This commentary was posted recently by fund managers, research firms and market newsletter writers and was edited by Barron’s.
Problems in Chinese banks?
July 9th : Chinese government unexpectedly announced broad-based RRR [reserve requirement rate] cut to take effect on July 15. This is not the targeted cut mentioned at an important government meeting, and it sends the wrong signal. So why does China need this cup? What’s wrong with the economy?
My personal opinion is that the main intention of this reduction is to help banks meet their capital and liquidity needs. From the Q&A written by the People’s Bank of China, we understand that this RRR reduction is aimed at increasing the capital and liquidity of financial institutions and lowering their lending costs.
It gives me a feeling of unease. Are the banks under pressure? If so, it implies that there could be more bad debts. These bad debts could come from the recent debt reform. Banks have not been able to lend to real estate developers as easily as before and have reduced their mortgage activity. The fintechs, to which the banks also lend, have also been the subject of a deleveraging reform.
After this drop in the RRR, banks should have more leeway on capital and liquidity. But what’s next for the PBoC and the banks? Banks cannot change the loan framework for real estate developers. But they could get into the microcredit left by fintechs, although it is a risky business. This means that the banks will continue to suffer from the same problems. And while they have some leeway at the moment, it might only last for another quarter or so, given that the release of cash is quite low compared to outstanding loans.
China may need another RRR cut in the fourth quarter.
A technician’s perspective on Bitcoin
Bitcoin Money Flow
Research on the actions of the Brogan Group
July 9th : The apex is where two lines converge to form a point. In this case, this is the point of the wedge consolidation formation that the price of Bitcoin has established. When the price hits near the Apex, we see the price volatility decrease dramatically. What happens next is an explosion of volatility with a big price movement. The tricky part of this model is predicting which way the price will skyrocket. Generally, according to the textbooks, with a bullish bearish wedge, we should see the price recover / break in the direction of the main trend, which in the case of Bitcoin is on the upside. Currently, we are still stuck in this low volatility position with money flows still trending negatively, so we just sit on our hands and wait for the breakout of money flows to tell us to go long.
The performance slide is not what it appears to be
July 8: We are witnessing another classic battle between fact and perception. Many equity investors estimate that the 10-year U.S. Treasury bill [yield] going from 1.75% to 1.30% means that the outlook for growth and inflation has peaked, and that it will decelerate rapidly. As a result (according to the perceived story), the “love affair of values” and the cyclical rotation are over. Now a few facts:
The 45 basis point drop in nominal yields since March has been associated with an almost 1: 1 drop in real rates, which have fallen by around 40 basis points [hundredths of a percentage point] and are now around -100 basis points. In other words, inflation expectations have been stable, suggesting that economic forces are not at the heart of the fall.
The interest rate players and our macro team inform us that technical issues related to liquidity, positioning and forced buying are “driving the bus”.
Regarding liquidity, the last Treasury issue dates from June 24 and we will not see any new paper until next week. In addition, secondary liquidity is limited due to the fact that investors take time off during the holidays.
Regarding positioning, a survey conducted by a competitor implied significant short-term interest in the rate market, providing leeway for Treasury rallies catalyzed by short cuts / hedges.
In particular, there is a large and systematic buyer in the market: the Fed, to the tune of $ 80 billion per month, or about $ 20 billion per week.
Combining a lack of liquidity with weak hands and a systematic big buyer, a drop in rates is not surprising. Many equity investors are not precise when analyzing the rate market, believing that the movement of nominal rates is strictly driven by inflation expectations; this has not been true recently. In addition, inflation expectations listed in the 10-year Treasury remain in the 2.0-2.5% range, which is not what one would expect if the economy recovers and the economy recovers. investors felt that inflation was about to fall.
—Christopher P. Harvey, Gary S. Liebowitz, Anna Han
State credit ratings improve
Credit comment Q2 2021
July 6: A number of states whose outlook or ratings have recently changed to stable or positive are states that have had a history of downgrading, mainly due to pension funding issues and a stalled government. Recent improvements in ratings show the resilience of states and reflect the substantial federal assistance that has been extended. However, the pension and the OPEB [other postemployment benefits] Funding continues to be a long-term concern, and it may take a long time or significant expense to redress an underfunded position.
Illinois was modernized by
to Baa2 from Baa3 on a material improvement in the finances of the State. Fitch rates Illinois BBB- and on June 23 rated the outlook positive, while S&P rates Illinois BBB- stable.
Connecticut was upgraded from A to A + by S&P (Moody’s upgraded to Aa3 in March). The state has made progress in debt reduction and in the fight against the underfunding of its pensions and the OPEB.
New Jersey’s A3 outlook has been changed to stable by Moody’s, reflecting better-than-expected income performance in fiscal 2021 and the expectation that the resulting large fund balances will support fiscal flexibility through the resumption of the coronavirus pandemic. New Jersey is well positioned for the next 12-18 months as the state continues to deal with historic fiscal challenges, including large structural budget variances and growing pension contributions. S&P rates New Jersey BBB + stable and Fitch rates status A- with a negative outlook.
The misery index sends a warning
July 6: Our poverty index is reaching new heights. Whenever a combination of rising inflation, high unemployment and rising house prices was in play, it was a salute of warning that the policy mix could become a toxic cocktail for asset prices. long-term.
The BCA remains cyclically bullish on equities over a 12 to 18 month horizon. However, this does not isolate asset prices from a hiccup in the coming months.
According to our misery index, rising inflation could prove to be a more lasting threat than most realize, especially if the Delta variant of the Covid virus begins to sabotage supply chains around the world. Employment gains have increased in most countries, but the increase in productivity suggests that frictional unemployment may be a more lasting phenomenon. Finally, rising house prices and growing inaccessibility will prove to be extremely damaging to financial stability, pushing central bankers further to the hawkish side.
The above scenarios are assumptions and not our basic point of view. However, purchasing insurance in the form of VIX calls could be very profitable for the prudent investor.
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