It's the market, baby

5 lug 2022

INVESTMENT CONTEXT

• For the first time in over three decades Germany reported monthly trade deficit in goods, which accounts for EUR 1bn, against analyst expectations of EUR 1.2bn surplus. The spike in energy prices translated into higher import costs, while the sanctions imposed on Russia and China’s coronavirus lockdowns negatively affected exports
  
• Iran slashed the prices of its crude oil to stay competitive with Russia in regards to Chinese clients, in an attempt to maintain market share amidst OPEC's approved volume increases
  
• In the first half of 2022 coal imports in Europe increased by 35% on a yearly basis, earmarking the continent's struggle to cope with lower crude oil and natural gas supplies from Russia
  
• In June, the Caixin China General Services Purchasing Managers Index reached 54.5, beating analysts expectations of 49.7. Analysts appreciate the index crossing the 50-point threshold which separates expansion from contraction
  
• The ECB expressed concern on the potential overlapping amongst the EU member States in the matter of regulating cryptocurrencies. Aiming at "harmonizing" the bloc's policy-making on the issue, the bloc is about to implement Markets in Crypto-Assets, or MiCA, framework 
  
• After shedding USD 200mln assets in the past three weeks, Coinbase-backed crypto lender Vauld suspended trading and withdrawals. Meanwhile, Estonian cryptocurrency exchange capped withdrawals to USD 5k a day
  

PROFONE'S TAKE

• European electricity prices hit record high levels, soaring on July 4 to EUR 325/MWh in Germany and EUR 366/MWh in France. European zinc and aluminum producers, whose activity hinges on energy prices, are struggling due to the combined effect of surging costs and falling prices on industrial metals as recession fears loom. Profs maintain bearish views on European energy, not ultimately considering that Nord Stream 1 pipeline will be closed for maintenance starting July 11. Elsewhere, French nuclear capacity stands at historical lows, since the country had to shut down for an indefinite period 12 of its 56 reactors due to unexpected corrosion of infrastructures. As a result, neighboring countries are now forced to burn additional gas to provide France with electricity, while all continent struggles to fill inventories before winter under mounting fears of further Russia's cuts of gas supply.
  

PROFZERO'S TAKE

• What is a currency?
  To think of currencies in terms of supply and demand tends to be trickier than, for instance, commodities. After all, how can there be "demand" for money? What is the use for one, especially if foreign? And what is the return?
  In reality, it takes but to look at 2 pairs to understand the extend of supply-demand logics into FX markets. Looking at RUB/USD, we see right away that something must be off. The pair is now trading below its point before the war (61.08 vs. 75.45 on February 7), at a time when Russia had 9.5% interest rate and U.S. was still stuck at zero-rate. Today, the base rate applied by the Russian Central Bank is still 9.5% (after it shot to 20% a few days following the invasion of Ukraine), while that imparted by the Fed is 1.50%; yet, RUB is stronger than ever. Why? Because demand can't fully satisfy itself unloading RUB-based exposure (think of Russian equities held by international investors), while artificial demand for RUB has been created when Gazprom (GAZP) demanded energy bills to be honored in currency.
  Looking at EUR/USD instead, it is hard to justify the 15% slide on a yearly basis just by looking at fundamentals. While it is true that the Fed's monetary policy has been much more responsive to inflation than the ECB's, forward rates ought to be tilted to a sensibly stronger EUR due to more resilient growth in the area. Why is that not happening? The answer lies in the USD 4tn capitalization wiped from the S&P 500 and perhaps also the USD 2.1tn evaporated in the blockchain space - an unprecedented watershed of cash which sought refuge in cash USD-denominated deposits.