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Blain: Inflation Will “Change The Way We Think About Markets”

Blain: Inflation Will "Change The Way We Think About Markets"

Authored by Bill Blain via MorningPorridge.com,

“A multiplicity of options does not lead to better choices…”

Inflation is the market’s theme today. Markets expect it,…

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Blain: Inflation Will "Change The Way We Think About Markets"

Authored by Bill Blain via MorningPorridge.com,

“A multiplicity of options does not lead to better choices…”

Inflation is the market’s theme today. Markets expect it, but are they prepared? Inflation doesn’t necessarily spell disaster, but it will force change in the way we think about markets – and Tech will likely be the sector that feels it most!

Neither the market nor the world's central bankers will be much surprised by 6% inflation prints in coming months. Tomorrow we get US Dec CPI numbers – which will raise sighs (headline expected over 7%). Markets expect inflation – but are they prepared? The big uncertainty in economic/trading circles is just how significant the inflation threat could prove – will it be short or long-term, and how deep will the consequences go?

It’s a fascinating debate – split between pragmatists and economists.

  • The pragmatists – who can be characterised as traders – look at markets, inflation, activity and make plans like; “this is a mess, it’s going to take time to fix. We can profit by adapting as inflation impacts expectations and markets, and how the unravelling consequences of price volatility determine the investments most likely to prove the best inflation hedges to add value.”

  • The economists want to understand. They model the global economy across a disconnected multiverse of separate worlds called short-term, medium-term and long-term. They look at snap-shots of each, consider how they are changing and consult their arcane models to sagely conclude the innovation of new technology is mid-term deflationary, that long-term demographic changes will also prove deflationary, and that short-term inflation is simply a temporary imbalance between supply and demand. Snap shots give fascinating insights, but don’t really show how the machine actually works – or how unimagined consequences will trip their predictions.

I find it all terribly fascinating. Somewhere in the middle is truth. Being adaptable as the picture changes is critical, but understanding what that picture is also counts. Which is why we need to understand what CPI tells us.

I wish I was clever enough to be both a great trader and a great economist – but sadly I suspect they are mutually exclusive. So, I’ve spent a career trying to do both and become a middling investor and a dumb economist dispensing advice gleaned from both sides – a professional position known as an “Investment Banker”.

I am trying to better myself.

Over the past few weeks the Tech sector has become a bellweather for inflation fears. It has proved increasingly wobbly to the threat of rising bond yields (a result of inflation and normalisation). It increasingly feels like a tech “moment” or “shakeout” is coming. Will rising inflation and higher bond yields crush the speculative forces that have driven tech stocks to their current ultra-fantabulous valuations? And could a correction/collapse in tech trigger a possible contagious collapse across markets?

The inflation/markets relationship is much deeper and more complex than just the prospects for over-priced quasi-gambling stocks. Working out how and where to hedge against the escalating inflation bogey is complex on so many levels.

First there is the big inflation picture – when it comes to understanding how inflation is going to hit markets, I’ve taken a pragmatic cause-effect-consequences view on how the trend is going to travel. For instance: the supply chain bottlenecks caused as the pandemic economy imperfectly reopened were in themselves transitory issues, but have triggered consequences that will create longer-term structural inflation – most visibly in labour shortages and nascent wage inflation.

As the pandemic has stretched on into Delta and Omicron the destabilisation caused by pandemic supply chains has become magnified and stretched – to the extent it’s no longer just a short-term effect. The global economy is swiftly evolving around the bottlenecks. What does that mean for commodities and products? The economy isn’t following a predicted path – but kind of snakes its way to whatever unimagined place it’s going to. In trader speak – that’s called opportunity!

Globalisation of supply chains is being more swiftly undone and replaced by regional solutions than we imagined possible – the results could be very significant. As China navel-gazes inwards, its’ overseas markets refocus. Again – what does that mean in terms of repatriating domestic jobs elsewhere, and how much will new tech ease the costs of doing so? Again – opportunity! You should even factor in the geopolitical consequences for China as its’ economy is morphed by the pandemic.

Even as “transitory” supply chains alter the shape of global trade, soaring energy costs are a very real, long-term inflationary wrench thrown between the cogs of the global economy. Energy has been distorted by climate change transition – basically a consequence of no one planning just how important and for how long gas will remain critical as we move to a decarbonised economy.

But it’s not just the global economy that’s changing. Markets are also undergoing fundamental seismic shifts as well – and they are also all about inflation, or more correctly; hidden inflation.

Since the Global Financial Crisis that began in 2007 (and is set to continue, in my mind, for at least another 10-years), we have seen ultra-low-rates, quantitative easing “QE” (soon to be QT) and other forms of extraordinary monetary experimentation to stabilise markets and kickstart recovery growth. The effect on markets has been huge. Smart traders very quickly understood how these distortions inflated all financial asset prices, and the market followed.

Effectively, easy money underlies the bull market of the last 12 years. Inflation has been hidden in financial assets as equity and bond prices went stratospheric. That inflation has begun to leak into the real world – the more expensive a financial asset becomes the less it yields, hence investors are always looking for better yielding cheaper assets. Real assets in the real economy; from trade finance, aviation, property, private debt and private equity have become increasingly “financialised” – bought for the returns they generate. (I think I just invented a new word! Yay!)

That process of “financialisation” is increasingly unstable – built on easy money, cheap capital and bountiful liquidity. What would happen if it dried up, or was withdrawn? As interest rates normalise, what could happen if investors conclude the low returns on “risk-free” bonds are actually preferrable and a better risk-return than high-risk other assets?

There is a balance: one of the best reasons not to buy bonds is inflation. If you pay the UK Debt Management Office £100 for a 10-year bond today, what you get back in 2032 will buy far fewer cups of coffee than today. Which means investors will favour financial assets most likely to prove resilient to inflation.

The obvious ones are banks and financials. The commonly held wisdom is that banks will be able to increase their profits during periods of inflation by raising fees. Except, that only works if everyone’s wages are rising to pay these fees. At present – around the globe incomes are not rising, but standing still. That leaves consumers with rising energy, food and essentials bills to cover, and reducing discretionary spending… the most likely result of tumbling spending in an inflationary world being stagflation.

Maybe defense stocks would be a better idea? In an unstable world, governments perceive rising threats, and would spend accordingly… if they we’re already up to their necks paying for the pandemic!

For Tech stocks, the argument on inflation is most interesting. Think of the current market uncertainty on inflation and demand as a moment of reality. There are really two factors to consider: which Tech stocks are fundamental game changers, and which are distractions.

  • What we’ve seen during the easy capital cheap money era since 2007 has been a feeding frenzy in any and all Tech stocks. In a low interest rate, cheap capital environment it didn’t really matter if companies are unprofitable: size = returns.

That relationship is about to change.

  • When rates rise and money is diminished by inflation, profits start to matter as returns become ultra-important as an inflation counter.

That does not mean all Tech is bad. Identify now the long-term Tech stocks likely to become the next Amazon, Apple, Microsoft or Meta. They are going to be the ones that show profits, returns and a grasp of reality.

Yesterday, in the office we were talking about streaming and which firms can continue to grow subscriptions by providing the best content. Where does the line get drawn between Netflix and Disney or how much Apple can pump at the opportunity? What does the future of gaming via streaming mean. The office was split on Netflix.

At that point I was struck by something we learnt prior to the great financial crisis… Back in 2002 my bank was acquiring a US sub-prime lender and we wanted to know just how likely their borrowers were to repay their mortgages. We commissioned some research and discovered that among sub-prime borrowers, the last thing a broke borrower stopped paying wasn’t his mortgage or car, but his subscription to the Sports Channel.

Somewhere there is a lesson in that..

Tyler Durden Tue, 01/11/2022 - 10:44

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Zinc Outlook 2022: Analysts Expect Small Refined Deficit

Click here to read the previous zinc outlook. After an uncertain 2020, zinc rose steadily in 2021, hitting a 14 year high in the second half of the year.The power crisis and increasing demand for the base metal as strict COVID-19-related lockdown restrict

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Click here to read the previous zinc outlook.

After an uncertain 2020, zinc rose steadily in 2021, hitting a 14 year high in the second half of the year.

The power crisis and increasing demand for the base metal as strict COVID-19-related lockdown restrictions were lifted supported prices for zinc during the 12 month period.

As the new year begins, the Investing News Network (INN) caught up with analysts to find out what’s ahead for zinc supply, demand and prices. Read on to learn what they had to say.


Zinc outlook 2022: 2021 in review


Zinc prices kicked off 2021 above the US$2,800 per tonne mark after rallying for most of the second half of 2020. A recovery in the steel sector helped the base metal throughout the first half of 2021 as COVID-19 lockdown measures eased, supporting demand for zinc.

Commenting on the main trends seen in the market in 2021, Helen O’Cleary of CRU Group told INN zinc’s demand recovery was stronger than expected in the US and Europe, but lagged in Asia excluding China.

In October, zinc prices hit their highest level in 14 years, hovering around the US$3,800 mark on the back of the power crisis and costs associated with carbon emissions.

“Zinc’s price outperformed expectations in 2021 on the back of strong demand and smelter disruption, particularly in Q4, when European smelters started to cut back due to record high energy prices,” O’Cleary said.

One of the world’s top zinc smelters, Nyrstar (EBR:NYR), said back in October that it was planning to cut production at its European smelter operations. Mining giant Glencore (LSE:GLEN,OTC Pink:GLCNF) also said it was adjusting production to reduce exposure to peak power pricing periods during the day.

Speaking with INN, Carlos Sanchez of CPM Group said zinc has been in recovery since prices bottomed out in 2020, helped in part by vaccination efforts globally and also by supply disruptions around the world.

“The most recent issue is the concern about high energy input costs into smelters in Europe — that's been pushing prices higher recently,” he said. Even though prices could not sustain that level until the end of the year, zinc remained above US$3,500 on the last trading day of 2021.

Zinc outlook 2022: Supply and demand


As mentioned, demand for base metals took an upward turn in 2021 as the world economy recovered on the back of stimulus plans and as vaccination rollouts took place in many parts of the world.

Looking at what’s ahead for zinc demand in 2022, CRU is expecting Chinese demand growth to slow to 1.1 percent year-on-year as the effects of stimulus wane.

“In the world ex-China we expect demand to grow by 2.4 percent, with the ongoing auto sector recovery partially offsetting the construction sector slowdown in Europe and the US,” O’Cleary said.

CPM is also expecting zinc demand to remain healthy in 2022, both inside and outside of China, including demand from developing countries. “One thing that remains uncertain is what will happen with COVID,” Sanchez said.

Moving onto the supply side of the picture, the analyst expects that if everything remains status quo, disruptions are unlikely to happen.

“There are going to be some blips here and there, but there have been some labor issues in Peru; yes, there's been some energy problems in Europe and China, but that's a fact in zinc output and in demand to an extent,” Sanchez said. “But really the catalyst that we don't know, and how it can affect prices, is how COVID will impact industries.”

For her part, O’Cleary is expecting most disruptions to happen in the first quarter, with CRU currently having a disruption allowance of 55,000 tonnes for that period.

“But this may well tip over into Q2,” she said. CRU is expecting mine supply to grow by 5.1 percent year-on-year in 2022, and for the concentrates market to register a 190,000 tonne surplus.

Meanwhile, smelter output is forecast to grow by less than 1 percent year-on-year in 2022, according to the firm, which is currently forecasting a small refined zinc deficit in 2022.

“Should smelter disruption exceed our 55,000 tonne allowance the deficit could grow,” O’Cleary said. “But high prices and a tight Chinese market could lead to further releases of refined zinc from the State Reserve Bureau stockpile, which could push the market towards balance or even a small surplus.”

Similarly, CPM is expecting the market to shift into a deficit in 2022. “That's due to the strong demand, recovering economies of COVID and its financial economic effects,” Sanchez said.

Zinc outlook 2022: What’s ahead


Commenting on how zinc might perform next year, O’Cleary said prices are likely to remain high in Q1 due to the threat of further energy-related cutbacks in Europe during the winter heating season.

O’Cleary suggested investors keep an eye on high prices and inflation, as they could hamper zinc demand growth.

Similarly, CPM expects prices to stay above current levels and to average around US$3,400 for the year. “I wouldn't be surprised to see zinc top US$4,000,” Sanchez said. “But at the same time, I don't think it holds above there; you'd have to have really strong fundamentals for that to happen, stronger than what's happening now.”

The CPM director suggested zinc investors should keep an eye on COVID-19 developments and be quick movers, taking a position whether it's short or long.

Looking ahead, FocusEconomics analysts see prices for zinc cooling markedly next year before falling further in 2023, as output gradually improves and new mines come online.

“Moreover, fading logistical disruptions and easing energy prices will exert additional downward pressure, although solid demand for steel will continue to support prices,” they said in their December report, adding that pandemic-related uncertainty is clouding the zinc outlook.

Panelists recently polled by the firm see prices averaging US$2,827 in Q4 2022, and US$2,651 in Q4 2023.

Don’t forget to follow us @INN_Resource for real-time news updates.

Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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Economics

Taylor Wimpey share price up 3% as housebuilder promises to return more cash to investors

The Taylor Wimpey share price has risen by 3.3% today, reversing some of the…
The post Taylor Wimpey share price up 3% as housebuilder promises to return more cash to investors first appeared on Trading and Investment News.

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The Taylor Wimpey share price has risen by 3.3% today, reversing some of the losses taken over a bad start to the year that has seen the housebuilder’s valuation decline by over 10%, after the company today promised investors it would return more cash to them over coming months. The windfall comes as a result of what Taylor Wimpey described as an “excellent” 2021.

Demand for larger properties, especially houses with gardens, has leapt as a result of the pandemic. As well families spending more time at home desiring more space, buyers were further encouraged to take the leap by the stamp duty holiday that ran from 2020 until late last year, offering savings of up to £15,000. Rock bottom interest rates and fierce competition between providers also led to cheaper mortgages which helped maximise selling prices.

taylor wimpey plc

The combination of favourable headwinds means the homebuilder expects to now realise an operating profit of £820 million for 2021 from the sale of a little under 14,000 homes. That represents a growth of 47% in the number of new-built properties delivered compared to 2020, when construction work and administrative processes were delayed by Covid-19 disruption.

As a result, Taylor Wimpey finished last year with a bank balance of £837 million. It will now, it says, see how much cash is left once it has paid out its dividend and planned for expenses over the rest of the year. Any “excess cash” surplus will be returned to shareholders, most likely through a major share buyback. The company will confirm details alongside its full-year results, due to be reported in March.

Taylor Wimpey is worth around £6 billion and is a member of the FTSE 100. It has existed in its present format since 2007 when created out of a merger between the housebuilders George Wimpey and Taylor Woodrow. The deal was legendarily struck by current chief executive Pete Redfern at a service station on the M40.

Despite sector concerns over how much it will cost to replace dangerous cladding used on buildings over the past 20 years and now banned as a result of the Grenfell Tower scandal, Taylor Wimpey has repeatedly stated it is confident the £165 million it has set aside to cover related expenses will suffice. It has been challenged on the sum but still considers it a “reasonable estimate”.

If the cladding provision does prove sufficient, that should leave plenty of cash for redistribution to investors through a major share buyback over 2022.

The post Taylor Wimpey share price up 3% as housebuilder promises to return more cash to investors first appeared on Trading and Investment News.

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Zinc Outlook 2022: Small Refined Zinc Deficit Ahead

Click here to read the previous zinc outlook. Following an uncertain 2020, zinc prices steadily rose throughout 2021 to hit a 14 year high in the second half of the year.The power crisis and an increasing demand for the base metal as the strict lockdown..

Published

on



Click here to read the previous zinc outlook.

Following an uncertain 2020, zinc prices steadily rose throughout 2021 to hit a 14 year high in the second half of the year.

The power crisis and an increasing demand for the base metal as the strict lockdown restrictions were lifted supported prices during the 12 month period.

As the new year begins, the Investing News Network (INN) caught up with analysts to find out what’s ahead for zinc supply, demand and prices.


Zinc outlook 2022: 2021 in review


Prices kicked off the year above the US$2,800 per tonne mark after rallying for most of the second half of 2020. The recovery in the steel sector helped the base metal throughout the first half of 2021 as COVID-19 lockdown measures eased, supporting demand for zinc.

Commenting on the main trends seen in the market in 2021, Helen O’Cleary of CRU Group told INN zinc’s demand recovery was stronger than expected in the US and Europe but lagged in Asia excluding China.

In October, zinc prices hit their highest level in 14 years, hovering around the US$3,800 mark on the back of the power crisis and cost associated with carbon emissions.

“Zinc’s price outperformed expectations in 2021 on the back of strong demand and smelter disruption, particularly in Q4 when European smelters started to cut back due to record high energy prices,” O’Cleary said.

One of the world’s top zinc smelters, Nyrstar (EBR:NYR), said in October it was planning to cut production at its European smelter operations. Mining giant Glencore (LSE:GLEN) also said it was adjusting production to reduce exposure to peak power pricing periods during the day.

Speaking with INN about zinc’s performance, Carlos Sanchez of CPM Group said zinc has been in recovery since prices bottomed out in 2020, helped in part by vaccination globally and also by supply disruptions around the world.

“The most recent issue is the concern about high energy input costs into smelters in Europe — that's been pushing prices higher recently,” he said.

Even though prices could not sustain that level until the end of the year, prices remained above US$3,500 on the last trading day of 2021.

Zinc outlook 2022: Supply and demand


As mentioned, demand for base metals saw an upward turn in 2021 as the world economy recovered on the back of stimulus plans and as vaccination rollouts took place in many parts of the world.

Looking at what’s ahead for demand in 2022, CRU is expecting Chinese demand growth to slow to 1.1 percent year-on-year as the effects of stimulus wane.

“In the world ex. China we expect demand to grow by 2.4 percent, with the ongoing auto sector recovery partially offsetting the construction sector slowdown in Europe and the US,” O’Cleary said.

CPM is also expecting demand to remain healthy in 2022, both in China and outside of China, including demand from developing countries.

“One thing that remains uncertain is what will happen with COVID,” Sanchez said.

Moving onto the supply side of the picture, the analyst expects that if everything remains status quo, disruptions are unlikely to happen.

“There are going to be some blips here and there, but there have been some labor issues in Peru, yes, there's been some energy problems in Europe and China, but that's a fact in zinc output and in demand to an extent,” Sanchez said. “But really the catalysts that we don't know, and how it can affect prices is how COVID will impact industries.”

For her part, O’Cleary is expecting most disruptions in Q1, with CRU currently having a disruption allowance of 55,000 tonnes for that period.

“But this may well tip over into Q2,” she said. CRU is expecting mine supply to grow by 5.10 percent year-on-year in 2022 and for the concentrates market to register a 190,000 tonnes surplus.

Meanwhile, smelter output is forecast to grow by less than 1 percent year-on-year in 2022, according to the firm, which is currently forecasting a small refined zinc deficit in 2022.

“Should smelter disruption exceed our 55,000 t allowance the deficit could grow,” O’Cleary said. “But high prices and a tight Chinese market could lead to further releases of refined zinc from the State Reserves Bureau stockpile, which could push the market towards balance or even a small surplus.”

Similarly, CPM Group is also expecting the market to shift into a deficit in 2022.

“That's due to the strong demand, recovering economies of COVID and its financial economic effects,” Sanchez said.

Zinc outlook 2022: What’s ahead


Commenting on how prices might perform next year, O’Cleary said prices are likely to remain high in Q1 due to the threat of further energy-related cutbacks in Europe during the winter heating season.

O’Cleary suggested investors to keep an eye on high prices and inflation, as these factors could hamper zinc demand growth.

Similarly, CPM Group is expecting prices to remain above current levels and to average around US$3,400 for the year.

“I wouldn't be surprised to see zinc top US$4,000,” Sanchez said. “But at the same time, I don't think it holds above there; you'd have to have really strong fundamentals for that to happen, stronger than what's happening now.”

The CPM director suggested zinc investors should keep an eye on COVID developments and be quick movers, taking a position whether it's short or long.

Looking ahead, for FocusEconomics analysts, prices for zinc are seen cooling markedly next year before falling further in 2023, as output gradually improves and new mines come online.

“Moreover, fading logistical disruptions and easing energy prices will exert additional downward pressure, although solid demand for steel will continue to support prices,” they said in their December report, adding that pandemic-related uncertainty clouds the outlook.

Panelists recently polled by the firm see prices averaging US$2,827 per metric tonne in Q4 2022 and US$2,651 per metric tonne in Q4 2023.

Don’t forget to follow us @INN_Resource for real-time news updates.

Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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