Fed Rate-Hike Risk Rebounds on Vaccine Buzz

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Comments of the Day

11 November 2020

Video commentary for November 10th 2020

Eoin Treacy’s view

A link to today’s video commentary is posted in the Subscriber’s Area.

Some of the topics discussed include: bonds yield continue to back up, globally. stock markets generally steady, commodities moving to outperformance, loss making new listings falling, purchasing power of currencies to be threatened by additional monetary support measures.

Email of the day on recovery candidates versus stay at home champions

Thank you for bringing Rolls Royce to our attention recently. Thanks to you I was able to open a position which looks excellent now. Do you think the volatility in the share will continue for much longer? And what are your views about this share now? Thanks again very much.

Eoin Treacy’s view

Thank you for your kind words and congratulations on taking opportunities in the market. The big question at present is about the trajectory or interest rates and bond yields. It will shape where risk appetite focuses. Investors will either favour recovery candidates on the basis that survivors will have more market share to expand into or they will continue to favour high growth/high leverage plays as they continue to disrupt incumbents.

Fed Rate-Hike Risk Rebounds on Vaccine Buzz

This article by Stephen Spratt and James Hirai for Bloomberg may be of interest to subscribers. Here it is in full:

Traders are building the risk of Federal Reserve hikes back into interest-rate markets following news of

the most encouraging scientific advancement so far toward a coronavirus vaccine.

The sudden improvement in the economic outlook prompted a fresh burst of trade in Eurodollar futures, which are hugely popular as a low-cost way to play the Fed outlook. As daily volumes of contracts surged to the most since March, prices tumbled sharply, reflecting a flurry of bets on higher interest rates.

As front-end rates jolted higher, overnight index swap markets — a proxy for the Fed’s policy rate — show pricing for a quarter-point hike around the fourth quarter of 2023, and a second by the end of 2024.

ECB Easing

Rate hikes by the European Central Bank are not on the horizon yet, though investors trimmed bets on further easing and exited haven trades following the vaccine report. Money markets pared the odds of easing by almost half by the end of next year, betting on a 6 basis point rate cut, compared with 11 basis points at the end of last week.

BOE Bets

Similarly, Bank of England easing bets have been slashed, banishing the prospect of negative interest rates. Investors, who had bet on a 10 basis-point cut by August and sub-zero rates by the end of 2021, no longer expect the BOE to cut rates to 0%. Instead, wagers are for 7 basis points of easing by the end of next year.

Eoin Treacy’s view

There is a great deal of commonality in the government bonds markets at present. That is usually a sign that what is going on in the market is not isolated to a single market but is global in nature.

The total quantity of negative yielding bonds is a handy barometer for how much demand for debt is evident. It hit a new high last week and has pulled back this week. Downside follow through next week would confirm a failed upside break and greatly increase scope for at least a reversion towards the mean.

Sustained high palladium price favours substitution

This report from Heraeus may be of interest to subscribers. Here is a section:

Substitution of palladium with platinum in three-way autocatalysts will help to offset platinum’s decline in time, but near-term upside is limited. A modest level of substitution is expected in gasoline autocatalysts from 2021, initially in the US where vehicles are generally larger with lower temperature engines. In China and Europe, car manufacturers have prioritised meeting increasingly tight emissions legislation, so will be behind on changing catalyst formulations compared to the US.

However, a sustained palladium price above that of platinum could be tipping the balance in favour of increased substitution, which is necessary to bring both the platinum and palladium markets closer to balance. Palladium has traded at an average of $2,187/oz this year, despite being in the midst of a pandemic and a global recession, with significant contractions to demand. The palladium market deficit is forecast to shrink to around 340 koz this year (as demand was impacted more than supply by Covid-19), and again in 2021 due to work-in-progress stock but is expected to expand significantly thereafter as light-vehicle production recovers.

Eoin Treacy’s view

Both platinum and palladium are industrial metals with precious metal attributes. They have both been used for catalytic converters and it usually takes a very large move to initiate the retooling necessary to switch from one to the other.

Eoin’s personal portfolio – new trading position opened October 21st

Eoin Treacy’s view

One of the most commonly asked questions by subscribers is how to find details of my open traders. In an effort to make it easier I will simply repost the latest summary daily until there is a change.

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