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

    Brazil Analysts See Inflation Further Above Central Bank Target

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

    Brazil analysts raised their 2022 inflation expectations further above target for the third week in a row as the central bank prepares to lift its interest rate into double digits at Wednesday’s policy meeting.
    Inflation will hit 5.38% in December, above the prior estimate of 5.15%, according to a weekly central bank survey published on Monday. Analysts also lifted their 2023 year-end consumer price forecast to 3.50% from 3.40%. 

    Policy makers led by Roberto Campos Neto are expected to deliver their third consecutive 150-basis point rate hike this week, lifting the benchmark Selic to 10.75%. Inflation slowed less than expected in mid-January, as factors including global supply-chain disruptions pressured prices of transportation and
    durable goods. Analysts see borrowing costs at 11.75% in December. 

    The central bank risks missing this year’s inflation target of 3.5%, which has a tolerance of plus or minus 1.5 percentage points.

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    Email of the day on the green revolution

    Thanks for the great service pulling the noise out of market trends for us. We especially enjoy what my wife affectionately calls the “Big Picture Long-Winded” Friday recordings. Regarding the possible rotation into the renewable/green economy do you have any ideas on Industries/companies that could benefit from the build out? Or would the safer play be directly in the commodities needed for the grid, vehicles, batteries, and such? Hoping to get to another Chart Seminar before too long.

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    The Sell-off

    Thanks to subscriber for this chartbook from Goldman Sachs which may be of interest. 

    London Gets Vote of Confidence From Big Finance Firms, EY Says

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

    Most global finance firms are planning to establish or expand operations in the U.K. in 2022, according to a survey of 40 key decision-makers in the industry.

    Around 87% of global financial services investors expect to invest in the U.K. next year, EY’s latest poll found. That’s the highest since the professional services firm started tracking sentiment toward the country in 2016, the year of the Brexit vote, and compares to 50% in early 2021 and a low of 11% in 2019. 

    The data is a boost for the City of London, whose credentials as an international finance center are being questioned since the U.K. left the European Union. Meanwhile, 90% of respondents said the U.K. offers the right conditions to invest in assets with environmental, social and governance attributes.

    “This is testament to the stability and resilience of the mature U.K. market which continues to ably withstand the material challenges and uncertainty of both the pandemic and Brexit,” said Anna Anthony, EY’s financial services managing partner for the U.K.

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    The New Agri-Giant Invading the U.S. Heartland

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

    Viterra is already the world’s largest wheat trader, thanks to its investments in major exporting regions including Canada, Australia, Argentina, and the former Soviet Union. If Gavilon in the U.S. is added to that impressive portfolio, it will be the kind of concentration — and power — that governments worry about. Indeed, Beijing may be even more concerned about the deal than Washington. China, which is spending billions of dollars to build its own state-owned agricultural trading house, is unlikely to welcome further consolidation in an industry it relies on to feed more than one billion people.

    Regulatory concerns aside, the deal is a steal. Glencore, founded by the late U.S. fugitive Marc Rich in the 1970s, built its agribusiness through acquisitions. In 2012, it beat out ADM and purchased Canadian grain trader Viterra Inc. for 6.1 billion Canadian Dollars ($4.8 billion). Today, Glencore controls just under 50% of the enlarged Viterra business, with 49% owned by two Canadian pension funds and a residual percentage controlled by the staff.

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    Partygate Fuels U.K. Tories Growing Alarm About Boris Johnson

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

    But it is the reaction of his own Tories that will be of most concern to the prime minister. One Conservative member of Parliament privately described the mood among colleagues as sulfurous, while predicting the premier will survive because he’s prepared to brazen it out. Another, though, said the scandal will ultimately mean the end of the road for Johnson.

    It’s a significant moment of peril at the worst possible time for Johnson, who had hoped to begin 2022 with a reset after a turbulent end to last year when support for the Conservatives plummeted in the polls.

    A string of allegations about other rule-breaking gatherings in Westminster -- dubbed “partygate” by the U.K. media -- was compounded by a damaging loss in a special election and widespread criticism over how he had funded the refurbishment of his Downing Street flat.

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    The Fed Minutes That Shook the World

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

    Why such angst? There’s a lot in the minutes, with much useful information for students of the economy and monetary policy. You can find the full version here. For those less interested in such studies, the passage of three sentences that accounted for more or less all of the market reaction read as follows:

    it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated. Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate. Some participants judged that a less accommodative future stance of policy would likely be warranted and that the Committee should convey a strong commitment to address elevated inflation pressures.

    This commits the central bank to nothing, but the notion that there were hawks on the committee who thought that the Fed should reduce the size of its balance sheet (in other words, start to sell off its huge bond holdings in a move that, all else being equal, should raise yields) came as an unpleasant surprise. Those words are there for a reason. The Fed thought it a good idea to plant a reminder of hawkish intent just as markets were ramping up again after the New Year break, and it seems to have worked.

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    Our Market and Economic Observations Heading into 2022

    Thanks to a subscriber for this report from Bridgewater which may be of interest. Here is a section:

    Equity team co-heads Atul Narayan and Erin Miles on other equity markets catching up with the US: Looking ahead, it feels that things are primed for the equity markets that have lagged the US (China, Japan, the UK, Europe, etc.) to catch up. There are several factors at play. First, COVID has been a material relative support to US equities from all channels—favorable sector tilt, less virus economic impact, more support from falling rates (versus, say, Japan, where yields are pegged), and compressing risk premiums, given safe-haven appeal for US equities, especially the FAANMGs. We would expect the COVID impact to gradually fade in the coming year and this to be a relative support for the markets outside the US.

    Second, China is showing early signs of moving toward easing after a year when the structural goals (deleveraging, rebalancing, common prosperity, etc.) were prioritized. This again will be a bigger relative support for economies like Japan, Europe, and EMs that are a lot more exposed to China. Finally, if you look back over the last 100 years, it’s almost always been the case that the winners of a given decade end up being laggards in the next one because of the degree of exuberance (and pessimism) that gets priced in following the winning (and losing) stretch. Given how stretched the relative positioning and pricing is today (for logical reasons), we expect the US versus rest of world diff to finally start to revert after a decade-long off-the-charts performance. The main things we are watching closely are the evolution of COVID globally, China’s policy stance, and the retail flows in the US, which were the biggest support for US equities over the past year and a half.  

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    How Erdogan's Plan to Halt the Lira's Fall Is Meant to Work

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

    3. What does it mean for inflation and public finances?
    Potentially, the Treasury takes on foreign-currency risk of 3.3 trillion liras ($265 billion) now deposited in retail banking accounts. If the lira depreciates beyond deposit rates, that would impose a burden on the budget. If the central bank prints money to make up the difference, then inflation would spike. 

    4. Does this plan address the crux of the problem?
    While the worst may be over for the lira for now, with some confidence restored among retail depositors, “until interest rates provide a credible anchor against inflation, the lira will tend to be volatile and subject to downward pressure,” said Todd Schubert, head of fixed-income research at Bank of Singapore Ltd. Much will also depend on whether depositors believe the policy can actually be implemented, according to Brendan McKenna, a currency strategist at Wells Fargo in New York. “Right now, Turkish institutions don’t have a ton of credibility, so there may be challenges getting lira depositors on board,” McKenna said. 

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