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UK U-TURN HELP SHORT COVERINGThe UK Bond Crisis is showing signs of easing and some major news over the weekend with new Chancellor Hunt talking about possible budget cuts and Tax rate changes to the upcoming budget on Oct 30th. The Bank of England Governor also talked up more aggressive rate hikes and both are helping calm markets Monday morning ahead of what will be volatile day. The market is holding its breath for UK Bond market open later in Europe with the BOE no longer involved in buying longer term bonds will they surge higher again and crach the GBP or will the respond to the Government Uturn and in that case the GBP relief rally has legs here. Can see UK Bond Template here www.tradingview.com Longer term there are still reasons to be bearish on GBP but things improve then the current crisis pricing of GBP and short positioning makes short squeeze very possible. Any opinions, news, research, analyses, prices, other information, or links to third-party sites contained on this website are provided on an "as-is" basis, are intended only to be informative, is not an advice nor a recommendation, nor research, or a record of our trading prices, or an offer of, or solicitation for a transaction in any financial instrument and thus should not be treated as such. The information provided does not involve any specific investment objectives, financial situation and needs of any specific person who may receive it. Please be aware, that past performance is not a reliable indicator of future performance and/or results. Past Performance or Forward-looking scenarios based upon the reasonable beliefs of the third-party provider are not a guarantee of future performance. Actual results may differ materially from those anticipated in forward-looking or past performance statements. easyMarkets makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or any information supplied by any third-party.
Long
by easyMarkets
Bank of England Emergency Bond PurchaseLast week, UK pension funds, which hold highly leveraged bond derivative positions, were facing a nearly $1 trillion loss as bond prices crashed and yields rose. The crash in the bond market has been underway for years, but the tipping point occurred when the UK prime minister pledged to cut taxes at a time when inflation is soaring into the double digits. Cutting taxes worsens inflation because less taxes means consumers have more money to spend on inflating goods. Cutting taxes while inflation is high therefore risks worsening inflation or inducing hyperinflation. Fear of this caused the price of UK bonds to crash and yields to spike. (As many of you know well, bond prices move down when yields rise). This crash caused pension funds with highly leveraged bond positions to experience amplified losses, which caused these funds to need to put up more cash collateral on their losing positions. This could have caused a downward spiral because these funds may have had to sell bonds to raise more cash, which would have had a negative feedback loop that could have sent prices down further, amplifying losses more, and creating the need to raise even more cash collateral. The Bank of England had to make an emergency purchase of bonds. However, by purchasing bonds, the Bank of England has taken an action that will now make inflation worse (there will be a lag effect). Whenever a central bank purchases bonds, it is adding liquidity to the system (when the central bank buys bonds this has the effect of increasing the money supply). Increasing the money supply when inflation is at a multi-decade high is super risky. At best it could risk inflation staying elevated for longer, at worst it could spiral into hyperinflation. In the chart above, reproduced below, you can see that when priced in the British pound, crude oil prices are barely declining (as we would have expected from all the rate hikes). If anything, crude oil is looking poised to increase further. The Bank of England, and other central banks, are trapped. Until they stop monetary easing (adding to the money supply) and tighten the money supply such that rates are higher than core inflation, inflation will continue to get worse. Yet, as we now see in the UK, central banks cannot tighten the money supply sufficiently to accomplish this without causing a financial crisis. The rapidity with which the Bank of England switched back on the money printer, despite double-digit inflation, has me convinced that central banks will choose the hyperinflation route. In fact, hyperinflation is already happening in some countries. Argentina has hiked rates to 75% (not 75 bps, 75% or 7,500 bps) and yet inflation continues to spiral higher. There is actually no limit to how bad inflation can get. When people need to pay $100 trillion dollars for food, as in Zimbabwe in 2008, people usually stop believing that central bank fiat notes are valuable and the system collapses. Look at the chart below. I did not log-adjust the chart so that you can see that hyperinflation is when commodity prices rise exponentially over time. For the chart, I used the Invesco Commodity Index Tracking Fund (DBC) and priced it in Argentine pesos. I used cross plots on a smoothened moving average. This level of hyperinflation always leads to some kind of crisis. Either interest rates must crush demand and cause economic decline, or hyperinflation eventually causes a monetary crisis whereby people stop using the currency altogether. Commodity hyperinflation also leads to political instability and the rise of fascist or communist dictators. Furthermore, when these crises occur on a global scale, they can precipitate conflict, and conflict in turn can worsen commodity shortages. For those who have been thinking that inflation has peaked globally, there is no chart that I have seen which validates that conclusion. Indeed, as shown in the chart below, commodity prices continue to break record highs in some parts of the world. In most currencies, commodity prices appear to be bull flagging. Compare the below two charts. One shows how commodity prices continue to spiral higher in Argentina, despite the central bank hiking rates all the way to 75%, compared to 2008, when commodity prices fell while the central bank raised interest rates to just 12%. This shows that we are dealing with a much more dangerous type of inflation. I posted these figures to show just how bad inflation can get and the risks associated with monetary easing. Many people are believing the pig-in-a-python theory, where they think inflation is transitory and will improve when the massive COVID stimulus passes through the pipeline. However, what they fail to realize is that central banks have been putting an endless stream of pigs in the python for decades through monetary easing. Economies have become totally dependent on monetary easing and central banks are now trapped in needing to maintain it. Yet, if central banks continue monetary easing, inflation cannot come down. It just keeps spiraling higher so long as monetary easing continues, assuming commodity shortages also continue. Commodity shortages are deep-rooted and are due in part to war, deglobalization, aging and less productive populations, and climate change to name several factors. Monetary policy has little efficacy on these supply issues. Sri Lanka was the canary in the coal mine. It was the first central government to fall due to commodity hyperinflation. And yet, even after a central government collapse, commodity prices in Sri Lanka are still high. The chart below shows that commodities appear to be bull-flagging, and poised to go higher. Core inflation which is typically stable in the United States is now exploding to a 40-year high. If the Federal Reserve is to be successful at hiking rates to quell inflation, it must hike rates above the core inflation level. There is virtually no central bank with an interest rate higher than core inflation. Indeed, Japan continues to maintain negative interest rates. As I noted in a prior post, because negative interest rates incentivize the creation of money through credit, negative interest rates reflect limitless growth of the money supply. However, as alluded to above, the Fed is trapped. It must hike rates above core inflation, but it also cannot hike rates above core inflation. Decades of monetary easing have left a highly leveraged economy totally reliant on low interest rates. Hiking rates as far as would be needed to quell inflation would likely lead to an economic depression. Pension funds are already under tremendous strain from the hiking and yet the charts show that the scope of tightening that will be necessary is not even in sight yet. The best-case scenario is that commodity supplies improve and demand softens enough to stabilize rates but not so much that economies decline significantly. Even in this perfect mitigation scenario, stock market returns are likely to be muted for years to come.
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TVC:UKOIL
by SpyMasterTrades
65
£ $GBP - Slippery slope!£ $GBP - Slippery slope! Now to be aware fundamentally GBP is at a very weak position just like EUR. UK recession and plenty of more other various factors that are listed in previous post based on GBP. However, we could decline further leading us towards low of 2020 areas and perhaps Brexit areas IF we go below 1.17 handle. Just to be aware we do have new Prime Minister coming in early sept and even if its Rishi we could get GBP yields head a little higher but overall we are fundamentally in a difficult situation even cap on energy isn't enough, globally housing is struggling we are at a time where cash is king for now. Tread carefully, TJ
by Trade_Journal