Month: May 2021

The recent surge in retail trading, which has seen the WallStreetBets army flood back into meme stocks for the second time since the epic February short squeeze sending names like AMC and GME soaring even as other high risk-reward corners of the market have remained stagnant…

… may prove to be – in the Fed’s favorite parlance – “transitory.”

The reason fort his is that unlike the first quarter when we saw a record flood of new capital entering equity funds and validating the retail buying…

… this time the flow of funds is in the opposite direction.

According to BofA’s latest Flows Show, this week’s EPFR data revealed a broad defensive retrenchment, culminating with the largest inflow to cash since Apr’20 & largest inflow to gold in 16 weeks ($2.6bn); and while broad inflows to equities continue ($512bn YTD) & largest inflow to Europe since Feb’18 ($2.8bn); we just experienced the largest 3-week outflow from tech since Mar’19 ($1.5bn) as well as the largest outflow from banks since Jun’20 ($0.6bn).

Refinitiv confirms this, reporting this morning that “global money market funds saw huge inflows” amounting to no less than $53.2 billion, the highest in four weeks, in the week ended May 26 amid caution that quickening inflation could alter the direction of U.S. monetary policy and shake up asset markets.

Despite the massive flows into the safety of money market, Refinitiv also finds that global equity funds attracted solid inflows of $8.84 billion, a 46% increase over the previous week, as stocks rallied somewhat after U.S. Federal Reserve officials reaffirmed a dovish monetary policy stance: U.S. equity funds received $2.87 billion, while European equity funds and Asian equity funds obtained $2.47 billion and $1 billion, respectively.

Where the EPFR and Refinitiv data diverge is when it comes to tech. Contrary to the EPFR observation, Refinitiv reports that tech funds attracted inflows worth $546 million after three straight weeks of outflows, while financial sector funds faced their first outflow in 16 weeks, hit by a decline in bond yields.

Still, the defensive bias prevailed with global bond funds receiving inflows worth $8.25 billion, a 26% increase over previous week, while precious metal funds saw net purchases worth $1.37 billion, the biggest in 16 weeks, as gold prices surged to a 4-1/2-month high this week.

Finally, the reflation narrative appears to be running on fumes according to the latest reversal in emerging market flows: Refinitiv’s analysis of 23,865 emerging-market funds showed equity funds had net outflows worth $463 million, while bond funds had inflows worth $420 million after outflows in the previous week.

America’s top virologist, Anthony Fauci, argued in 2012 that the risks of a lab accident sparking a pandemic are outweighed by the potential benefits of manipulating viruses via gain-of-function research, according to previously unsurfaced remarks reported by Sharri Markson via The Australian.

“In an unlikely but conceivable turn of events, what if that scientist becomes infected with the virus, which leads to an outbreak and ultimately triggers a pandemic?” Fauci wrote in the American Society for Microbiology in 2012, adding “Many ask reasonable questions: given the possibility of such a scenario – however remote – should the initial experiments have been performed and/or published in the first place, and what were the processes involved in this decision?”

“Scientists working in this field might say – as indeed I have said – that the benefits of such experiments and the resulting knowledge outweigh the risks,” Fauci continued. “It is more likely that a pandemic would occur in nature, and the need to stay ahead of such a threat is a primary reason for performing an experiment that might appear to be risky.“

In the paper, Dr Fauci also writes: “Within the research community, many have expressed concern that important research progress could come to a halt just because of the fear that someone, somewhere, might attempt to replicate these experiments sloppily. This is a valid concern.”

Dr Fauci has led the US response to the outbreak but is now facing serious questions about his role in funding the radical experiments being conducted inside the Wuhan Institute of Virology.

…

Dr Fauci on May 11 reversed his position on whether Covid-19 had leaked from the WIV, and said he was now “not convinced” the virus had developed naturally and authorities needed to find out “exactly what happened”.

Gain-of-function experiments – often with bat-derived coronaviruses – centre on manipulating, splicing and recombining viruses potentially into strands of highly infectious and little understood diseases. -The Australian

This and more on Fauci is from my book “What Really Happened in Wuhan”… you can pre-order it on Amazon https://t.co/od8I1zLUSh

— Sharri Markson (@SharriMarkson) May 28, 2021

Earlier this month, Senator Rand Paul (R-KY) went to town on Dr. Anthony Fauci Tuesday during a hearing in front of the Health, Education, Labor and Pensions committee. Paul alleged that the National Institutes of Health (NIH) had used a middle-man to funnel money to the Wuhan Institute of Virology via EcoHealth Alliance – which worked with the lab on bat coronavirus projects.

Paul specifically referenced “gain-of-function” research which in this case has been focused on how to make animal viruses more transmissible to humans – specifically bat coronaviruses.

“Government scientists like yourself who favor gain of function research,” Paul began…

…only to have Fauci interject “I don’t favor gain of function research in China,” adding “You are saying things that are not correct.”

Paul pushed back – continuing:

“[Those who favor gain of function] say that COVID-19 mutations were random and not designed by man.”

“I do not have any accounting of what the Chinese may have done,” Fauci shot back, adding that he’s in favor of further investigation, but that the NIH had nothing to do with the origins of COVID-19.

“We have not funded gain of function research on this virus in the Wuhan Institute of Virology,” he added.

“No matter how many times you say it, it didn’t happen.”

As we noted in March, the US National Institutes of Health (NIH) – headed by Fauci, “had funded a number of projects that involved WIV scientists, including much of the Wuhan lab’s work with bat coronaviruses.”

Zhengli Shi got shipped out to Wuhan lab after her paper (2015) regarding attaching a sequence coding for a spike protein that attaches to human ACE2 receptors.

Why?

That’s gain of function research, illegal in the USA in 2014.

Fauci and Peter Daszak funded her in Wuhan. Link

— Noelle Smith (@425Noelle) May 28, 2021

Via our May 11 report:

In 2017, Fauci’s agency resumed funding a controversial grant without the approval of a government oversight body, according to the Daily Caller. For context, in 2014, the Obama administration temporarily suspended federal funding for gain-of-function research on bat coronaviruses. Four months prior to that decision, the NIH effectively shifted this research to the Wuhan Institute of Virology (WIV) via a grant to nonprofit group EcoHealth Alliance, headed by Peter Daszak.

The NIH’s first $666,442 installment of EcoHealth’s $3.7 million grant was paid in June 2014, with similar annual payments through May 2019 under the “Understanding The Risk Of Bat Coronavirus Emergence” project.

Notably, the WIV “had openly participated in gain-of-function research in partnership with U.S. universities and institutions” for years under the leadership of Dr. Shi ‘Batwoman’ Zhengli, according to the Washington Post‘s Josh Rogin.

Meanwhile, Fauci ‘rammed through’ gain-of-function research in December of 2017 without approval.

Via The Australian:

Multiple Trump administration officials told The Weekend Australian Dr Fauci had not raised the issue of restarting the research funding with senior figures in the White House.

“It kind of just got rammed through,” one official said.

“I think there’s truth in the narrative that the (National Security Council) staff, the president, the White House chief-of-staff, those people were in the dark that he was switching back on the research.”

The Weekend Australian has also confirmed that neither Mike Pompeo, the then director of the Central Intelligence Agency, nor National Security Council member Matthew Pottinger, was briefed.

The experiments are also opposed by prominent scientists, including the Cambridge Working Group of 200 researchers which issued a public warning in 2014.

“Accident risks with newly created “potential pandemic pathogens” raise grave new concerns,” the group’s letter read. “Laboratory creation of highly transmissible, novel strains of dangerous viruses, especially but not limited to influenza, poses substantially increased risks.

“An accidental infection in such a setting could trigger outbreaks that would be difficult or impossible to control. Historically, new strains of influenza, once they establish transmission in the human population, have infected a quarter or more of the world’s population within two years.”

And Steven Salzberg, of the Johns Hopkins School of Medicine, in 2015 said the benefits of gain-of-function research were “minimal at best” and they could “far more safely be obtained through other avenues of research”.

“I am very concerned that the continuing gain-of-function research on influenza viruses, and more recently on other viruses, presents extremely serious risks to the public health,” he wrote.

Worth the risk, Fauci says?

It was back in February when we first said that (almost) nobody was paying attention to the “mind-boggling liquidity” that was about to hit the markets in the form of hundreds of billions in cash released from the Treasury’s TGA account held at the Fed. This historic liquidity injection by the Treasury and not the Fed (which continues to this day to inject $120BN in liquidity monthly from its ongoing QE) was, as we put it, a form of backdoor QE, which would push asset prices higher and depress real rates. 

And while everyone knows that stocks have galloped higher since then – the S&P is now effectively at its all time high of 4,200, up from 3,800 at the start of the year, how has this tidal wave of liquidity impacted rates?

As DB’s Francis Yared writes in his “chart of the day”, while the US Treasury has disbursed significant amounts of its latest stimulus in March, a move which would be typically associated with higher real rates, US real rates have instead rallied ~20bp since early March in a move usually associated with additional Fed QE.

According to Yared, this apparent “puzzle” could be explained by what our readers already know: the US Treasury has massively drained its cash balance at the Fed. As shown below, the Treasury General Account has declined by USD640bn from USD1.5trn to USD866bn since March, a liquidity injection comparable to 5 months of QE.

Yared then explains something else our readers know: that “the decline in the TGA balance is an injection of liquidity in the system that will result in an increase in excess reserves. As some of the injected liquidity is likely to be reinvested in financial assets in general and US government bonds in particular, the liquidity injection could have a similar impact as QE“.

And that’s precisely what effect it is having, on both stocks and Treasuries.

That said, the party is almost over and looking ahead, the TGA balance is expected to fall to around 450bn by the end of July from $778BN currently but then quickly rise after to settle in a $600-800bn range.

But first, there is just too much liquidity in the system, and is why Fed’s ON Reverse Repo Facility is working overdrive to drain record amounts of reserves amid a massive shortage of collateral, hitting an all time high of $485BN today…

… in the process neutralizing increasingly larger amounts of liquidity.  But not for long: the Fed is expected to announce its tapering plans some time around, or just after, the late August Jackson Hole symposium – perhaps the September FOMC meeting.

This means that the impact of the backdoor QE should wane in the months ahead, and that peak liquidity momentum is just around the corner. Indeed, one can say that we are about to go from generous backdoor QE to “stealth “QT in Q3, as the US Treasury expects to rebuild the TGA to levels around 750bn by the end of September, in the process zapping liquidity by around 300bn in Q3 along the way according to Nordea, which paired with a potential tapering announcement from the Fed in September could prove to be a trigger for a surge in volatility and an important turning point for USD liquidity.

And speaking of Nordea, the bank expects a limited impact of the liquidity additions the rest of Q2, since the surge in overnight RRP (assuming there is no major crisis in the repo market now that half a trillion dollars in inert reserves are rolled over every night) usage acts as a counter-weight to the added liquidity and if the Fed decides to relax the criteria for the ON RRP facility even further in June, then it only adds to this point.

How to play it?

According to Nordea, the cross-currency basis swap “is probably the most “naked bet” on a reversal of USD liquidity trends (OIS/OIS xCcy would be the clearest bet). The recent positive repricing of the entire EURUSD xCcy basis curve is a consequence of the abundancy of USDs and it is starting to look almost historically cheap to receive the EURUSD xCcy curve. When the Fed finally launched tapering in late 2013, it proved to be the first warning signal of a reversal of the trend in the xCcy basis as well, which a subsequent year-long repricing of USD liquidity following the decision (see chart 4).”

The bank goes on to note that the combination of a fairly strong USD and a cheap USD in the xCcy basis is historically a rare  phenomenon – as shown by the yellow dot in the next chart – hinting that the current combination of levels is a kind of sweetspot for hedgers of USD assets.

Furthermore, Nordea notes that the xCcy basis is clearly correlated to global equity trends, and is currently 75% correlated to MSCI World on a running yearly basis, which leaves receiving the 5yr xCcy basis as a decent macro hedge from a portfolio perspective.

Why note just short stocks? Well, that’s possible – but remember that should markets crash, and they well might if there is a major liquidity regime shift, it will only invite the Fed to immediately step in and potentially go all in, buying up ETFs (like the BOJ) or even single name stocks. Impossible? Well, before March 2020 10 out of 10 very serious finance professionals also said it was impossible that the Fed would be buying corporate bonds and junk bonds ETFs in the open market. See how that worked out for them…

Once upon a time, we couldn’t go an hour without some dire news involving Deutsche Bank (and its tens of trillions of gross notional derivatives). Now, it’s Credit Suisse’s turn.

In what was at least the third flashing-red headline for the day referencing the scandal-plagued Swiss Bank, moments ago Bloomberg reported that Credit Suisse, still humiliated from the billions it lost on Archegos and Greensill and countless subsequent banker terminations and defections, has temporarily barred clients from pulling their cash from a feeder fund that that was sold as an investment option for rich clients at the bank’s wealth arm, and which invests with Renaissance Technologies “after the strategy tanked and investors rushed to exit.”

To be sure, Credit Suisse has every right to impose this gate: according to Bloomberg, the Swiss bank invoked a hold back clause, after assets in the CS Renaissance Alternative Access Fund slumped to about $250 million this month from approximately $700 million at the start of 2020. While investors are expected to receive 95% of their redemption requests after two months, the remaining 5% is expected to be paid out in January, after the fund’s year-end audit, the people said. Hold back clauses are a standard part of offer documents at some U.S. based hedge funds.

The Credit Suisse feeder fund lost about 32% last year, identical to the decline in the Renaissance Institutional Diversified Alpha Fund International fund that it invests into, as the latest HSBC hedge fund report notes.

The troubles at the Renaissance market-neutral fund have been well publicized: while it is regarded as one of the most successful quant investing firms in the world – mostly thanks to the stellar performance of its “friends and employees only” Medallion fund, the RIDA fund which is open to external investors was rocked by billion of dollars in redemptions earlier this year after unprecedented losses in 2020. Three of its funds open to external investors fell by double digits last year.

As Bloomberg notes, like Credit Suisse, the Renaissance fund – which allows investors to take out money every month – also has the ability to hold back but unlike Credit Suisse – RenTec is not invoking the clause and hasn’t ever done so. As shown in the table above, the fund is up 6.54% this year through May 28 after last year’s losses.

This suggests that in addition to the massive reputational damage that it has suffered after the implosion of the bank’s supply-chain finance funds linked to Greensill Capital and the collapse of family office Archegos Capital Management where the Credit Suisse prime brokerage lost around $5 billion, the Swiss bank is starting to experience a liquidity crunch too as that would be the only justification for gating its feeder fund clients.

The question is whether this latest troubling development sparks a broader liquidity run on the troubled Swiss bank, one which could make all of its existing troubles pale by comparison.

We may have a little more insight as to reports yesterday that Tesla was pre-paying for semiconductor parts to secure supply. Yesterday, we guessed that Tesla’s new “pre-payment” terms could be a result of suppliers showing little patience with the automaker, who has over $6 billion in payables.

But a new report overnight from DigiTimes Asia sheds more light on the situation, leading us to believe that Tesla could simply be short of supplies and desperately in need of parts to be able to hit production targets. 

The report notes that Tesla is “scrambling” for instrument cluster supplies:

Tesla is reportedly approaching IC suppliers in Taiwan, Korea and the US, seeking to secure steady supplies of automotive chips with advance payments, according to industry sources.

It might be difficult for Tesla to achieve significant results, given the IT and automotive supply chain makers have been competing for the foundry capacity since the fourth quarter of 2020, said the sources.

In the first quarter of 2021, there were reports saying that Tesla had already piled up enough IC parts for its target production of 500,000 EVs.

However, speculations have emerged recently indicating the firm is short of semiconductor parts, and it has even admitted that it has been feeling the pinch.

Additionally, the reasoning behind Tesla recently choosing to remove radar from its vehicles – which caused it to lose Consumer Reports’ “Top Pick” status this week – may also have to do more with a lack of supply than innovation. “The firm’s recent decision to remove mmWave radar sensors from its EVs highlights the shortage of its IC parts,” the DigiTimes report noted. 

We noted yesterday that Tesla was reportedly in talks with semi companies in Taiwan, South Korea and the US. The chips that Tesla uses for its vehicles are mainly made in Taiwan and South Korea. Some chipmakers have been allowing large customers to make upfront deposits to secure orders at fixed prices. While that practice is outside the norm generally, it has come to prominence once again due to the supply shortage. 

CW Chung, an analyst at Nomura, noted that companies like Samsung can change contracting arrangements with companies like Tesla who seek specialized chips: “Given the current capacity shortage, Samsung may give dedicated capacity to companies like Tesla, which uses chips with a longer life cycle.”

Recall, we also noted days ago when Tesla said it was ditching radar in favor of using a “camera-focused Autopilot system” and that the change is going to apply to both Model 3 and Model Y vehicles in North America, starting this month.

The move comes as scrutiny of both “Autopilot” and “Full Self Driving” – two features that clearly don’t live up to their name the way they are labeled – has intensified. Additionally, as CNBC noted, “radar sensors are relatively expensive” and this could be yet another cost for Tesla to try and cut. 

“Pure vision Autopilot is now rolling out in North America,” Tesla CEO Elon Musk said on Twitter, referring to the change, earlier this week. Recall, Tesla had to quickly shelve its last Full Self Driving beta after numerous humiliating videos surfaced of the software having repeated issues and quickly went viral. The Full Self Driving beta v8.2 was thrashed by critics like Road and Track who called it “laughably bad” and “potentially dangerous”.

“If you think we’re anywhere near fully autonomous cars, this video might convince you otherwise,” Road and Track wrote about Tesla’s Full Self Driving feature. The article referred to the feature as “morally dubious, technologically limited, and potentially dangerous”. 

Tesla’s blog on its website said:

We are continuing the transition to Tesla Vision, our camera-based Autopilot system. Beginning with deliveries in May 2021, Model 3 and Model Y vehicles built for the North American market will no longer be equipped with radar. Instead, these will be the first Tesla vehicles to rely on camera vision and neural net processing to deliver Autopilot, Full-Self Driving and certain active safety features. Customers who ordered before May 2021 and are matched to a car with Tesla Vision will be notified of the change through their Tesla Accounts prior to delivery.

For a short period during this transition, cars with Tesla Vision may be delivered with some features temporarily limited or inactive, including:

• Autosteer will be limited to a maximum speed of 75 mph and a longer minimum following distance.
• Smart Summon (if equipped) and Emergency Lane Departure Avoidance may be disabled at delivery.

In the weeks ahead, we’ll start restoring these features via a series of over-the-air software updates. All other available Autopilot and Full Self-Driving features will be active at delivery, depending on order configuration.