighed by the benefits. Now, the WHO is reiterating that line, as officials appear to finally be coming to terms with the fact that they have no credibility to claim that the vaccine is perfectly safe. After all, the accelerated testing period makes it virtually impossible to address any more-rare risks posed to patients with various medical conditions.

But member state from Italy to Austria have reported cases of rare blood clots forming in patients with low blood-platlet counts. In one instance, a man died after receiving the vaccine. And while there’s no evidence of a direct link, the Italian prosecutors have launched a manslaughter investigation.

As the bloc’s vaccination rate continues to drag…

…Brussels’ bureaucratic leaders are sticking it to the WHO (which has issued myriad statements decrying so-called “vaccine nationalism”) as EU Commission President Ursula von der Leyen threatens to withhold more vaccine exports from the UK as a spat over the terms of the Brexit split intensifies, and the UK’s vaccination numbers far outpace numbers from the Continent.

Per Bloomberg, with the EU struggling to accelerate vaccinations, von der Leyen says the bloc will consider blocking supplies to countries that aren’t reciprocating, or which already have high vaccination rates, with the UK singled-out as the No. 1 importer of shots from the EU.

“We have observed that in the last six weeks, 10 million doses have been exported to the UK,” von der Leyen told reporters in Brussels. “The UK is producing AstraZeneca. In our contract with AstraZeneca there are two sites in the UK that are put in the contract for potential deliveries to the EU.”

Von der Leyen also reiterated warnings about a third wave that have been repeated by many bloc leaders and health officials.

“We are in the crisis of the century,” she said. “We see the crest of a third wave forming in member states, and we know that we need to accelerate the vaccination rates.”

Confirming just how critical the AstraZeneca jab is to the EU’s vaccination vision, the EU has blamed members states’ sluggish rollout on AstraZeneca’s failure to meet its delivery commitments, and fumed that 10M jabs produced in Europe have already been exported to Britain. Some critics have noted the hint of jealousy in Brussels’ criticisms of the UK rollout.

“If this situation does not change, we will have to reflect on how to make exports to vaccine-producing countries dependent on their level of openness. We will reflect on whether exports to countries with higher vaccination rates than us are still proportionate.”

Von der Leyen urged EU leaders to consider additional measures to bolster the bloc’s vaccine supplies when they meet next week, including potentially using emergency legal powers to effectively seize control of production and distribution.

“All options are on the table. We are in the crisis of the century. I am not ruling out anything for now because we have to make sure that Europeans are vaccinated as soon as possible,” she said, when asked whether the EU should invoke Article 122 of the EU treaty. The clause allows the introduction of emergency measures when “severe difficulties arise in the supply of certain products.”

European Council President Charles Michel has raised the prospect of invoking Article 122 as a way to get the vaccinations back on track. That would allow Brussels to offer more financial assistance to member states, and take other emergency measures.

“Vaccine production and vaccine deliveries in the EU must have a priority and I also want to discuss this whole picture with the heads of state and government,” von der Leyen said.

While threatening to withhold vaccines produced by AstraZeneca and others from the UK, EU officials have also been slamming the leaders of some of the bloc’s biggest member states (Germany, Italy and France) who have insisted that, while they’re “ready” to resume vaccinations with the AstraZeneca jab, they will wait until after a safety review set for Thursday.

By Michael Every of Rabobank

The Fed-dy Bears’ Picnic

“If you go down in the bonds today; You’re sure of a big surprise

If you go down in the bonds today; You’d better go in disguise!

For every bear that ever there was will gather there for certain

Because today’s the day the Fed-dy Bears have their picnic

Picnic time for Fed-dy Bears; The little Fed-dy Bears are having a lovely time today

Watch them, catch them unawares; And see them picnic on their holiday

See them gaily gad about; They love to play and shout; They never have any cares

At 6 o’clock this trading fad-dy; Will put its books to bed; Because they’re tired little Fed-dy Bears

Every Fed-dy Bear who’s been good is sure of a treat today

There’s lots of marvellous things to tweet and wonderful games to play

Beneath the trees where *everyone* sees; They’ll hide and seek as long as they please

‘Cause that’s the way the Fed-dy Bears have their picnic”

We have a long wait ahead of us for a critical Fed meeting and one has to kill the time as productively as one can: I apologize for nothing. Yes, we can focus on weak US retail sales and industrial production data yesterday, which is bond bullish; we can focus on the risk-off North Korea leader’s sister stating “We take this opportunity to warn the new US administration trying hard to give off gun powder smell in our land” (which was not about flatulence); or the latest suggestion that US officials will bring up Hong Kong and Taiwan when they meet Chinese officials in Alaska tomorrow, which is hardly risk on. You can even mention that Germany seems to have the same negotiating tactic with the US over Nordstream2 as North Korea does with its nukes: just keep building and expect the Americans to eventually live with it.

But the long and the short of it is that it’s all about the Fed, and if they display any sign at all of shifting the dot plot towards rate hikes from as early as 2023. That’s especially true given the possibility this will be a period following not just the USD1.9 trillion stimulus package, but a USD2.0-2.5 trillion infrastructure bill too – in which case one would suppose the underlying pressure for higher rates would be strong…if things still work the way the textbook says they are supposed to re: liquidity > investment > wages > inflation. Which they clearly don’t right now.

One of the big headlines is that following a UK court loss, Uber are reclassifying their 70,000 British drivers as workers rather than self-employed capitalists en route to global transport domination. This entitles them to benefits, which would be a pay rise in kind. Is this the harbinger of labour winning vs. capital? Consider that Uber are claiming this only covers time spent driving, so waiting around for a fare doesn’t count towards pay: does that sound like a strongly-unionised working environment? As the grandson of a cabbie, it sounds like being a taxi-driver. (Uber will potentially have issues with VAT payments due to the government: but that’s another story.)  

Back to the Fed. As I’ve already noted recently, it would be odd if they tried to flag inflation concerns given the Treasury are arguing these are “small” and “manageable”: surely they won’t want to show any policy disconnect? As such, and like the RBA just did, the risks appear that most members still won’t flag rate hikes by 2023 despite the recent upturn on overall data, on the US vaccination effort, in commodity prices, and in fiscal stimulus.

In which case, while short end bond yields would of course stay low, the risks are also that long yields react further to all this “running hot”. So, yes, it could be picnic time for Fed-dy bears. Could this look like the 2013 Taper Tantrum, where US 10s jumped 136bp (to 3.06%)? Could it even look like the 1994 Bond Massacre, where US 10s leaped 245bp trough to peak (to 8.05%)? However, before one gets ‘Uber-excited’, the fact that one peak was 8.05% and another was 3.06% shows you just what happened to the US structurally in the two decades in-between. It’s going to take a lot of US infrastructural changes, in many senses of the term, to get us back towards anything close to 2013 US yield levels, let alone 1994.

Nonetheless, in the meantime the rest of the world has followed that general yield collapse and new-normal path, and hence even a moderate move higher in yields could be painful – and not just to bonds. Yes, there are US stocks to worry about. But also note the headline ‘China braces for “turmoil in financial markets” following new US stimulus’. Of course, it’s not the only one. Key EM are now having to actively think about raising rates despite still being in the throes of the Covid epidemic. The higher US bond yields go, the more capital could flow back to the US and USD. That’s one form of turmoil – and very 2013.

Yet even if the Fed does not provide a picnic for bond bears today, via some form of curve action to match the dot plot, we still get turmoil anyway. How well are EM (and DM) set up for a much weaker USD (and yet higher commodity prices), for example?

It was to be expected, if deeply ironic, that Chinese officials oppose a US fiscal deficit of over 15% of GDP; the promise of massive infrastructure spending; all backed by a pliant central bank; with aims of social stability; and suggestions of protectionism to lock this liquidity in; and hopes the currency moves lower. Takes one to know one? But rather than accept the expected flood of hot capital inflows –pushing up CNY, blowing bubbles, and seeing jobs exported along with manufacturing– suggestions are they will encourage more capital to flow straight back out again. In which case, it’s more of a Fed-dy bulls picnic globally. But somebody is going to end up with an over-valued currency, hitting exports, and assets, hitting financial stability.  

There are many other ways this can play out too, depending in large part on how the US reacts – but all of them suggest the risk of significant market and geopolitical volatility, to which today could well be a key milestone.

But that’s enough for now. I am a tired little Fed-dy bear, and today will likely be no picnic.

As BMO chief technician Russ Visch writes in his latest Daily Action Report, yesterday was mostly a non-event as the major averages were relatively unchanged on an extremely light volume day as traders sat on their hands ahead of today’s FOMC announcement.

This means that there has been no change to Visch’s short-term timing model for North American equities which remains mostly positive, “which suggests bias should remain the upside here with targets that measure to 19,228 for the S&P/TSX Composite and 4177 for the S&P 500.”

Yet in a more ominous observation, the BMO chartist cautions that one issue that bears watching is that “the recent breakout in the S&P 500 was not confirmed by new cyclical highs in any of our market based measures of economic activity”…

… such as copper, semiconductors, South Korean stock market…

… or bond market sentiment gauges such as corporate/treasury credit spreads and CDS indexes.”

While he notes that it is possible that these “canaries in the coalmine” catch up to the S&P 500 once we get past this week’s quad-expiry, “these are the warning signs that typically only develop ahead of major corrections.”

To that point, Visch notes that he has written about the potential for a “squishy middle” for equities in 2021, “and continued deterioration in these gauges would increase the odds of that becoming a reality.”

And while BMO sees pain in the medium-term what about shorter – i.e., today? As SpotGamma writes in its morning note, while the FOMC always contains the possibility of inducing volatility “we give edge to markets “mean reverting” and initial move today, and holding the major gamma range of 3900-4000 into Fridays close.”

Our models suggest a max move of 77bps today with key levels showing as 3950, 3975.  4000 remains the Call Wall and major resistance into Fridays close. Alternatively should Powell upset markets, we’d look for 3900 support.

But while SG is sanguine about today’s FOMC meeting, they are somewhat more nervous about Friday’s quad-witch opex: in light of the continued reduction in SPX gamma (which no longer acts as an anchor and thus makes greater volatility more likely), SpotGamma notes that it often talks “about how market volatility declines into the large monthly OPEX, and that is portrayed in the graphs below. These charts show the intraday range for markets and you can see that into OPEX (blue arrows) the market “compresses”, i.e. the intraday trading range consolidates.”

Oil prices rollercoastered overnight, rallying on the surprise API-reported crude draw and then slumping during the EU session amid demand concerns (driven by the terrible vaccine rollout).

“The suspension [of AZN vaccines] will not do the bloc’s economic and fuel recovery any favors,” said Stephen Brennock of oil broker PVM.

“The hope now is that Europe can get its sluggish vaccine rollout back on track.”

Oil weakness was exacerbated by IEA’s latest report that said a supercycle was unlikely, demand won’t return to pre-pandemic levels until 2023 and could peak earlier than previously thought.

After the prior two weeks of record-breaking swings in inventories, this last week is expected to show only modest changes, with crude stocks sitting at their highest since early December.

Source: Bloomberg

API

• Crude -1.00mm (+400k exp)

• Cushing

• Gasoline -930k (-1.4mm exp)

• Distillates +904k (-900k exp)

DOE

• Crude +2.396mm (+400k exp)

• Cushing -624k

• Gasoline +472k (-1.4mm exp)

• Distillates +255k (-900k exp)

Despite refinery utilization recovering from the weather chaos in Texas, crude stocks increased last week (significantly more than API and was expected).

Source: Bloomberg

US Crude production has yet to accelerate along with higher prices and more rigs…

Source: Bloomberg

WTI hovered around $64.50 ahead of the official inventory data and reversed its rebound on the print…

On the bright side, that $3.00 nation gas price may be avoided.

Authored by Matt Taibbi via TK News

Variety just published a graph that should horrify cable news executives:

Yikes. https://t.co/dTwyOEI6ue pic.twitter.com/Zel6erjzrj

— Noah Rothman (@NoahCRothman) March 12, 2021

This data, showing significant declines in all of the major primetime cable news shows, came in a piece called, “Cable News Ratings Begin To Suffer Trump Slump.” Gavin Bridge of the Variety Intelligence Platform explained:

VIP has previously covered the initial ratings decline Fox News, MSNBC and, most of all, CNN, saw in President Biden’s first week, as the nonstop controversies of the previous administration slowed down.

Our prediction that audiences would perk up for President Trump’s second impeachment trial proved correct. But in the weeks after the trial ended, audiences for CNN have plummeted; MSNBC is seeing about half CNN’s drop, while Fox News is down single digits.

It’s natural for news audiences to dip after seismic events like the January 6th riots. CNN had its best month ever in January, and individual shows like Anderson Cooper 360 jumped above 5 million viewers.

Still, Variety’s report showing significant ratings drops as we move farther away from the Trump experience is both predictable and fascinating. It’s not clear how media executives will respond to losing the best friend they ever had. They will either have to surrender to the idea of significant long-term losses — impossible to imagine — or find a way to continue an all-time blockbuster entertainment franchise, which doubled as the most divisive public relations campaign in our history, without the show’s main character.

Trump transformed news into a ratings Krakatoa, combining the side-against-side drama of sports programming with the amphetamine urgency of breaking news.

Moreover, the Democratic Party’s response to Trump — which involved multiple efforts to remove him, premised on the idea that every day he spent in the Oval Office was an existential threat to humanity — allowed stations to turn every day of the Trump years into a baby-down-a-well story (the baby was democracy). Between the Mueller investigation, two impeachments, the Kavanaugh confirmation, multiple border crises, the “Treason in Helsinki” fiasco, and a hundred other tales, every day could be pitched as a drop-everything emergency.

Add the partisan rooting angle, and you had ratings gold. Imagine three or four dozen Super Bowls a year, each one played in the middle of a category 5 hurricane, and you come close to grasping the magnitude of the gift that Donald Trump was to MSNBC, Fox, and CNN.

Six or seven years ago, it was common to see CNN or MSNBC fall outside the top 20 rated cable networks, below titans like Disney, USA, TBS, and the History Channel. By 2020, the three top networks on cable — not just news networks, but overall — were Fox News, MSNBC, and CNN. The fact that news ate away so much of the market share of the entertainment business in the Trump years raises questions about what exactly we were watching.

Jump in your Dr. Who police box and go back to 2014, the last year Trump was not a major political figure. The cable news genre had what Variety described as an “overall down year.” It was a particularly grim time for CNN and MSNBC:

Total Primetime Viewers, 2014  Change
Fox News             1.779 million (even)
MSNBC                   600,000     (down 8%)
CNN                         528,000      (down 8%)
HLN                         337,000      (down 16%)

CNN exemplified the pre-Trump dilemma. In 2011, the network’s average primetime viewership was 689,000. That dropped to 670,000 in 2012, and the year after that, in 2013, it fell all the way to 568,000, a 20-year low. Imagine the pucker factor at Time Warner the next year, when CNN’s entire 8-11 p.m. programming slate dropped 8% off that 20-year dip. 

2013 was CNN’s first year under the management of Jeff Zucker, whose career arc leading into the Trump years was a dazzling study in failing upward. He was named head of NBC Entertainment in 2000, and rode the successes of a handful of shows — including, notably, The Apprentice — into a job as CEO of NBC Universal, where he presided over one of the most disastrous tenures of any TV executive in history. Under his leadership, NBC dropped to fourth behind ABC, CBS, and Fox, amid catastrophic decisions like trying to move Jay Leno into primetime.

When Zucker moved to CNN, he trumpeted a new plan to save the news. This is from Politico in 2013:

Zucker has told staff he wants to “broaden the definition of what news is,” meaning more sports, more entertainment, more human interest stories — and, at times, less politics.

That didn’t work out so well in 2014, though to be fair to Zucker, the ratings narrative started reversing at least somewhat before Trump jumped on the scene. But the first giant leap forward for the business as a whole came in 2015, when CNN’s average primetime audience soared to 730,000, a 30% increase, in significant part because it hosted two Republican debates starring Trump.

The news business had never seen anything like the Trump effect. The first Republican debate on Fox drew 25 million viewers and was the most-watched non-sports event in the history of cable, while the second debate drew 23 million and was merely the top show in the history of CNN. 

Taking note of all this was Trump himself, whose poll numbers were dipping a bit at the end of 2015. Some were predicting his demise. To this, Trump snapped, “I’m not a masochist,” and promised he’d pull out if his numbers worsened. However, he said, if he did, “There’d be a major collapse of television ratings,” adding a poisonous prediction: “It would become a depression in television.”

This is an excerpt from today’s subscriber-only post. To read the entire post and get full access to the archives, you can subscribe for $5 a month or $50 a year.

The US Federal Reserve meets. Today is all about expectations, including the fabled dot plot of FOMC member forecasts. Former Fed Chair Greenspan once declared “I know you think you understand what you thought I said, but I’m not sure you realize that what you heard is not what I meant.” Greenspan is no longer Fed chair, and so the dot plot was invented to replace that confusion.

– UBS chief economist Paul Donovan

As previewed yesterday, today is all about the conclusion of the 2-day FOMC and Powell’s subsequent press conference with this meeting also including the latest economic projections and dot plot from the FOMC’s members (the first one since the end of 2020). DB’s Jim Reid reminds us that back in December when the last dot plot was released, it showed that most of the committee favored keeping rates on hold at least through to the end of 2023. But since then we’ve seen a sharp move higher in Treasury yields thanks to the passage of the $1.9tn stimulus package, and markets are now pricing in an initial hike from the Fed within the next 2 years and three hikes in total by the end of 2023.

With a more robust outlook ahead, DB’s US economists expect that one hike should be reflected in the committee’s updated projections out to end 2023 (via the median dot) but it’s a close call. However higher growth and lower unemployment will be in the forecasts, as well as a modestly higher inflation trajectory.

As a reminder, Goldman also expects the Fed to unveil 2023 liftoff, with 11 participants showing at least one hike in 2023 versus 7 showing no hikes (Christopher Waller has joined the Board of Governors, raising the number of submissions to 18). Of those showing at least one hike, most will show just one, but a handful will show two or more, in line with market expectations of 3 rate hikes. For more on market’s reaction to the median 2023 dot, please read “All Hell Could Break Loose”: The Fate Of The Market Is In The Median 2023 Dot.

The press conference may bring most of the focus though with every word scrutinized and cross examined given the recent run up in yields.

Some curious facts from Deutsche Bank: Powell has now presided over 24 FOMCs and on average the S&P 500 has been -0.15% (15 out of the 24 were down days) lower on decision day – though this is heavily weighted by his first 7 meetings, which saw equities slip back when the Fed started its small hiking cycle in 2018. In terms of 10 year yields they have been -3.0bps lower on average with a median of -1.6bps (16 out 24 down in yield) on Powell FOMC days. To put this in perspective the S&P 500 is up +49.5% since his tenure begun in February 2018 and 10yr yields are down -108.8bps.

With that in mind, here is a comprehensive preview courtesy of Newsquawk of everything that Wall Street expects Powell to cover (or ignore) in today’s closely watched FOMC rate decision at 2pm and Powell press conference at 230pm ET:

• The Fed will keep the Federal Funds Rate target at 0-0.25%, and the rate of its asset purchases steady at USD 120bln per month.
• Updated economic projections will reveal the extent to which officials see the brighter growth outlook translating into rate hikes down the line; previously it had not pencilled in any hikes through the end of 2023.
• Analysts will also be paying attention to the extent the Fed forecasts an overshoot of inflation, in keeping with its new policy framework.
• The Fed may update on whether SLR relief for banks will continue beyond March, although since it does not strictly relate to monetary policy, it may ignore the issue.
• Traders will also be looking out for any hints about the conditions the Fed wants to see before scaling-back asset purchases. Judging by recent commentary from senior officials, Chair Powell will likely adopt a stoic approach to the bond market sell-off, reiterating familiar arguments, and he may again avoid jawboning rates lower with threats of twisting purchases or yield curve targeting policies.
• A hike to the IOER rate is a possibility, but this would be framed as a technical adjustment rather than a change in monetary policy course.

HIKE TRAJECTORY: Focus will be on the 2022 and 2023 dots to judge how far the improvement in the economic outlook translates into higher rates in the Committee’s view. Currently, market-based pricing assesses that there is a risk of a rate hike in 2022, and has fully priced a rate rise in 2023, which contrasts with the Fed’s December projections, where the median forecast saw rates remaining unchanged at current levels (0-0.25%) over its forecast horizon through end-2023; in December, just one of 17 FOMC participants had envisaged a 2022 rate hike, while just five saw rates above current levels in 2023. There is still a chance the median forecast will not envisage a hike, however, despite the Fed being likely to upgrade its growth view. Barclays’ analysts reason that the Fed is likely to see the economy as in a similar fundamental position at the end of 2023 as it did last December; fiscal stimulus will likely push GDP growth higher in the short-term relative to what the FOMC was forecasting last year, but Barclays argues that subsequent growth rates will be slower as federal expenditures retrace, leaving economic fundamentals on a broadly similar footing at the end of the forecast horizon vis-á-vis the Fed’s prior outlook.

INFLATION COMMITMENT: The Fed aims to achieve inflation “moderately above 2% for some time” so that inflation “averages 2% over time and longer-term inflation expectations remain well anchored at 2%”; the key question is how the Fed sees the Q2 2021 inflation spike contributing to the ‘average’ profile of inflation, and does the expected surge in inflation this year imply less of a need to overshoot later in the cycle? The updated economic projections may reveal what level inflation will be at when the Fed envisages its next hike; for reference, the median of dealers surveyed by the NY Fed in January estimated that headline PCE would be running at 2.2% when the Fed fires its first hike.

QE TIMELINE: Fed officials have stated that the current pace of bond purchases remains appropriate, and rates would not be hiked while the Fed is making these purchases, which implies the timing for QE is pivotal to the timing of future rate hikes. However, officials have also been clear that its guidance is outcome-based, which makes it trickier for market participants to price rate hikes in money markets; Goldman Sachs thinks that without any date-based guidance on QE, front-end rates may need to reprice higher. Powell and Co. have generally been cautious about attaching any date-based guidance to its policy, but have suggested that the pace of QE remains appropriate for now, and can be expected to continue through the end of this year at least. However, considering the more optimistic view about the medium-term, market participants will be keeping an ear out for any conditions the Fed wants to see before it begins pulling back purchases from the current USD 120bln/month pace; analysts at Societe Generale think it would be premature for the central bank to offer specifics given it wants to maintain as much policy flexibility as possible.

PUSH-BACK ON RISING RATES: Officials at the ECB have been far more aggressive in pushing-back against higher EGB yields, last week opting to adjust asset purchases (front loading) to reinforce officials’ verbal interventions. The Fed has been reticent to do so, and instead key officials have attributed the recent rise in yields to optimism in the recovery narrative, while others have noted the USD 1.9trln fiscal stimulus package amid an environment where all Americans will likely have access to vaccinations by May. The Fed will have noted that 10-year breakevens last week rose to the highest levels since 2014, and crucially, the rise in inflation expectations was not accompanied by a similar rise in real yields, which analysts at BMO say may provide Fed officials with encouragement. One of the key standouts over the last three weeks has been the Fed’s stoic approach to turmoil in the bond markets, and that approach has been vindicated. This suggests that the statement and the position of Fed Chair Powell will be consistent with recent commentary, suggesting that Powell will steer clear of any detailed discussion of extending the weighted average maturity of Fed purchases further out the curve, and any yield curve targeting policies, although he may remind us that both tools remain in the Fed’s toolbox for use if necessary, while the Fed also has the option to ‘twist’ asset purchases if needed (offsetting short-end sales with long-end purchases). Powell will likely reiterate that while the near-term is mired by uncertainty, the outlook for the second half is brighter, asset purchases at the current rate remains appropriate for this year at least, it will take a great deal of time for inflation to moderately exceed the Fed’s target sustained basis, perhaps three years; there is still a huge amount of progress needed in the labour market.

SLR: Banks’ supplementary leverage ratio requirement (SLR) is a capital rule that requires institutions to hold a certain percentage of capital against total assets. In April 2020, regulators exempted Treasuries and deposit reserves from banks’ SLR calculations, which allowed these banks to build balance sheets by purchasing Treasuries without hindering their SLRs (some analysis suggests USD 300bln of Treasuries were accumulated over the last year). This arrangement is set to expire at the end of March, and if it were not extended, banks could have to hold more capital against their holdings of Treasuries if SLRs suddenly become the binding capital constraint on banks, which some warn may result in reduced demand for government debt, perhaps triggering in a wave of Treasury selling, which could in-turn reduce funding for other Treasury investors, stoke volatility in fixed income markets, and potentially result in significant market disfunction. Some think that the recent sharp decline in dealers’ holdings of Treasuries could be a function of concerns that SLR relief will not be extended, with banks preparing for the possibility that an extension decision does not come.

Goldman Sachs dismisses these concerns, noting that the recent decline in dealer holdings was driven by a fall in holdings of Treasury Bills; GS also says that many banks have SLR exemptions at the parent company level, where it is a default exemption, not at the subsidiary level, where banks have to opt-in, which it sees as a sign of confidence that there may not be any forced Treasury selling if the relief was not extended. Other analysts have expressed forward-looking concerns regarding the evolution of bank balance sheets as Treasury issuance continues to balloon and the Fed continues to flood the system with reserves via QE; SLR may not be an issue now, but soon could become the binding restraint.

NOTE: any decision on SLR relief is taken at the Fed board-level, and in conjunction with the FDIC and OCC – it is not made at the FOMC-level, which suggests there is some scope for the issue to not feature heavily at this week’s FOMC. Given the issue relates to bank regulation rather than the implementation of monetary policy, it is possible that the FOMC could ignore the issue, although many expect Powell to be pressed on the issue in the Q&A. If the Fed did choose to act, it could do so by either extending the relief, ending it, or perhaps just extending relief for holdings of deposits (reserves), rather than Treasuries.

POSSIBLE IOER HIKE: Intricately linked to the SLR theme is whether the Fed will ‘technically’ lift the rate of Interest on Excess Reserves, the idle cash that banks hold in excess of regulatory requirements which are then parked at the Fed. In recent weeks, the Secured Overnight Financing Rate (SOFR, the Libor-replacement) has been flirting with negative territory as an excess amount of cash chases a limited amount of collateral. It is important to note that the SOFR is not a Fed policy rate, although it can influence other STIRs as well as the Effective Federal Funds Rate, and Dutch bank ING argues that if it were to fall to zero or turn negative, it might suggest that the Fed has lost some control over the front-end of the curve at a time when the economy is picking-up. The situation might be helped if the pace of Treasury issuance picks up, but that is something that will take months and quarters rather than weeks; if the Fed wanted to act now, ING says it could hike the IOER to lift other liquidity buckets. Some desks look for a hike of between 5-10bps from the current 10bps.

FIRST LIFTOFF, I.E. THE 2023 MEDIAN DOT: Goldman writes that after its latest forecast upgrades, the bank views the first hike in the funds rate as a close call between the second half of 2023 and the first half of 2024.  The working assumption has been that the FOMC’s inflation threshold for liftoff is 2.1%, and Goldman now expects to reach this slightly earlier in 2023 H2, which would argue for bringing forward the timing of liftoff from the standing forecast of 2024 H1.However, Goldman admits that it is “increasingly unsure where FOMC participants put this threshold and see the risks as tilted to the higher side, for two reasons.” First, the New York Fed’s Primary Dealer Survey and Survey of Market Participants indicate that the median respondent has a higher bar of 2.2-2.3% in mind.  Goldman had assumed a lower bar because policy would still be very accommodative after liftoff, meaning that inflation should in theory rise somewhat further, and because there might not be that much make-up inflation needed this cycle. But Goldman admits that it is not sure, and Fed officials likely have a range of views. Second, there will be substantial turnover on the FOMC by 2023—in fact, President Biden can appoint four new people to the Board of Governors, a majority—and we expect the new appointees to lean dovish.

It has certainly been a wild ride this year, so far, for ARK Fund investors.

As the NASDAQ has whipsawed back and forth for the last couple of weeks, holders of ARK ETFs like the ARK Innovation Fund (ARKK) have similarly been taken for a wild ride, witnessing up and down days of near 10% on more than one occasion. ARK ETFs fell as much as 30% between February 12 and March 8, the Wall Street Journal notes. 

But for now, it appears as though Cathie Wood is convincing her loyal followers to do just that: keep following.

24 year old Jackson Call, who owns $50,000 of the ARK Genomic Revolution ETF, told the WSJ: “It kept dropping, dropping, dropping, and then it was down 25%. It got painful.” He said watching videos of Cathie Wood’s constant media tour helped calm his nerves. “She helped me not to sell,” he said. 

Wood has been on what seems like a never-ending media tour for the last 12 months, appearing not only on major financial news networks what seems like weekly, but stopping into grassroots podcasts and conferences to also make appearances. 

Wood proclaimed in a video March 5: “It’s exciting to be alive. We’re as excited as ever about everything we’re doing.”

And it seems investors share that optimism. Despite the selloff in tech this year, ARK investors put more money into the funds than they took out, adding $2 billion in cash to ARK Funds over the past month – about $320 million more than JP Morgan took in for the same types of products. Investors poured more than $36 billion into ARK Funds last year after the Covid selloff. 

31 year old Shawn DaCruz, who owns ARK’s Genomic Fund, said: “It may sell off 50%. But if you look at the companies she owns, some of the larger holdings like Square and Tesla, in five years, I’m pretty sure those companies will be around and they will be bigger than they are now.”

DaCruz “reads every tweet, watches every video and listens to the podcasts put out by Ms. Wood and ARK,” according to the Journal. This year, he started designing ARK merch, which he sells through an online store. “My sales are down of course,” he said of his ARK merch store. 

55 year old Jeff Sanders said he also wasn’t worried about this year’s sell off: “She still has conviction. It makes me feel better about it. I got a screenshot of our portfolio and texted it to my wife. I said, ‘This is ugly. But it’s going to come back.’”

Financial adviser Larry Carroll has been putting his clients into ARK’s Innovation ETF since 2018. They have cumulatively bought about $300,000 in shares. He believes in Wood so much that he organized a virtual meeting between her and his clients. “There’s nothing wishy-washy about her opinions. Those come through loud and clear and are part of her success,” Carroll said. 

As financial advisor Carroll keeps putting his clients into ARK funds, the most prescient quote of the report comes from 27 year old Brock Driver, a production manager at a machining company. Driver said he sold out of the Innovation Fund during this year’s drop: “I’m afraid at this moment. We could be getting ready to face something I don’t think Cathie can control.”

Authored by Bill Blain via MorningPorridge.com,

Europe’s vaccine rollout is in tatters as a result of stupid politics and a desire to blame the UK, while the UK has just sent a very unsubtle message about Europe looking after itself. Its a silly playground squabble that needs to be resolved quickly, but at its heart is the usual European problem: Britain vs France.

Vaccine Wars and Britain in a Huff

Let me apologise for not writing about bond markets, the likelihood Central Banks will let inflation ride, the ongoing relative strength of equity investments, and therefore the likelihood the market retains its current valuations for longer… but we need to talk about Yoorp, again, this morning.

One of my key market mantras is: outcomes are seldom as bad as we fear, but never as good as we hope. We have a bias to overweight our expectations of utter disaster, but mankind being a social animal, the reality is common sense usually prevails to create workable compromises. Societies that don’t compromise – don’t last long.

Tensions over vaccines, Brexit and the new UK global strategy are all coming to a head – and they need to be resolved. They probably will be, but someone is going to have to step down before punches get thrown. When it comes down to compromise in Europe, there are two key issues: Europe’s stupid vaccine blockade, and the UK’s equally daft new Global Strategy – each the result of a silly playground tussle.

Let’s start with the vaccine war

At some point in the next 100 years, historians will look back to 2021 and wonder what all current fuss is about. Today’s European blockade of the proven AstraZeneca vaccine, and all the attendant stupidity of denying the vaccine when it is most needed, will likely become a footnote in the annals of the Global Financial Crisis 2007-2031.

Vaccine wars will be little remembered – much like when the UK and France nearly went to war in 1898 in Africa. British and French spheres of influence clashed on the White Nile. A French military exploration party intent on extending French trade from West to East Africa ran into a British Army with gunboats led by Lord Kitchener aiming to link the continent North to South, from Cairo to Cape Town.

Apparently it was all very friendly.. the officers and men of the two forces getting on splendidly – just like the professional medics, doctors and researchers trying to solve Covid today. But the diplomatic stakes were enormous and it all kicked off between London and Paris. It came close. The fact Kitchener outnumbered the French by 10-1 rather decided the result. Pleasantries on the Nile were exchanged and the French marched off, back into the desert and back towards the setting sun. The French diplomatically withdrew and stored up the insult of the Fashoda Incident as yet another perfidious British commercial slight to French interests.

Cut to 2021 and the French are upset again.

The French believe they invented vaccination and are rather miffed some upstart UK pharmaceutical company, AstraZeneca, and a University no one has ever heard of called Oxford, has developed a world beating vaccine in nearly record time. And after the Brits Brexited Europe, how very dare they expect to sell their vaccine in Europe.. even if AZ is effectively giving it away at zero profit?

French efforts to develop a vaccine trundled along very slowly and bureaucratically. None of this Anglo-Saxon rush to find solutions for them. Paris knew best. But, the prestigious Pasteur Institute gave up completely after going down a very traditional route with a vaccine based on a well-worn measels based model.  It failed completely.

That left Sanofi, but its jab has been repeatedly delayed, slowed down by testing delays and a conservative approach described as lacking urgency. Its facilities in Germany are now producing the Pfizer jab instead. There is no doubt the slowness of the European Commission to order vaccine doses for Europe was driven by French assurances they could provide a cheaper internal European vaccine solution – they failed, and now Europe and the EC is trying to cover up.

There is still a French firm in the race, Valneva, but interestingly they couldn’t get any funding in France! It’s activated virus tech was first supported by the UK grants and money rather than the French government.

Now the French are doing what they usually do – blaming everyone else. Macron and the rest now saying its unfair competition, spreading fake-news about the efficacy of the AZ vaccine, complaining brilliant French scientists are being poached in a coordinated brain-drain, and blaming London for the lack of any significant French Biotech venture capital infrastructure. The reality is the French were complacent and slow at all key stages – but they will never admit that.

Let’s not forget the first Covid vaccine was rushed through by the highly innovative  Turkish/German BoiNTech. (Sure enough, this morning we learnt the BioNTech jab also came under attack from French regulators on its mRNA technology.) While the Brits backed any and all promising approaches the French held back on orders, delayed clinical trials and approached everything with a convention bureaucratic mindset.

And they lost. And now Europe is suffering for it.

Despite every single competent medical authority on the planet stating and reinforcing the AZ vaccine is safe and should be used immediately, there has been a coordinated rejection by Europe’s political leaders. Even the European Commission was urging nations to proceed with the AZ vaccine. Tellingly, the head of the Italian medical regulator admitted their decision to pause the vaccine was a “political one”.

Why?

Vaccine nationalism is at the heart. Why is a British company offering its world saving product at zero-profit being rejected? Here in the UK, vaccine development is driving the greatest peacetime effort to protect society – and we are giving it away at zero-profit. Yet, as Europe’s vaccination programme went into meltdown, yesterday, the French Minister for Industry stated AZ’s CEO is on a “hot-seat, and he knows it” – warning of dire repercussions for the company’s failure to kow-tow to Europe’s delivery demands, and now accusing them of delivering a dangerous deadly product.

The Torygraph reported: “Professor Dame Clare Gerada, one of the UK’s leading doctors and a former president of the Royal College of GPs, accused Europe’s leaders of “weaponising” fears over the jab and said they should “get a grip”.

The French can go reproduce themselves.

I was speaking to a UK vaccinator yesterday. Despite all the negative press about how unsafe Europeans say the AstraZeneca jab is, the Brits he was injecting yesterday were generally happy to receive it. The success of vaccinations in the UK is showing considerable success in terms of crashing infection and death numbers – although there are areas where the number of BAME people refusing to be vaccinated remains stubbornly high, leading to fears such areas will become reservoirs for future Covid mutations and new infections – much like Europe will become.

Meanwhile…. A new UK Global Perspective?

The other big news yesterday – and a product of the deepening Brexit divide – was Boris Johnson announcing a new “Global Britain” strategy which was long on a pivot towards Asia/Pacific, identified China as a threat to do business with, and painted Russia as a clearly defined enemy.

What it specifically did not say was anything about maintaining or strengthening the UK’s commitment to remaining the second strongest component within NATO. The surprise announcement to increase nuclear warheads and spend more on non-conventional threats – while running down conventional land forces, sounded like a clearly unworded warning to Berlin.

Retiring the UK’s minesweepers was a subtle point. Who is going to keep the supply lines across the Atlantic from the US open if not the Royal Navy? It would take two Russian minelaying trawlers to block 90% of Europe’s port capacity to receive US reinforcements should the Russians decide to get “outward bound”.

European politicians will be acutely aware that without a strong UK military component, Europe’s defence is untenable. “Airstrip One”, the unsinkable aircraft carrier moored off the European coast, is a critical logistical and strategic component to the strong US NATO presence in Europe. Europe is showing signs of being unwilling to submit to US pressure on China trade – but kow-towing to Washington is what may be required in return for a strong US commitment to Nato. Never forget that Germany’s fundamental political aim in Europe boils down to a strong alliance to defend it from a still vengeful Russia.

Yesterday’s defence paper from the UK, and a realisation on just how badly France has played Europe on vaccines, may well force a rethink in Germany about the European relationship with the UK. It may happen.. I have a feeling there will be new Governments in Germany and France in the near future…

After a much anticipated and hyped federal investigation and intelligence report into ‘Russia-linked cyber attacks’ found (gasp… or rather entirely as expected in yet the latest repackaged iteration of long deflated Russiagate) the Kremlin mounted an online ‘interference’ campaign related to the 2020 election, President Biden said in a bombshell ABC News interview that he agrees Vladimir Putin is a “killer” and that he’s going to pay a price. CNN reports sanctions are likely coming, specifically targeting “people close to Russia President Vladimir Putin as soon as next week.”

Here’s the key part of the pre-recorded interview with George Stephanopoulos which aired early Wednesday:

Asked whether he believes Mr Putin is a “killer” in a pre-taped interview that aired on Wednesday, the president responded: “I do.”

“The price he’s going to pay, you’ll see shortly,” he said.

Mr Biden recalled meeting Mr Putin, during which he reportedly told him that he “doesn’t have a soul”: “I wasn’t being a wise guy.”

“He looked back at me and said, ‘We understand each other’,” Mr Biden said.

EXCLUSIVE: Pres. Biden told @GStephanopoulos that he agreed Russian President Vladimir Putin is a “killer” and will “pay a price” for interfering in U.S. elections. https://t.co/rIe2ms8sSv pic.twitter.com/VtAGCvF9hp

— Good Morning America (@GMA) March 17, 2021

“I know him relatively well,” Biden had introduced the comments with, and added that “the most important thing dealing with foreign leaders in my experience… is just know the other guy.”

This past conversation wherein Biden says he told the Russian president he doesn’t think he has a soul has echoes with the 2001 face-to-face meeting between George W. Bush and Putin.

Bush came to the opposite conclusion at the time: “I looked the man in the eye…I was able to get a sense of his soul,” according to that famous and widely mocked moment of Bush’s soul-gazing…

Biden recounted to Stephanopoulos that during the “long talk” with the Russian leader, he informed his Russian president, “I know you and you know me. If I establish this occurred, then be prepared” — speaking of the cyberattack and election meddling allegations. 

“He will pay a price,” Biden said. “We had a long talk, he and I, when we — I know him relatively well. And the conversation started off, I said, ‘I know you and you know me. If I establish thisoccurred, then be prepared.”

Stephanopoulos asked: “So you know Vladimir Putin. You think he’s a killer?”

“Mmm hmm, I do,” Biden replied.

While the president said “you’ll see” that Putin is “going to pay,” he did not elaborate.

He did say, though, that it was possible to “walk and chew gum at the same time for places where it’s in our mutual interest to to work together.” —ABC News

The 15-page Office of the Director of National Intelligence assessment is being widely reported as concluding that central to the Russian ‘interference’ was an effort to promote “Donald Trump and right-wing conspiracy theories in an attempt to discredit Mr Biden.”

…So that’s what it’s all about, apparently – resurrecting the Russiagate farce and repackaging it in different form after it failed to “stick” despite the years-long obsession of the media and political pundit class.

Meanwhile the Kremlin indicated Wednesday it’s taking “necessary measures” to prepare for any looming new US sanctions expected in the wake of the intelligence report, the conclusions of which it’s vehemently denied. Russian government spokesperson Dmitry Peskov slammed the allegations and “baseless” and ultimately “not backed by any evidence”. 

The Russian ruble tumbled on the headline Wednesday…

…sinking down more than 1.5% against the dollar after Biden’s remarks aired, the most significant intraday drop since Feb. 25.