Rabobank: Really Black Friday
By Michael Every of Rabobank
Welcome to Black Friday, where the emphasis is sadly on the darker interpretation of that title. I wish I could be referring to the classic South Park trilogy about the zombie-like surge of US consumption the day entails, but five far more serious developments are underway.
#1. Key US banks scrambling to revise their rates views in the wake of the Fed’s minutes. One headline is the Fed now seen accelerating tapering to $30bn a month, ending it by mid-2022, and hiking in June, September, and December, then twice in 2023, taking Fed Funds up 125bp. That would either see US 10-year yields move significantly higher, or the US curve threaten to invert. Are markets and the economy set up to handle that pace of hiking? Are emerging markets? What do they say about tech – “Move fast and break things”…well, the shoe may soon be on the other foot. (And note the Wall Street Journal suddenly grasping rents are about to lift US CPI sharply: it is not just used cars, folks.) Presuming Powell and Brainard get approved by the Senate ahead, would both back that course of action over time?
#2. The B1.1.529 Covid variant suddenly surging across Southern Africa has mutations that could potentially mean higher transmissibility and the ability to evade vaccine defenses. Scientists and the financial press are worried in equal measure, and are talking about it as potentially the ‘next Delta’. There are already fresh travel restrictions from six African countries to the UK. Using plain language to not be ‘Ivermectine-d’ or ‘Nordea-d’, despite the market’s focus on the ever-increasing vaccination threshold level that means ‘Covid freedom’, science always said a non-sterilizing vaccine and a mutating coronavirus were not a combination guaranteed to see Covid disappear like Smallpox. Rather, it could keep adapting to move ahead of vaccines. This is not to be anti-vaccine, but to stress that in a ‘war’ against a coronavirus, both sides can and do change strategy.
#3. The Russian build-up vs. Ukraine has military experts as concerned as Covid scientists:
The UK is sending its armoured division back to Germany again, whose new government promises a “less naïve” foreign policy towards Russia and China, and higher defence spending;
Rochan Consulting says the emptying of Russian storage facilities is a very ominous sign, as is logistics (sub)units being activated, while there has also been a sharp increase in anti-Ukraine and anti-NATO rhetoric coming from Moscow;
The CNA Director of Russian Studies underlines Russia has moved its red lines from Ukraine never joining NATO to NATO defence cooperation (e.g., arms transfers, use of territory, etc.) – which is already underway on the ground; and
The Director of @RiddleRussia talks of an imposed choice between Finlandization and war.
Suggestions are that were war to occur, Russia could at least destroy the dam in Ukraine stopping the flow of water to Crimea, and seize the key Black Sea port of Mariupol, but may grab land up to the border of Moldova. In direct terms for markets, the potentially impacted areas account for 32% of Ukraine’s wheat production and 43% of barley; but a border-changing Russia-Ukraine conflict could up-end the world order in ways markets aren’t willing or able to price for.
#4. Bloomberg says ‘China’s Property-Led Economic Slowdown Shows No Signs of Ending’, as car and home sales dropped again in November according to their leading indicators. They also say only export orders are doing well and domestic demand remains in the doldrums. Perhaps that’s why the China Securities Journal reports ‘relatively high mortgage interest rates in some Chinese cities may be lowered in the future.’ Via lower bank profits or targeted rate cuts, and is this not a retreat from the retreat from asset-bubble based growth? Caixin global reports trust firms are pulling back from property, cutting off funding for developers and bubblicious income for households. The state *might* fill the lending gap for developers, but who fills the gap for households relying on trust returns to save/consume? Many questions: few answers – and slower Chinese growth – and for Tencent, given it is again in regulators’ crosshairs, it seems. By the way, if you want to see consumption, try Australia, where retail sales just leaped 4.9% m/m vs. 2.2% expected. The problem is that the RBA now have even more reason to be nervous: if you think the Chinese economy has problems dealing with a property bubble…
#5. The US is threatening to confront Iran at the International Atomic Energy Agency (IAEA) next month if it does not cooperate more with the nuclear watchdog, which could undermine the foot-dragging, I mean talks, about reviving the 2015 deal. Iran still insists the US has to walk back all sanctions first, and promise to never renege on the deal again, which is undeliverable by any president. Some observers say the US, with an eye on Russia and China, is not willing to act regardless of what Iran does. However, Israel has made its own position clear: its defence minister hopes a better nuclear deal will come out of upcoming talks, but is hedging his bets and building up military capabilities; and the prime minister says he will not be bound to the deal regardless.
Overall, therefore risk is off so far (albeit in Asian time, as the US still rubs its belly full of Turkey). US 2-year yields are down 3bp to 0.61% and 10s down 4bp to 1.60%, while USD/JPY is back under 115. And, as a reminder of how much wilder things can always get in markets, the Wall Street Journal reports ‘Turks Abandon the Lira for Dollars as Currency Crisis Deepens’. Let’s hope for the best, but imagine how the five risk points flagged above could conflate for both developed and emerging markets in a worst-case scenario.
Happy really Black Friday.
Fri, 11/26/2021 – 11:00