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David Fuller and Eoin Treacy's Comment of the Day
Category - Global Middle Class

    Russia Sidesteps Sanctions to Supply Energy to Willing World

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    With Russia regrouping for a fresh offensive in eastern Ukraine, China is preparing to receive the first commodity shipments from Moscow paid for in yuan since several Russian banks were cut off from the international financial system. 

    Russian crude that would normally end up in refineries in Europe or the U.S. is heading for Asia, where buyers, particularly in India, are taking advantage of steep discounts. Shipments from the Black Sea and Russia’s Baltic Sea ports of Primorsk and Ust-Luga started heading to India in March, following earlier cargoes from the same terminals to China.

    EU foreign ministers are likely to discuss imposing an oil embargo on Russia when they meet next week, said Josep Borrell, the bloc’s foreign policy chief. Speaking in Brussels on Thursday, Borrell said that a ban on oil is not in the latest sanctions package, though he expects ministers will tackle it on Monday, “and sooner or later -- I hope sooner -- it will happen.”

    Russia’s natural gas supplies, which like oil have yet to be sanctioned by the EU, continue to flow freely as Europe faces an energy cost crunch that’s prompting governments to think twice before taking any action that might see prices rise further. 

    Italy, one of the biggest buyers of Russian gas, said Wednesday that it would support a ban if the bloc was united behind the idea, a move that Germany among others has so far opposed.

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    One Trend Must Change Soon to Avoid a UK Recession

    This article from Bloomberg may be of interest. Here is a section:

    If the economy is going to avoid recession this year, consumers will need to dip into savings accumulated during the pandemic. So far, the evidence suggests this hasn’t happened. That’s worrying given the deep cost-of-living crisis facing the country.

    It’s well documented that the combination of enforced saving during lockdowns and massive government income protection programs has seen household balance sheets to balloon over the past two years.

    The cash, once seen as rocket fuel for the recovery, is now being viewed as a way for households to maintain the volume of goods and services they consume while inflation spirals.

    That’s what made the latest credit data from the Bank of England all the more concerning. As yet, consumers have shown no willingness to dip into the 200 billion pound slush fund they have amassed even though inflation continues to run well ahead of income growth.

    With inflation set to accelerate further those cash reserves will need to be drawn on if the economy is going to avoid falling off a cliff. In our forecast, we have assumed 10% of the stock of deposits is used over the next year, when the hit to spending power will be at its most intense. Consumption still contracts on a quarterly basis in 2Q and 4Q, but the economy avoids recession. About 25% of the pandemic savings are used over our whole forecast period to 2025.

    Of course, it may be that as the squeeze on household budgets intensifies, it forces people to use the cash. It’s also possible that rather than run down assets, households borrow. For low income workers, who weren’t able to bolster their savings during the pandemic, that may be the only option if they want to maintain their spending. With that in mind, it was notable that the same credit data showed a big increase in unsecured net borrowing.

    Still, with consumer confidence at levels that are normally associated with recessions, the worry is that caution prevails and the economy takes a far bigger hit than we expect this year.

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    New York Jet Fuel Soars to New Height as Inventories Dwindle

    This article from Bloomberg may be of interest to subscribers. Here it is in full:

    Wholesale jet fuel prices in New York continue to soar unabated, touching a fresh record for the second consecutive trading day.  

    Jet fuel on the spot market added another 93 cents, surging to $7.61 a gallon on Monday, a new high since Bloomberg started publishing these prices in 1988. Regional stockpiles are at their lowest for this time of year since 2015.

    For much of the pandemic, U.S. refiners prioritized making other fuels such as gasoline and diesel with air-travel demand lagging the pace of recovery in other oil markets. Fuel makers began raising jet fuel production in late March as prices suddenly soared above diesel for the first time since Jan. 2020. Fuel accounts for up to a third of operating costs for airlines. Some airlines were already cutting flights as a result of expensive fuel back in early March.

    Potentially bringing some relief to East Coast inventories, a jet fuel cargo was diverted mid-voyage to New York from Spain with an estimated arrival next week. Wholesale jet fuel prices have more than doubled within the past month.

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    Russia's Other War of Attrition Is Against Europe

    This article by John Authers for Bloomberg may be of interest. Here is a section:

    In a provocative but persuasive column for the New York Times, Bret Stephens suggests that Russia’s war aim is not preventing NATO enlargement, or rebuilding the Soviet empire, but cementing its status as an energy superpower:

    Suppose for a moment that Putin never intended to conquer all of Ukraine: that, from the beginning, his real targets were the energy riches of Ukraine’s east, which contain Europe’s second-largest known reserves of natural gas (after Norway’s). Combine that with Russia’s previous territorial seizures in Crimea (which has huge offshore energy fields) and the eastern provinces of Luhansk and Donetsk (which contain part of an enormous shale-gas field), as well as Putin’s bid to control most or all of Ukraine’s coastline, and the shape of Putin’s ambitions become clear. He’s less interested in reuniting the Russian-speaking world than he is in securing Russia’s energy dominance.

    Even if this is not the aim, the possibility of entrenching Russia’s energy power is now at the center of the broader conflict between Putin’s Russia and the West. 

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    Biden Says Wait and See on a Russian Pullback

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    Ukraine and Russia failed to clinch a cease-fire in talks that ended in Istanbul on Tuesday, with Moscow saying it will reduce military operations in areas where its forces are being pushed back and Kyiv calling for security guarantees from European Union and NATO members.

    U.S. President Joe Biden said he’ll see how Russia acts on a pullback and “see what they have to offer” in further talks with Ukraine.

    A Ukrainian negotiator said his country is seeking guarantees for territory that doesn’t include Russian-controlled areas and that Kyiv is willing to discuss the status of occupied Crimea. Russia indicated a meeting was possible between President Vladimir Putin and his Ukrainian counterpart Volodymyr Zelenskiy.

    Russia’s delegation left Istanbul, and no date or time was set for any potential future talks, according to a person close to the Moscow delegation. European nations expelled more Russian diplomats from their capitals, even as stocks rose and oil fell on optimism for progress in the negotiations.

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    (Don't Fear) The Yield Curve, Reprise

    Thanks to a subscriber for this article from the Federal Reserve which may be of interest. Here is a section:

    It is not valid to interpret inverted term spreads as independent measures of impending recession. They largely reflect the expectations of market participants. Among various terms spreads to consider, the 2-10 spread offers a particularly muddled view. Especially in the present circumstances when the 2-10 spread is very much out of step with the near-term forward spread, which offers a much more precise view of market expectations over the next year and a half, it is difficult to concoct a reason to be concerned about the flattening of the 2-10 spread. In contrast, if and when the near-term spread does contract, we know that investors will then be expecting a cessation in monetary policy tightening. While such a shift in expectations could well be precipitated by future concerns about a recession, that need not be the case. A more benign cause would be a marked easing in inflation and inflation expectations that allow for a cessation of policy firming.

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    A Revolution in British Meritocracy

    This article for Bloomberg may be of interest to subscribers. Here is a section:

    Nowadays, Brampton Manor Academy regularly gets as many pupils into Oxbridge as Eton College, the alma mater of Cameron, Johnson and the majority of the privileged faces staring out from the 1987 photograph. It does this by dint of high-expectations and relentless discipline. Pupils arrive early in the morning and stay on into the evening in order to accumulate extracurricular activities. Slacking is not tolerated. Pupils are expected to be smartly dressed and always on the ball. Eton — the quintessential, privately-funded British public school — charges about £50,000 a year and selects from the whole world. Brampton Manor charges nothing and selects from one of the poorest boroughs in London. The majority of pupils are from ethnic minorities and one in five gets free school lunches because of their parents’ low incomes.

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    Now That Powell's Convinced Markets He Means It

    This article from John Authers at Bloomberg may be of interest to subscribers. Here is a section:

    Market-based expectations for how the Fed moves its target fed funds rate have also broken out. The shift in expectations has come with breathtaking swiftness. The following chart shows implicit expectations for rates after each of the next seven meetings as they stood on Dec. 31, where they had moved by the day the tanks entered Ukraine, and where they are now:

    Bear in mind that as the year began, CPI had already topped 7% for the first time in four decades. It’s remarkable both how long it took for investors to come around to expecting a sharp monetary tightening, and how swiftly that realization has now taken root.

    What does this imply for asset allocation? Higher bond yields tend to be bad news for stocks if they are part of a Fed tightening, and make high stock valuations harder to justify. However, expectations of a more aggressive Fed are even worse for bonds. The mathematics of the bond market on this point is
    inexorable. If rates and yields are going up, then bond prices have to come down.

    And, indeed, just as those who’ve been saying There Is No Alternative (to stocks) would have predicted, this news has been far worse for bonds than stocks, meaning that the returns for those who are long in stocks relative to bonds have surged to yet another new high:
     

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    Email of the day on how many interest hikes are likely

    I and probably many others will be intrigued in your contrarian view that the Fed will hike once and be "done". Whereas as per enclose Bloomberg article others expect seven rate hikes this year.

    If only one rate hike does that mean USA stock markets will revert to their bull run?

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