Hive Intelligence Report: Supply Chains, Russian and European Energy, Tether Stability

Every week, we bring together our community of macro experts to discuss the latest market developments. In this piece, we distil all the latest insights from our conversations up to 13 October. These are views from our network rather than the views of the Macro Hive research team.

Supply Chains

Trading the resolution of supply chain issues

• If the worst of the supply chain crisis is over, then the best trades are to fade inflation, long NASDAQ, long EM yields and FX. But long EM is only a good trade for improved supply chains if China doesn’t properly slowdown, in which case it would struggle.

When will it end?

• The shipping crisis ‘to last to next summer’ as container vessels queue in the Channel. Possibly the worst is over, but arguably the worst precedes COVID and roots can be found in 2016 (Brexit/Trump big turn), or 2014 (Europe vs Russia).
• The saving grace of the supply-side crisis, unlike the 1970s, is that it was orchestrated by the buyers, not by the sellers.
• Have we reached and passed peak globalisation, or we will go back to further integration?  

Are the issues due to demand?

• People might be buying more than before. That said, it could be a one-off inventory adjustment: inventories were too lean before COVID, and the combination of China growth and the pandemic has made everyone decide they need higher inventories.
• Over the past 18 months households have overconsumed goods. Similar with capex, far too high relative to historical relationships with capacity utilisation, potentially due to substituting for hard to find/contagious human work, or to bring production closer to home markets.
• However, these could be one-off adjustments which suggests we could be hit by a surprise decline in demand, imports, and port congestion.

What is the data showing?

• Latest data shows shipping costs from Shanghai-LA are now over eight times more expensive than LA-Shanghai (up from six times in the FT article mentioned above). Shanghai-LA is ~10% off the highs since mid-September, the largest decline since COVID.
• The price of Shanghai-Rotterdam continues to hit all-time highs. Before COVID, Shanghai-LA and Shanghai-Rotterdam used to be flat to each other, on average. Since November 2020, Shanghai-Rotterdam has consistently been above Shanghai-LA, now it is at 30% premium! And Shanghai-Rotterdam is nine times more expensive than Rotterdam-Shanghai.

Russian and European Energy

• EU Energy Ministers are to hold an extraordinary meeting on 26 October. However, more talks will not change the fact that the EU has limited options ahead of the winter season. Being nice to President Putin seems to be the best option to ease the burden of high gas prices.

Energy sources

• There is most likely a price, and technology to use, at which Wadden Sea will be opened. Further, the Netherlands is shutting down Slocheteren (Groningen gas field), Europe’s largest field since the 1960’s with two decades worth of remains left.
• Putin’s hand is strong, but he does not need to incentivise controversial exploration.

Will Europe change its energy sources from away from Russia?

• Europe’s only alternative is nuclear, which would take a decade to get going.

Indian Energy

• Reliance Industries just got into solar cell manufacturing via their acquisition of REC. The timing of their moves is quite instructive. They got into shale in 2007-2010 and have been exiting since 2013, and have been pivoting to services via Jio (5G build out etc) and recently have farmed down the Jamanagar refinery to the Saudis. Solar does make sense in India – at least on the West Coast. These are all part of a 2030 target, apparently the industry is being forced to shut down due to a lack of coal stock.

US

Equity Seasonality

• The average performance for the S&P500 sa, since 1940, displays a strong seasonal pattern. It tends to decline on average between June to September. Below is the nsa versus sa series.  removed.

VIX Direction

• Table below shows a string of call and put spreads from 15-40 strikes to see if there are any inefficiencies in the pricing. Could also help to understand how the market could price being above, or below, a certain strike. Values are the % price of the premium for the spread over the maximum pay-out for the spread. Red areas are unlikely to be achieved, leaving a range of 20-22 for October expiry.

US Vs China Technology

• President Xi Jinping said reunification with Taiwan must happen. Will the US Armed Forces be positioned or prefer the chip foundries to remain active?
• Why not simply replicate the hardware and human talent of China in the US? Semiconductor knowhow isn’t quite like assembling widgets. You can learn a lot about it from textbooks and journal articles, but nothing matches hand-on experience.
• Why don’t China build in-house? They lag in advanced technology such as robotics because other countries won’t share it and they lack the R&D to recreate it. Much of the China miracle is copying what has already been done elsewhere rather than creating it. That said, China seems to have organisational skills (semi-brute force) lacking in many places. But US has already lost AI fight to China, says ex-Pentagon software chief.

Japan

• BoJ concerned about energy costs dampening growth. Weaker Yen raises the cost of imports.
• BoJ maintains an accommodative stance on policy but is now being tapped on the shoulder that there is a globally coordinated effort to normalise. Should look at ‘energy concerns dampening growth’ headlines carefully.
• USDJPY and Nikkei were at critical levels last week, but not anymore. We are going to continue globally coordinated policy normalisation.
• We are starting to see a weak JPY, weak Nikkei pattern evolving.

Korea

Market Movements

• BoK press conference hinted at two immediate hikes, in November and January that’s now consensus.
• Punchy rates moves. KOSPI can’t get any respite from a weak KRW, but it never has.
• Still, a lot of investors are stopping out of receivers in rates.
• Curious if the ‘love affair’ between KOSPI and HSI is going to get restored, and how?

KRW term rates above pre-COVID levels

• They are far above because housing prices have gone up a lot in recent years.
• Also, because Moon Jae-in borrowed a lot relative to his predecessors.

Tether

China

• Tether is being used to avoid capital restrictions in taking money out of China and to prop up very troubled companies in China. But this concept has been around for a while.
• Another issue is that Tether is not supposed to take risk, it’s surprising Chinese authorities are not looking into this more.

Susceptibility

• It’s surprising the discussion on Tether is still ongoing. If the product is simple to understand then why is it so hard to publish an audited asset snapshot along with asset quality referenced by credit rating agencies of those assets? Given that it is so difficult, surely this raises concerns for potential fraud.
• Note that Tether last confirmed a valuation 30 June 2021, audited by Moore Cayman. Moore Cayman are a 10-employee big accounting firm.
• However, the weight of evidence so far suggests Tether backing is extremely susceptible, but in the absence of regulation it is still able to function as a medium of exchange and not as a store of value.

Trade Ideas

Receive Ruble Rates

• Ruble rates are tempting receive. The CBR hiked sooner and faster than other EM central banks. But people were making that argument 50 and 100bps ago, and they were squeezed out.

Long RUB

• The debt-GDP ratio is 17.8%, a budget deficit of -3.8% post-COVID is fine, current account +2.4%, and yes there’s inflation, 7.4%, so not quick policy easing. But RUB unhedged is a good trade.
• RUB is the best performing currency YTD, and since risk-off started in September it has been better than NOK and CAD.

Interesting Reads and Listens

• Twitter Thread on the Metaverse
• The Supply Chain Crisis: How We Got Here
• Michael Pettis on What Evergrande Means for China’s Macro Economy
• Digital Cancer – Will Facebook Go The Way Of Big Tobacco?

Humour

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)