So this week, I am going to try something different with the blog post and newsletter. Quite often I try and stick to a single theme or topic, but there has really been a lot going on in the markets and perhaps there is merit in highlighting some of these.
They have a bearing on the global investment approach in aggregate and factor into the analysis and asset allocation discussions I have with many clients, so I felt it apt to highlight some of the key recent flashpoints which have made the headlines. The beauty of global macro is that there is always so much on the go, so to contextualise this, even if the implications are incremental at first, is key.
Lets kicks off with the headline. It’s US Thanksgiving weekend this weekend and also time for the infamous Black Friday! But if you are really looking to get something on the cheap, perhaps the Turkish lira may tickle your fancy.
The Turkish currency has been on a tear, pushing briefly above TRY13/USD before pulling back somewhat today. Last year around this time, it was around TRY 7.87/USD. Now remember, the higher number here means a cheaper currency. So the lira is around 40% cheaper than it was last year this time. Just in time for Black Friday.
A quick synopsis, Turkey’s President doesn’t like higher interest rates and prefers if rates are cut to stimulate growth and exports, inflation be damned. Previously central bank governors have lost their heads (not literally) for hiking rates to control double digit inflation. After the deputy governor at the Turkish central bank was sacked last month, perhaps the current incumbent deemed it appropriate to ‘consider’ the president’s requests. Policy rates have been slashed by around 500 bps since September to around 15%. Inflation runs around 20% and the Turkish 10 year is around 21%. Not a great set up, but, its been a long running flashpoint.
An ideological hurdle insofar as inflation targeting vs. growth (at any cost) is a tricky one especially when the empirical evidence is stacked in favour of the former. For now, the pain point is Turkish inflation and sentiment. Erdogan has an election next year. I don’t think we’re done yet.
Implications: pressure on the Lira tends to spill into EM sentiment in general. There has also been a strongly bid US dollar so it looks ugly for now. Long term, reform is needed and other EM’s should take heed as Turkey conducts this ‘experiment’.
Other central banks
Jerome Powell was nominated as Fed Chair with Lael Brainard as Vice Chair. This was a largely expected outcome. What does it mean? Steady hand at the wheel as we navigate the ‘Taper’ waters and head toward some form of ‘lift off in rates in 2022/23?’. Fed minutes this week.
The SARB hiked policy rates in South Africa much to the chagrin of certain local interest groups. It was not unanimous. The SARB has a history of caution and is arguably ahead of the curve. I don’t fault the move, there is sufficient reasons to be cautious at this juncture. For more, just look at the Turkey story above… more need not be said.
Mozambique and New Zealand hiked rates too. So lets see how this trend plays out. I think that there is some scope to go in terms of timing of hikes globally as well as how much pressure needs to manifest before central banks reverse tack. We are increasingly see a multi-speed world.
Implications: Slow and steady wins the race. Major central banks cannot upset the applecart too much, so moves will be incremental and measured.
Monster Energy Drinks
If central banks are keeping you up at night, its likely that you may need a ‘pick me up’. Monster Energy Drinks may be your poison of choice. But interestingly, the company behind this, Monster Beverage is rumored to be considering a merger with Constellation Brands, (owner of the unfortunately named Corona Beer and other brands).
Monster is a wonderful example of a global company built by South African expats and the journey is far from over for the business and the brand. This is just one of the companies that we have already covered in a weekly Magic Markets Premium report and podcast.
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Remember, our free weekly show is still going strong. In Ep 52 of Magic Markets (our one year anniversary!) we discussed a high-level view on Q3 earnings in the US and the potential impact on different sectors of an inflationary environment.
Shortages, fuel, ‘gas fees’ and private jets
It’s a tough time being a billionaire. The private jet shortage isn’t a new story but is worth including in this segment as it play nicely with the fact that the world is facing an energy price push.
We discussed the energy shortages on the blog before, but its gotten so bad that major nations have all decided on a coordinated release from strategic reserves. The US alone is set to release 50 m barrels with releases planned from China, India, Japan, South Korea and Britain.
Crude dipped briefly to the mid $70’s before resuming its uptrend. There’s blood in the water and the tick up in prices despite a strategic release is signifying how tight the system really is. Short of a boost in OPEC production on top of this, oil remains supported. I was caught wrong footed on the oil trade earlier this year when I thought we may see a return to the $60’s range more sustainably. Demand’s held up, supply’s been tighter than I expected and all this despite the risk of lockdowns looming in Europe again (more on this below).
And its not just the physical gas bills which have gone up. If you haven’t been watching the crypto space, its fascinating. ConstitutionDAO (DAO stands for Decentralized Autonomous Organization) set out to buy the US Constitution. It raised around $40m before losing out at the auction to Ken Griffin.
Since it lost its bid, you would argue that it needs to return the money raised except that ‘gas fees’ or as the uninitiated crypto follower would call it, transaction costs via the Ethereum network are high enough that for anyone contributing less than around $200, a round trip would all but wipeout your contribution! Makes for interesting reading.
Implications: Fill up your tank and know what your YOLO crypto moment actually means financially and logistically.
Germany, Austria, COVID, and Merkel
So unfortunately, this dreaded pandemic is not behind us. Its already starting to weigh on growth expectations and being reflected in some unease in certain market sectors. Germany is considering renewed lockdowns while Austria are facing riots as lockdowns earn the ire of a frustrated populace.
Fourth waves are upon us. Vaccines for kids are being authorised in North America. I have resigned myself to the fact that some form of COVID is likely with us for the foreseeable future and perhaps the COVID vax will become like an annual flu shot.
While COVID is not going away, Angela Merkel is. As one of the longest standing world leaders, she has earned a welcome retirement. Germany has managed to put together a coalition which will take the reigns after Merkel. What the government will also need to do will be to rally behind regional efforts to put Brexit tensions and friction behind them. Watch this space.
Implications: European growth is dependant on a strong and cohesive Germany. EURUSD and GBPUSD have been lagging but that’s also largely a Dollar story.
Xi is sticking around
Ok, so I know that the 3rd term for President Xi Xinping is only up for discussion in 2022, but recent changes in China have been fascinating. The 6th Plenum conducted recently is usually a process to look back at the party’s progress over 100 years except that this time around, it was quite forward looking.
An interesting development is the framing of President Xi coming out of the Plenum. A resolution on the party’s history has resolved that President Xi’s leadership is largely an outcome of history. No this may seem trite to the casual observer except that it entrenches the path to not only reappoint Xi for a 3rd term next year, but also to elevate him in the pantheon of Chinese political culture, bringing him on par with Mao Zedong and Deng Xiaoping.
Why is this important? It will embolden Xi to make deeper structural changes as he attempts to ‘Rejuvenate’ China. It also implies a more confident Xi who is likely to be more forceful on the global stage. The flashpoints will remain Hong Kong, Taiwan, South China Sea and beyond.
In fact, China’s ‘soft power’ is growing such that even Jamie Dimon has had to backtrack on a quip that JPM would outlast the CCP. It’s true, check it out.
Implications: China is important. China has also been a pain trade for me this year with some stocks down in excess of 30-40%! Ouch, its hurt and is mitigated only by position sizing within my wider asset allocation. More homework is required to understand the implications for Chinese policy in the coming years, but can you afford to not be invested in the region?
So that’s the smorgasbord of what’s been in the headline as well as some of the implications as you consider the macro and micro in your own approach to markets. If you enjoyed this format, please pop me a note as we try to evolve how and what we include in the blog to your interests.
Until next week, ciao.